A few journalists have recently interviewed me on the subject of fintech in Islamic finance space. The following is a compilation of my answers to all the interview questions.
1. Islamic fintech
is fast becoming a catchphrase for the Shariah finance industry – are Islamic
banks truly on board with the fintech movement? Do they have the resources to
do so and how are they positioning themselves to leverage fintech instead of
risking being swept away by the disruption?
Islamic banks have not been
truly on board with fintech movement. We have not heard much of Islamic banks
fintech agenda except for the Investment Account Platform (IAP) which was
launched by a consortium of Malaysian Islamic banks in February this year. In
fact, IAP was described as the first fintech platform for Islamic Banking. The
consortium members are Bank Islam, Bank Muamalat, Affin Islamic, Maybank
Islamic, Bank Simpanan Nasional and Bank Rakyat. We hardly hear anything on
these banks’ own fintech stories.
At group level however, CIMB,
RHB and Maybank have been very active with their fintech initiatives. CIMB
launched fintech incubation programme in May 2015. RHB partnered with Startupbootcamp to bring digital innovations to the banking market in
Malaysia in April 2015. Maybank organized Maybank Fintech 2015 in partnership
with L337 ventures and more than 100 technology companies from 10 countries.
Based on the above 3 banking groups’ initiatives on
fintech, their approaches seem to be collaborations with fintech companies.
This could be an indication of the lack of internal manpower. If these 3
banking groups have to resort to partnerships with fintech companies, it is unlikely
that the Islamic banks have sufficient internal resources to work on fintech
innovations. Therefore, the obvious way forward is for these Islamic banks to
collaborate with fintech companies to proactively disrupt themselves or else
face the risk of being swept away!
2. Is Malaysia best
positioned to lead the Islamic fintech movement? How so?
Malaysia is absolutely well
positioned to lead in Islamic fintech movement. First of all, Malaysia has been
recognized as the world’s most important Islamic finance centre. As one of the
“big 4” global centres in Islamic Finance, Malaysia is well positioned to take
advantage of the opportunities. Islamic fintech movement could leverage on Malaysia’s
vibrant Islamic finance industry which is attributed to the strong government
and regulatory support. Based on some of the regulators’ initiatives already in
place, Malaysia seems to be moving towards this direction. In mid-2015,
Malaysian Capital Markets and Services Act was amended to recognize and
regulate crowdfunding platforms. In September 2015, SC launched the aFINity@SC
initiative to create a network for Fintech stakeholders to engage with SC.
During Global Islamic Finance Forum 5.0 in May 2016, the newly appointed BNM
Governor Datuk Muhammad Ibrahim announced that BNM had been actively engaging
with fintech firms as part of its process to review the necessary regulatory
framework. In Jun, BNM Financial Technology Enabler Group (FTEG) was
established. The function of FTEG is to formulate and enhance the regulatory
policies in order to facilitate the adoption of fintech. In July, Discussion
Paper on Fintech Regulatory Sandbox was issued. The discussion paper also
covers fintech for Islamic financial services. After incorporating public
feedbacks on the discussion paper, BNM finally issued Fintech Regulatory
Sandbox Framework on the 18th Oct 2016. Meanwhile, anticipating that
Malaysia will play a key role in supporting Islamic fintech, Islamic Fintech
Alliance was launched in Malaysia by 8 of so called Islamic fintech start-ups
from all over the world.
3.
What is next in
the fintech space?
We can expect bigger momentum
of fintech development especially in the following areas:
a)
Rise of Fintech
in Asia Pacific region. Now Asia Pacific is already second biggest in fintech
investment after north America which are mainly driven by fintech hubs in
Mumbai, Banglore, Beijing and Tokyo.
b)
Emergence of
newer fintech segments such as Insurtech (targeting Insurance space), Risktech
(focusing on risk management solutions) and Regtech (focusing on regulatory
aspect of financial services).
c)
Most importantly,
there will be more collaborations between banks and fintech companies as banks seem
to have accepted that fact that fintech disruptions are real and begun to
realize the potential of collaborating with fintech companies to accelerate
their evolutions.
4. What is driving the growth
of these platforms?
There are a few factors that
are driving growth of these platforms:
a)
Customer demands
for more innovative and cost effective financial services’ solutions
b)
Digital
revolution in financial services
c)
Funding supports
from VCs and corporates
d)
Mentoring
supports such as incubation and acceleration programmes
5. Is there potential for
secondary market creation?
Yes there is definitely a potential
for secondary market creation. In fact secondary market is needed to allow
flexibility for those who have invested via crowdfunding or P2P financing
platforms to exit prior to the maturity of their investments. In certain
situations, these investors may need to withdraw from the investments earlier.
With secondary market in place, investment via crowdfunding and P2P financing
fintech platforms will be more liquid. Without secondary market, it will cause
inconvenience to both fund raisers as well as investors as fund raisers may
have difficulty paying the investors before the scheduled due dates.
6. Both the SC and Bank
Negara Malaysia have issued guidelines on equity crowdfunding and fintech
respectively – what other regulations does the fintech community needs?
Regulatory infrastructure aside, what else does the industry need to move
forward?
SC’s and Bank Negara Malaysia’s
guidelines on crowdfunding and fintech respectively have been good starts for fintech
development. It is an important milestones that enable entrepreneurs to start
Malaysian based fintech businesses. However, as fintech is all about
innovations, there should not be too much or too detail guidelines. Too
prescriptive framework or guidelines will hinder creativities.
Nevertheless, regulations addressing
cybersecurity threats will definitely help to protect fintech consumers.
Other than regulatory
infrastructure, government incentives such as funding programs and tax
incentives will definitely help in accelerating fintech development.
7. How is fintech disrupting
the local market and what can we expect from it?
The disruptions are largely positive
but pose some threats to the traditional financial services providers. First of all, Fintech
contributes to the evolutions of the local financial products and services offering.
To the consumers,
fintech innovation provides choices which are more aligned to individual needs
and more competitive financial services cost. Latest technology embraced by
fintech leveraging on internet, mobile devices and social media integrations
make financial transactions more automated, user friendly and more convenient
thus superior customer experience. Crowdfunding and P2P Financing options
provided by fintechs are also a blessing for individuals or SMEs that require
financing but do not qualify to obtain financing from traditional financial
institutions. Investors are also entitled to higher potential returns by
investing directly into the business ventures that they finance via online
financing marketplace.
However, traditional
providers face more intensified competitions with fintech sharing their pies.
With consumer options to invest through online P2P and crowdfunding
marketplace, FIs would end up with reduced Deposit and Investment portfolio.
Spoilt by the fintech innovations of more cost effective financial services
anytime, anywhere, integrated and automated, local FIs are facing consumers’ demands
of similar if not better services.
8. What kind of challenges
and opportunities can we expect from this revolution?
The opportunities are
countless. The following are just some examples:
a) Very promising
industry with VCs, private equity firms, corporates and some other players
pouring in more than $50 billion into global fintech start-ups since 2010
b) Various fintech
incubation and acceleration programs have been established in various parts of
the world in support of fintech start-ups
c) All sort of
technologies available that have made it much easier for start-ups to innovate
fintech solutions.
d) Symbiotic
relationships between traditional players with fintech companies are emerging
e) Healthy
development of financial products and services offering
f) Elimination of
“credit intermediaries” offering lower prices and/or higher returns
g) Consumer
empowerment giving access and more choices as well as more visibility to
financial products services
h) Highly automated
offering connectivity, cheaper and faster financial transactions
i) Potential platform for equity financing (Musharakah & Mudharabah)
which has not been very successful in traditional Islamic finance institutions
Some of the challenges are:
a) Cybersecurity
Threats – new risk exposures. As technology advance, so doo hackers’ abilities.
b) Immature
Technology – Innovations are fresh from the oven and not well “market” tested.
c) Regulatory
Attentions – Regulatory agencies are keeping close watch particularly on legal
jurisdiction and customer protection.
d) Cultural
Challenge – Fintech is changing the nature of financial services. Therefore,
there will be a cultural change in adopting the innovations.
e) Threat to Traditional
Business As Usual Model – Spoilt by sophisticated fintech solutions provided by
fintech companies, consumers are demanding similar if not better options from
traditional providers.
9. How quick is Malaysian market adapting to this changes versus the rest of
the region? What are the factors contributing to this pace?
Compared to other countries
in the region, Malaysia market is quite slow in adapting to the revolution. For
example, in terms of regulator’s initiative, Malaysia is at least 1 year behind
Singapore. In terms of regulator’s initiative, Monetary Authority Singapore
(MAS) has proposed regulatory Sandbox, Bilateral Agreement with Australia to
boost fintech trade, Open APIs initiative and fintech-bridge deal with UK’s
Financial Conduct Authority. Even in Islamic Finance space, fintech company
from Singapore EthisCrowd has emerged as the winner of the best Islamic
crowdfunding platform.
Factors that could have
contributed to this pace are lack of regulatory support (at least up until mid
of this year) and lack of innovations by local fintech start-ups.
10. What are the fintech innovations playing out in
IF? What is the state of IF fintech? And how has it grown?
Generally, the different
types of fintech specializations are Money Transfer, Mobile Payment, Trading
Platforms, Wealth Management, Credit Scoring, Peer to Peer (P2P) Lending and
Crowdfunding. In IF,
Fintech innovations are
mainly in the forms of Crowdfunding and P2P Financing platforms.
Islamic Finance Fintech
is still in its infancy and growing although not very rapidly. The number of
fintech players specializing in IF is still considerably low.
11.
Where does fintech stand in IF as opposed to
conventional finance?
Fintech in Islamic
Finance is very far behind compared to Fintech in the conventional finance space.
Fintech revolution in the conventional space emerged shortly after 2007-2008
financial crisis. However fintech in Islamic Finance just started in the past few
years. There are a lot more fintech innovations in the conventional finance.
According to Accenture Fintech Evolving Landscape 2016 report, more than $50
billion has been invested in almost 2,500 companies since 2010. Although there
is no figure directly available for Islamic finance, judging from only a
handful fintech players in IF, fintech in IF is nowhere near fintech in
conventional space.
12.
What IF banks and IF countries/markets are
leading in fintech?
As of now, there are no
Islamic Banks or countries/markets that is really leading in Islamic fintech
yet. However, Malaysia, UAE and Bahrain may potentially lead in IF fintech due
to the fact that these countries, which are leading in Islamic Finance, seem to
have put in efforts to facilitate fintech developments. For example, the
Regulatory Sandbox discussion paper issued by BNM in July this year has a
provision on Islamic finance. Abu Dhabi and Dubai are known to have been
striving to support and develop their local technology start-ups. Recently,
Finocracy and CH9 announced their initiatives of Future Finance 2030 which they
claimed would be the 1st Global Islamic Fintech Hub which
potentially will make Bahrain to be the Islamic Fintech Capital.
13.
What are the opportunities for fintech in IF?
The opportunities for
fintech in IF is huge as the industry is very new and largely untapped. From
consumer perspective, it is estimated that by 2020 there will be 2-3 billion
new consumers that will be entering digital finance space. It is also estimated
that 80% of these new consumers will be muslims. This is definitely a
significant opportunity for IF fintech. Those who would like to be IF fintech entrepreneurs
could also leverage on the various fintech incubators and accelerators out
there that provide all sorts of supports such as networking and funding
opportunities, mentorships, customer acquisitions etc.
14.
What are the challenges for fintech in IF?
There are probably two
main challenges for fintech in IF. One is lack of innovations. This is the same
syndrome that has been faced by Islamic finance in general. Most of the Islamic
finance products in the market today are the “Islamized” version of
conventional products. The second main challenge is unfamiliarity with shariah
guidelines in developing financial services products. Unlike traditional Islamic
financial institutions where there are Shariah team whom are well versed with
Shariah requirements that will take part in product development to ensure
Shariah compliance, fintech start-ups do not have such facility.
15.
What is the size of the IF fintech market? Which
are the key start-ups?
As of now, there is no
statistic available specific to IF fintech market. The key start-ups are
EthisCrowd and Kapital Boost which are based in Singapore, LaunchGood based in USA,
beehive based in Dubai and Blossom based in USA and Indonesia. Other IF fintech
start-ups are Narwi, Easi-up, FundingLab, SkolaFund and Ata-plus. The most
outstanding is probably EthisCrowd which received the Best Islamic Crowdfunding
Platform Award at the 6th Global Islamic Finance Award 2016 held in
Jakarta and Islamic Economy Award at the Global Islamic Economy Summit 2016
held in Dubai recently.
16. What regulations/laws have been put into place
to support IF fintech? What are the BNM regulations for IF fintech? And what
are the other ASEAN and global IF regulations?
There is no IF fintech
specific regulations or laws. IF fintech will have to comply with whatever
regulations/laws out there that fintech in general will have to comply. From
Shariah compliance perspective, the financial services provided by IF fintech
will have to comply with the prevailing Shariah ruling of the jurisdictions
that the IF fintech is operating in. For example, the BNM fintech regulatory
sandbox issued in July this year stated that one of the intended outcomes was
to ensure innovative solutions for Islamic financial services are consistent
with the prevailing Shariah standards.
17.
What are IAPs? How are they a fintech platform
for IF? How does IAP support fintech?
IAP is a short form of
Investment Account Platform, an Islamic fund raising and investment
intermediary online platform owned by a consortium of Islamic financial
institutions in Malaysia. IAP was launched on the 17th February
2016. IAP will serve as a central marketplace to finance small and medium-sized
enterprises with Malaysian government backing the scheme. Initial member of the
consortium were Bank Islam, Bank Muamalat, Affin Islamic and Maybank Islamic.
Later on, Bank Rakyat and BSN also joined. IAP model is quite similar to online
crowdfunding platform where fundraising projects will be listed in the platform
to attract investment from registered members of the platform. The key
difference is that IAP is the first bank-intermediated fintech platform. It is
a fintech for Islamic finance because IAP is backed by Islamic financial
institutions and both the fund raising and investment activities are in
accordance to Islamic finance principles.
18.
How will Brexit affect IF fintech?
Brexit could have impacted
UK’s fintech industry in areas such as regulation and passporting, data
sharing, anti-money laundering, human capital, the role of banks, London as a
fintech centre and venture capital. As far as IF fintech is concerned, there is
probably no direct impact. Although fintech industry has been well established
in the UK, there was hardly any fintech innovation in the Islamic finance
space. Indirectly however, the adverse impact of Brexit on UK fintech industry
in general could have affected the potential for IF fintech to benefit from the
maturing fintech industry in the UK.
