Digital age smart contracts for Islamic finance

(Edited version of this article appeared in my column in the Malaysian Reserve on 13th Febuary 2017)

The mobilization of funds from the Surplus Fund Units (SFUs) to the Deficit Funds Units (DFUs) in Islamic Financial System must be through contracts permissible by the Shariah such as Mudharabah, Wakalah, Murabahah, Ijarah, Musharakah, Istisna’ and Salam. 

Islamic finance products are structured based on either one or a hybrid of these contracts. Examples of hybrid Shariah contracts include Musharakah Mutanaqisah, Tawarruq and Ijarah Thumma Al Bai’ (AITAB). Hybrid contract structures typically involve multiple contracts and/or multiple parties to complete the transactions.

In order to be Shariah compliant, Islamic finance products must observe the fundamentals of contracts in Islamic law. Three main fundamentals are contractual expression (offer and acceptance), parties to the contracts and subject matter of the contracts. Each of these fundamentals come with certain guidelines. For examples, the offer and acceptance must be unambiguous, the parties must have the competency to conclude the contracts and the subject matter must be ascertained by the parties at the time of the contracts.

In the implementation of Islamic finance products, these fundamental guidelines are translated into a set of legal documentations which must be executed according to the right sequence. In Murabahah case for instance, the contractual expression is in the form of Sale and Purchase Agreements (S & P), the subject matter is clearly specified in the S & P documents and the parties to the contracts are represented by the documents’ signatories. To avoid uncertainty (gharar) of selling something that has not been possessed, the sequence in signing of the S & P documents will have to follow the direction of the transfer of assets (subject matter of the contract) between the financial institution and the customer.

The number of legal documents will be more and the order in which the documents need to be executed will be trickier for hybrid Shariah contract structures as there are more contracts and more parties. Let’s look at Tawarruq (also referred to as Commodity Murabahah) as the case in point. Tawarruq refers to the contract of purchasing a commodity on credit by those who need cash and selling the commodity to another party (not the original seller) for a lower price on cash basis. In addition to Islamic financial institution (IFI) and the customer, at least two other parties known as commodity brokers are involved in the transactions. Assuming the product is Islamic personal financing, the sequence of transactions is (1) IFI purchases commodity from Commodity Broker A, (2) IFI sells the Commodity to Customer on deferred payment, (3) Customer appoints IFI to sell the commodity to Commodity Broker B and (4) IFI sells the commodity on behalf of customer to Commodity Broker B. Step 3 involves an agency contract known as Wakalah.

At present, most of the steps described above are still controlled manually. This exposes IFIs to Shariah incompliant risk. In the event bank disburses the financing amount to the customer before full completion of the above steps, the transaction violates the condition precedent of the contract. In Tawarruq application for personal financing, cash can only be generated out of selling the commodity purchased earlier to another commodity broker on cash basis. In addition, the current processes in handling Tawarruq in financial institutions are time consuming and costly.

Blockchain smart contract technology has the potential to significantly improve the process. Blockchain is a peer-to-peer public ledger maintained by a distributed network of computers that does not require central authority or third party intermediaries. First introduced in 2009, Blockchain is the foundation of cryptocurrency such as bitcoin. The scope of Blockchain technology is much wider and has the potential to improve the overall financial system efficiencies. Smart contract is one of Blockchain applications in financial services industry.

Smart contract is a computer program that can execute contract terms. Fully automated, smart contract can either complement or fully substitute typical legal contracts. The terms of the contracts are coded in computer algorithm as a set of instructions that will be executed based on the conditions specified. Upon meeting the preconditions in each step, the smart contract program will automatically execute the next step until the entire transaction cycle completes.  In fact, the advantage of smart contract is beyond automatic executions of contract terms. Leveraging on blockchain technology, smart contract programs allow immutable, verifiable and secure record of all contracts and transactions which are fully auditable.

In summary, Islamic finance products are structured based on underlying Shariah contracts. The terms and conditions of these contracts are specified in legal documents and these documents must be executed in the correct order to ensure Shariah compliant. At the moment, the controls are manual and the processes are time consuming and costly. Blockchain smart contract, an algorithm based computer program, can automatically execute contract terms and has the potential to significantly improve the overall process. 

Career Talk to Kolej PolyTech Mara Students

On the 6th February 2017, I was invited to give a talk to students of Kolej PolyTech Mara (KPTM) Bangi Campus on the topic of Islamic Banking and Finance. In addition to giving some basic info about the subject matter, I was also requested to give some motivations and share about the career prospects in the field of Islamic Banking and Finance.

With the organizing committee and their lecturers

With lecturers and the students that attended the talk

Major Fintech Achievements in Islamic Finance in 2016

(Edited version of this article was published in my column at The Malaysian Reserve on Monday 9th January 2017)

Welcoming the New Year 2017, I would like to reflect on the progress of the financial technology (fintech) for Islamic finance. Despite the fact that fintech was not particularly familiar subject within Islamic finance communities until at least 2015, 2016 records quite remarkable achievements. Initial efforts by fintech entrepreneurs few years earlier became more concerted and prominent in 2016. The following are highlights which deserve recognition.

The Investment Account Platform (IAP), Malaysia’s first multi-bank platform for financial intermediation in the Islamic financial system, was launched on the 17^th February 2016. Owned by a consortium of six Malaysian Islamic Banks, the IAP serves as a central marketplace to finance small and medium enterprises (SMEs) with an initial funds of RM 150 million. Datuk Muhammad Ibrahim, the Governor of Bank Negara Malaysia, in his keynote speech during Global Islamic Finance Forum 2016 referred to IAP as “the first Islamic banking intermediated internet-based platform that combines the expertise of Islamic banks and efficiency of technology to channel funds from investors to viable economic ventures”.

Eight Islamic Crowdfunding Platform operators from across the globe clicked together to form Islamic Fintech Alliance (IFT Alliance) and launched it on the 1^st April 2016 in Kuala Lumpur, Malaysia. The founding members are BlossomFinance (USA/Indonesia), EasiUp (France), EthisCrowd (Singapore), Narwi (Qatar), FundingLab (Scotland/Palestine), KapitalBoost (Singapore), Launchgood (USA) and SkolaFund (Malaysia). According to the alliance’s chairman and the founder of EthisCrowd, Umar Munshi, “the alliance was set up to boost the growth of fintech among Muslims with hopes that they bring significant positive impact especially to those in developing countries”. The alliance has three primary objectives namely, (1) foster safety and trust by establishing, promoting, and enforcing shared standards for Islamic financial technology, (2) broaden the reach of Shariah and social impact financial technology by supporting a network of innovators, and (3) support development of a sustainable global ecosystem by interfacing with and providing industry insights to regulators and other key stakeholders.

Robo Advisors are fintech innovations that have been disrupting traditional investment advisory services. Robo advisors provide online, automated and algorithm-based wealth management services without the use of human financial planners. On the 26^th September 2016, New York-based Wahed Invest Inc. launched Wahed, the world’s first automated Islamic investment platform with “the aim of providing access to halal portfolio management for 2 billion Muslims around the world”. In addition to being the world’s first automated ethical investment platform, Wahed offers lower minimum investment amount of USD 7,500. Wahed is claimed to be the first global Robo Advisor to be accessible by the world’s lower socio-economic demographic. According to the statement during the launching, Wahed was available in the United States and would be rolled out to over 100 countries worldwide by 2017.

On the 28^th September 2016, Finocracy announced Future Finance 2030, the first Global Islamic Fintech Hub which would be the focal point of the fast growing Islamic fintech space. The fintech hub will be at CH9, a business accelerator that envisions to enhance the entrepreneurship ecosystem in Bahrain and GCC region. Future Finance 2030, expected to launch in the 1^st quarter 2017, will include key elements that will continue to power rapid expansion of Islamic fintech while building connectivity with the wider Islamic finance industry. The plan includes an accelerator program, a virtual network to connect various businesses, educational programs for executives and students, and a global hackathon series that will encourage Islamic Fintech development across emerging markets.

Two months after the launching of world’s first Islamic Robo Advisor, Wahed, on the 27^th October 2016, the Kuala Lumpur-based Faringdon Group announced that it would be launching the Asia’s first Shariah compliant Robo Advisor. The online tool called Algebra will provide automated portfolio management advice. Open to investors across all geographies with a minimum investment amount of USD 200 per month, clients can choose funds from Islamic Master Select Portfolio. The CEO Stuart Yeomans said that “Algebra brings together the sound investment principles of Shariah compliant funds with the next generation investment tools".

On the 3^rd November 2016, Securities Commission Malaysia awarded six Peer to Peer (P2P) licenses, one of which is the world’s first license for Shariah compliant P2P. The license was awarded to Ethis Kapital which focuses on funding small businesses and real estate development projects. Together with seven other crowdfunding platforms, Ethis Kapital is part of Ethis Ventures that builds, runs, and initiates Ethical and Islamic Crowdfunding platforms. According to the Chairman, Dr. Shahridan Faiez, Ethis Kapital has twin focus which are to support and develop the Islamic Sharing Economy in Malaysia and to grow into a serious global player.

Although launched last year, some of these initiatives have been targeted to only start their operations in 2017. Further progress of these initiatives and new innovative entrants will position 2017 for more excitements. Malaysia and Bahrain are very likely to take the lead. Malaysia has issued Fintech regulatory sandbox framework on the 18^th October 2016 and Central Bank of Bahrain is considering fintech regulations. With facilitative environments provided by these two leading Islamic financial hubs, I am optimistic that more amazing achievements will be recorded in 2017 for fintech in Islamic finance.

Fintech in Islamic Capital Market

Teaser of my interview with Capital TV Malaysia. The program was aired on Thursday, 5th January 2017, 8.30 pm.



https://www.youtube.com/watch?v=IS0AFsrBQNg

Muamalat Banking System

One of my biggest achievement is to have been entrusted to lead Bank Muamalat Malaysia Core System replacement project. In fact, I was responsible even for the tender response and was involved in the commercial negotiation.

My CV was submitted in the tender response as project director should Silverlake win the project. When Bank Muamalat finally awarded the job to Silverlake in early December 2012, my duty as the captain of Silverlake team officially began. The project was officially kicked off on the 13th December 2012.

My boss, Silverlake Executive Chairman signing the contract

I was lucky to have worked well with another colleague that took care the relationship part.

With colleagues during the signing ceremony

In order to speed up the process, Silverlake and Bank Muamalat agreed to have signing ceremony and project kick off on the same day.

Bank Muamalat CEO, Dato' Redza and one of the board members talking to me giving very high expectation

The core bank system replacement "codenamed" as Muamalat Banking System or MBS was very important for bank muamalat. Most of the board members attended the official kick off.

High tea with some of Bank Muamalat top management and board members.

The project was successfully completed 16 months later. Bank Muamalat officially cutover the new Silverlake Integrated Islamic Banking System (SIIBS) on the 16th June 2014.

With key project management team from Bank Muamalat

Fintech for Islamic Finance 2017 Outlook

(I first published this article in Linkedin on the 21st December 2017)

The 23^rd Annual World Islamic Banking Conference (WIBC 2016) was held at the Art Rotana Hotel Bahrain on the 5^th, 6^th and 7^th December 2016. The theme for this year is Economic Uncertainties: Vigilance and Growth. WIBC 2016 with its 23 years heritage had successfully attracted leading bankers, institutional investors, asset managers, policy makers, academics and other stake holders from across the globe to converge and engage into critical discussions across multiple dimensions of Islamic financial system such as banking and finance, Islamic financial market, asset allocations etc.

For the second consecutive year, one of the salient features of WIBC 2016 is on financial technology or fintech. Enterprise Excellerate, one of the two parallel sessions on Day 1 that was dedicated to fintech, saw prominent fintech personalities and advocates engaging into interesting and thought provoking discussions on fintech revolutions, challenges and regulations, fostering culture of innovations, blockchain and cryptocurrency, robo-advisors, crowd-funding, digital banking and cybersecurity. I happened to be one of the panel in discussing how best to engage customers in enhancing their digital experiences.

In addition to the dedicated stream on Day 1, fintech topics also appeared in the main agenda on Day 2 and Day 3. Islamic finance in digital age, cyber security challenges facing the banking industry and digitization of Islamic financial institutions were discussed on Day 2. Day 3 continued with two more sessions, how can Islamic finance adapt to the fintech revolution and enhancing banking growth through fintegration. I was also a panel in the latter.

Curated based on robust industry research and in conjunction with stakeholders across the global industry, the line ups of WIBC 2016 agenda pertaining to various aspects of fintech proves that global Islamic finance fraternity do realize fintech potentials as enablers to bring Islamic finance to the next stage. This is further evident by the remarks on fintech disruptions and opportunities made by numerous speakers and audiences even when they were discussing topics not dedicated to fintech.

Sitting through the whole there days of the conference, I observed that while there were still a few skeptics, the majority were in agreement that fintech disruptions was real and there were huge opportunities for fintech in Islamic finance space. For example, during CEO Power Debate session discussing the way forward for Islamic finance, a speaker highlighted the fact that Islamic finance has not fully tapped on the potential of huge muslim market in Indonesia, Pakistan and Bangladesh which coincidentally has a large unbanked segment. While traditional brick and mortar branch network could be a challenge to reach out to these prospects, digital financial services could be a good solution to drive inclusion for this segment, thanks to the amazingly high mobile phones penetration in these geographical locations.

Besides addressing fintech opportunities and disruptions in general, there were also discussions on the implications to traditional banking services. Some audiences related their unfriendly experiences with the current banking services. This could be easily solved with customer experience centric digital banking design. Customers in digital age expect personalized banking services which some of the fintech companies have been able to provide. In order not to lose more to the fintech companies, Islamic banks must embark into digital banking journey. Quoting one speaker, “Digital Banking is not about providing banking services online but about transforming banking experience from acceptable to delightful”.

I left Bahrain on the evening of 7^th December 2016 after WIBC 2016 drew its curtain feeling satisfied with my own conviction on fintech in Islamic finance that we have come to past the awareness stage.  There has been enough excitement and the stake holders have begun to realize the way of doing business is changing. I believe that decision makers are getting accustomed the phrase, “if you do not disrupt you own organizations, others will”. Some have started to take actions and I am optimistic that we will be seeing more in the near future.

2017 looks very promising for collaborations for innovative solutions between fintech companies with the traditional financial services’ providers. We can expect to see more of the “platformification of banking” that kicked off in 2016. Platformification is a strategic partnerships between existing banks and startups toward becoming banking platforms. Platformification concept originates from the platform idea of plug-and-play business model that allows multiple participants (producers and consumers) to connect to it, interact with each other and create exchange value. 

Capital TV Business Segment on Fintech and Islamic Capital Market

For the 2nd time this year, I agreed to appear in the Capital TV to talk about Fintech. This time is on Fintech and Islamic Capital Market. We did the recording on the 27th December 2016.

Getting ready for the recording

During the recording, I was asked the following questions:

1. Much has been discussed about financial technology or Fintech. Can you recap what is fintech all about?

2. What are fintech innovations in the Capital Market space?

3. Is there any indication on how much have been invested for the development of fintech in the Capital Market?

4. Please give some insights on the fintech influence in Islamic Capital Market Development and what are the challenges?

5. What are your observations and recommendations on the potentials of fintech in the Islamic Capital Market

Recording is in session

Fintech innovations in Capital Market space are crowdfunding and P2P online platforms, online and mobile trading platforms, social trading platforms, high frequency trading program and robo advisors.

The host is taking notes

According to Accenture Fintech Evolving Landscape 2016 report, USD 50 billion has been invested in fintech companies since 2010. 

Engrossed with the subject which I love to talk about

This is my last program on fintech for this year. There will be a lot more next year. 2017 looks very promising on fintech development..

The whole set up for the recording session

Stay tuned for a lot more sharing on my involvement as financial technology advocate in Islamic finance space.