Breaking the mold: How Singapore could pioneer global Islamic digital finance

9th July 2025

The untold story of Islamic finance excellence

Islamic finance’s core principles align remarkably with post-2008 calls for responsible banking, yet these features remain consistently undersold to Singapore’s sophisticated financial community. The prohibition of Gharar, Riba and investments in harmful industries inherently prevent the predatory practices that triggered global financial crises.

While conventional finance scrambles to implement ESG frameworks, Islamic finance has operated on these foundations for over a millennium. Risk-sharing partnerships, asset-backed transactions and ethical investment screening are not innovative concepts – they are time-tested principles that could further revolutionize Singapore’s financial landscape.

The industry’s marketing myopia becomes particularly stark when considering Singapore’s fintech ambitions. Rather than highlighting how Shariah compliant structures could enhance the city-state’s reputation for financial innovation, Islamic finance often retreats into religious terminology that alienates potential adopters in this cosmopolitan financial center.

Geopolitical baggage and missed opportunities

Perhaps more damaging than poor marketing are the geopolitical shadows that unfairly tarnish Islamic finance’s reputation in Singapore’s international corridors. Middle Eastern conflicts, despite being largely political rather than religious, create associations that prevent objective evaluation of Islamic finance’s economic merits.

This becomes particularly problematic when considering mounting evidence of conventional finance’s destructive practices. Recent data reveals staggering short selling costs – Trump Media & Technology Group saw borrowing rates hit 157.6%, while Barron’s reports some stocks commanding fees exceeding 600% annually. Bristlemoon Capital’s analysis, ‘The perils of short selling,’ demonstrates how these costs can skyrocket beyond 100%, with highly leveraged positions facing amplified risks during market stress.

EvidenceInvestor’s research, ‘The consequences of short squeezes,’ shows that when share utilization exceeds 90%, short squeezes occur every 11 days, imposing hidden costs of 29-37bps monthly. Reddit investors describe rates from 99% to 900% as “the biggest scam ever,” with one reporting a 76% annualized cost combining 12% margin interest and broker mechanics, while a GameStop-focused user shared a 243% cost-to-borrow rate. Meanwhile, Investopedia’s analysis ‘Why you should never short a stock’ highlights how margin interest compounds these costs – a 5% rate over five years erodes 25% of positions.

These predatory practices exemplify precisely the Gharar that Islamic finance prohibits, representing profit extraction through market manipulation rather than productive investment.

Digital advantage

The emergence of Singapore’s digital asset ecosystem presents unprecedented opportunities for Islamic finance demonstration. The Monetary Authority of Singapore’s progressive regulatory approach creates an ideal environment for Shariah compliant digital innovations. Blockchain technology’s transparency and immutability align perfectly with Islamic requirements for clear, verifiable transactions. Singapore’s robust fintech infrastructure could support tokenization of Shariah compliant assets, democratizing access while maintaining regulatory compliance.

More importantly, cryptocurrency and AI integration offer pathways to serve the unbanked populations across Southeast Asia – markets that Singapore’s financial institutions increasingly target. Smart contracts could automate Shariah compliance, while distributed ledger technology ensures transparency and accountability.

The potential extends beyond financial inclusion. Tokenization of productive assets, coupled with profit-and-loss sharing mechanisms, could create investment vehicles generating returns while supporting real economic activity across ASEAN’s developing markets.

Authority challenge

However, this digital transformation faces internal obstacles. When prestigious institutions like Al-Azhar declare Bitcoin Haram based on arguable reasoning – as documented in Egypt’s Dar al-Ifta Fatwas on cryptocurrency – their influence extends across Singapore’s diverse Muslim community. Such blanket prohibitions, often rooted in domestic political considerations rather than comprehensive technical analysis, stifle innovation.

Similarly, self-proclaimed social media influencers increasingly issue cryptocurrency opinions without possessing dual expertise: deep Islamic jurisprudence knowledge and technical understanding of digital assets. This creates confusion undermining confidence in Islamic finance’s technological adaptability.

Proper evaluation requires scholars combining traditional Islamic legal training with modern financial and technological expertise – a rare combination demanding dedicated study and collaboration between religious authorities and the technical specialists.

Strategic position

Singapore’s multicultural society and regulatory sophistication position it uniquely to lead global Islamic fintech innovation. The city-state’s established Islamic finance sector, combined with its digital economy initiatives, creates conditions for demonstrating how Shariah compliant principles can enhance rather than constrain financial innovation.

The conventional financial system’s excesses have never been more apparent, from predatory short selling to speculative bubbles. Meanwhile, Singapore’s technological infrastructure offers unprecedented opportunities to implement Islamic principles at scale while serving underserved regional populations.

Success requires Singapore’s Islamic finance community to abandon defensive postures and embrace proactive engagement. The sector must articulate its value proposition in terms of how the Lion City’s international financial community understands stability, transparency, ethical investment and sustainable returns.

As Singapore positions itself as Asia’s digital finance hub, Islamic finance possesses solutions to many conventional finance problems. Whether the sector seizes this moment to lead Singapore’s financial innovation or remains sidelined will determine not just its own future, but the city-state’s trajectory as a global center for ethical digital finance.