Islamic fintech has rapidly evolved from a niche innovation into a central pillar of the global Islamic finance industry. According to the ‘Global Islamic Fintech Report 2024-25’, the sector, with 490 fintech firms, was valued at $161 billion in 2023-24 and is projected to more than double to $306bn by 2028, growing at a compound annual growth rate (CAGR) of 13.6 per cent. This outpaces conventional fintech growth (11pc), underscoring the sector’s dynamism and investor appeal.

Islamic fintech refers to the use of financial technology solutions specifically designed to comply with the principles of Islamic finance. In simple terms, it is the intersection of technology, innovation, and Islamic finance — creating digital financial products and services that avoid interest (riba), excessive uncertainty (gharar), and prohibited activities (such as gambling), while promoting ethical finance, transparency, and risk-sharing.

Several global trends are shaping the future of Islamic fintech, including digital Islamic banks and alternative finance platforms, artificial intelligence (AI)-driven applications, digital credit scoring and assessments, blockchain and asset tokenisation, smart payment solutions, and central bank digital currencies.

Islamic digital banks and fintech firms are challenging traditional norms. Players like AEON Bank (Malaysia) and STC Bank (Saudi Arabia) are redefining retail banking for younger, tech-savvy customers. By combining real-time analytics, tailored offerings, and instant compliance monitoring, they illustrate the future of Shariah-compliant banking.

As Islamic fintech gains momentum globally, Pakistan presents the ideal environment for growth if forward-looking policies are implemented

Artificial intelligence is increasingly integral to Islamic fintech. AI systems can now automate Shariah compliance audits, improve credit risk assessment, detect fraud, and deliver personalised investment advisory services. These applications help build consumer trust and expand financial access to underbanked populations.

Blockchain-based applications are also transforming Islamic capital markets. Digital sukuk pilots in Russia and Nigeria have demonstrated how distributed ledger technology reduces settlement costs and improves transparency. In Malaysia, tokenisation platforms such as Kapital DX are opening new investment opportunities by enabling retail investors to access Shariah-compliant assets such as healthcare and infrastructure projects.

Countries including Iran and Pakistan are exploring legislation or pilots for Shariah-compliant central bank digital currencies and virtual assets. These digital currencies can ensure asset-backed stability and enhance cross-border remittances — critical for remittance-dependent Muslim economies.

With growing investor appetite, venture capital is increasingly flowing into Islamic fintech. For example, Saudi Arabia’s Arbah Capital, alongside international partners, has invested nearly $40 million in early-stage fintech firms. Similar momentum is visible in Egypt, Malaysia, and across the Middle East and North Africa, reflecting investor confidence in the sector’s scalability and profitability.

On the domestic front, Pakistan has made significant progress, ranking among the Top 10 Islamic fintech hubs for the first time in the 2024-25 Global Islamic Fintech Index. This achievement reflects improvements in regulation, ecosystem readiness, and talent availability. Although smaller in absolute size, Pakistan’s fintech market holds enormous growth potential given its demographics: a large Muslim population, low financial inclusion, and rapid digital adoption.

According to the ‘Global Islamic Fintech Report’, Pakistan hosts 19 Islamic fintech firms, spanning digital wallets, small and medium enterprise (SME) financing, earned-wage access, credit scoring, and wealth management, thereby addressing diverse needs of underserved segments. The ecosystem is buoyed by a young, digitally active population. With over 200m mobile connections and rising smartphone penetration, Pakistan offers fertile ground for fintech adoption. The expansion of e-commerce further fuels demand for Islamic wallets, gateways, and embedded finance platforms.

However, challenges persist for local fintech firms. These include limited access to venture funding, regulatory overlaps, low financial literacy, weak digital infrastructure in remote areas, high customer acquisition costs, and cybersecurity concerns that affect consumer trust.

Realising the full potential of Islamic fintech in Pakistan will require focused and coordinated policy measures, with the objective of establishing a comprehensive and resilient Islamic fintech ecosystem by December 2027 — the mandated deadline for transitioning to a fully Shariah-compliant financial system.

To promote Islamic fintech in Pakistan, regulators such as the State Bank and the Securities and Exchange Commission of Pakistan should expand Shariah-compliant sandboxes, simplify licensing, and set clear rules for Islamic crowdfunding, peer-to-peer financing, and digital assets.

Access to capital must be enhanced through dedicated venture funds, tax incentives, and partnerships with Gulf Cooperation Council investors. Strong digital infrastructure — including broadband, open banking, and cybersecurity — is also vital for growth and trust. At the same time, nationwide financial literacy campaigns, supported by apps in Urdu and regional languages, can drive adoption.

Collaboration between fintechs, Islamic banks, and the government through innovation hubs, along with cross-border partnerships with Malaysia, Saudi Arabia, and the United Arab Emirates, will further strengthen Pakistan’s position. Developing skilled talent in fintech and Islamic finance, while expanding beyond payments into Zakat, Waqf, SME lending, wealth management, and tokenised Sukuk, will ensure a robust ecosystem.

The writer is the founding director of IBA CEIF (aasiddiqui@iba.edu.pk)

Published in Dawn, The Business and Finance Weekly, September 8th, 2025