Monday, 31 October 2016

Opportunity awaits Islamic fintech ventures

In his keynote address during the Global Islamic Finance Forum (GIFF 5.0) in May 2016, Datuk Muhammad Ibrahim said: “Fintech is challenging the status quo of the financial industry”. He added that the overall banking revenues could be at risk by 2025 due to financial technology or fintech innovations.

In the very same speech, the governor mentioned that Bank Negara Malaysia (BNM) had been engaging with fintech firms to better understand their activities and providing guidance on the regulations that may apply to them. He also announced that BNM had commenced a review on the regulatory framework to suit fintech innovations.

In June 2016, BNM established Financial Technology Exposure Group (FTEG), which would serve as the focal point on fintech-related queries that include matters related to regulation and adoption of fintech by the FSI (financial services industry) sector. The momentum continued with a discussion paper on fintech regulatory sandbox framework issued on July 29, 2016.

“Regulatory sandbox” is a concept where businesses can test innovative products, services, business models and delivery mechanisms in a live environment without immediately incurring all the normal regulatory consequences of engaging in the related activities.

The discussion paper sets out the key principles and the proposed approach in operationalising the so-called sandbox.

The central bank had invited written comments on the specific questions set out in the paper as well as any general comments. Finally, after incorporating public feedback on the discussion paper, BNM issued Financial Technology Regulatory Sandbox Framework (FTRSF) on Oct 18, 2016, which took effect immediately.


The sandbox framework is applicable to all financial institutions licensed under Financial Services Act (FSA) 2013, Islamic Financial Services Act (IFSA) 2013, Money Services Business Act (MBSA) 2011 and Development Financial Institutions Act (DFIA) and all fintech companies intending to carry out businesses defined in all the Acts stated above. Applicants to participate in the sandbox programme can be a financial institution on its own, a fintech company on its own or a collaboration of a financial institution with a fintech company.

One of the key objectives of the FTRSF is for BNM to provide a regulatory environment that is conducive for fintech innovations to be deployed and tested in a live environment within specified parameters and timeframes.

To participate in the sandbox programme, interested parties must fulfil the eligibility criteria and submit the required documents as specified in the framework. In addition, the applicants must identify risks that may arise from the testing of the product, service or solution in the sandbox and propose the necessary safeguards.

Islamic Fintech

For Islamic financial services, it is stated that in assessing the risks and evaluating the proposed safeguards, BNM will give due regard to ensuring innovative solutions for Islamic financial services are consistent with prevailing Shariah standards.

Fintech companies that collaborate with Islamic financial institutions (IFIs) could leverage on the respective IFIs’ existing Shariah governance processes. Fintech companies that intend to provide services within the purview of IFSA 2013 need to ensure that they are well versed with the prevailing Shariah standards, either by employing people with the required knowledge or by engaging services from Shariah consultants.

Proactive approach

The fintech sandbox framework provides a conducive environment for fintech deployment. The Malaysian central bank governor has been extremely vocal and proactive in fintech initiatives.
Under his stewardship, BNM is seen as progressive on fintech development. In a short few months after his appointment as the governor, we have seen BNM making at least one announcement every month on matters related to fintech, leading to the recent issuance of the sandbox framework.
Fintech startup companies could also take advantage of the government initiatives known as Startup & SME Promotion Year declared in the recent Budget 2017 speech by Prime Minister Datuk Seri Mohd Najib Razak.

The conducive environment for fintech development and Malaysia’s proven track record in Islamic finance make Malaysia a good candidate to lead Islamic fintech movement.

As one of the “big-four” global centres in Islamic finance, Malaysia is well positioned to take advantage of the opportunities. Malaysia’s vibrant Islamic finance industry, which has been attributed to the strong government and regulatory support, could be leveraged further to push for Islamic fintech agenda.

A group of eight fintech companies operating across eight different countries had already recognised this prospect when they chose Malaysia to launch Islamic Fintech Alliance, a reference point for knowledge and advice, and facilitate business matching between entrepreneurs and investors to develop a Shariah-compliant fintech ecosystem.

Malaysian startup companies and IFIs should collaborate to seize the opportunity and help to accelerate the development of Islamic fintech ecosystem. Bounty of opportunities await Islamic fintech ventures!

My column as appeared in THE MALAYSIAN RESERVE 31 October 2016