Fintech and Islamic Finance

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 18^th 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 1^st 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 6^th 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 17^th 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.