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.

Fintech Interview in conjunction with the Royal Award for Islamic Finance 2016

As part of the publicity for the Royal Award for Islamic Finance 2016, the media team organized an interview on Fintech in Islamic Finance. I was one of the interviewees besides Raja Teh Maimunah (the CEO of Hong Leong Islamic), Elain Lockman and Kyri Audreou (both are co-founders of Ataplus, an equity crowdfunding company).

The interviewers are journalists from Business Times (News Straits Times), Berita Harian and Islamic Finance News (IFN).

The Royal Award for Islamic Finance (The Royal Award) is a distinctive Award recognizing leaders and visionaries who inspire others to create a positive impact in the world through the shared values and principles of Islamic finance. The Award is presented by His Majesty, the King of Malaysia.

The biennial Royal Award initiative spearheaded by Bank Negara Malaysia and Securities Commission Malaysia recognizes individuals who have excelled in advancing Islamic finance globally through their contributions and achievements. 

THE Royal Award 2016 for Islamic financial services is conferred on Professor Datuk Rifaat Ahmed Abdel Karim by the Yang diPertuan Agong Tuanku Abdul Halim Mu'adzam Shah on the 14th November 2016 at a ceremony held at the Kuala Lumpur Convention Centre.

The three previous recipients of the Royal Award were Datuk Dr Abdul Halim Ismail, founding member of Malaysia's first Islamic bank (2014); Iqbal Khan, CEO of Fajr Capital (2012); and Shaikh Saleh Abdullah Kamel, founder of the Dallah al Baraka Group, one of Middle East's largest conglomerates (2010).

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.

BNM Fintech Regulatory Sandbox Discussion Paper and Islamic Financial Services

Following the establishment of Bank Negara Malaysia (BNM) Financial Technology Enabler Group (FTEG) on 2nd June 2016, BNM issued a discussion paper on Fintech Regulatory Sandbox on the 29th July 2016. BNM in its Press Statement said that "the Sandbox will allow regulated financial institutions (FIs) and fintech companies looking to do businesses regulated by the Bank to experiment with fintech solutions in a production or live environment, subject to appropriate safeguards and regulatory requirements." BNM invited written comments on the discussion paper to be submitted by 30th August 2016.

 

Clauses specific to Islamic finance are as follows:

1. Section 1.6 of the discussion paper states that one of the intended outcomes is to ensure innovative solutions for Islamic financial services are consistent with prevailing Shariah standards.
2. Section 3.2 defines "Islamic Financial Services" as Islamic financial intermediation activities including Islamic banking and takaful services which leverage on technological innovation

In my opinion, the above clauses are not a problem for financial institutions as they should already have Shariah governance to ensure compliance to the prevailing Shariah standards. Collaborative fintech companies that partner with Islamic financial institutions should also not have any problem as they can ride on the Shariah governance of their partners. However, it is a big challenge for competitive fintech companies especially small start-ups which are not familiar with Shariah requirements.

 

I would recommend BNM to have a section on guidelines to comply with "prevailing Shariah standards". The guidelines should clearly differentiate the requirements for Collaborative and Competitive fintech companies. Some of the details to be included are the governance structure and the measures to be taken for ensuring the compliance.

 



Musharakah Mutanaqisah and Its Implementation in Home Financing Products in Malaysia

This is another collaboration effort with my wife. This paper, Musharakah Mutanaqisah, the Contract Elements and its Implementation in Malaysian Home Financing Products was published in the collection of academic articles by Kolej Polytech Mara (KPTM).

The following is the conclusion of the paper:

" Musharakah Mutanaqisah is an Islamic equity financing instrument. It is a form of partnership in which one of the partners promises to buy the equity share of the other partner gradually until the ownership of the subject of the Musharakah is completely transferred to him. However, the buying and selling agreement must be independent of the partnership. Shariah forbids the contract of partnership is entered as a condition for the contract of buying and selling.

Musharakah Mutanaqisah contract is a combination of two (2) contracts, Musharakah and Ijarah which have to be concluded separately. Shariah scholars internationally including Bank Negara Malaysia Shariah Council and AAOIFI, are in consensus of the permissibility of the contract.

From Shariah contract perspective, Musharakah Mutanaqisah is a binding contract. The contract comprises the elements of sale and lease which are binding and create a constructive obligation on the contracting parties. The obligation is created on the party who has agreed to buy the share of his partners and therefore he is required to pay the price of the shares. The financier, on the other hand, is also obliged to sell his share to the customer according to the ratio that has been agreed upon at the beginning of the contract.

Musharakah Mutanaqisah contract and its implementation in Malaysia as a Home Financing instrument is still a long way to go. It only started in 2006 with only seven (7) banks so far are offering this product. Since Musharakah Mutanaqisah is more globally accepted compared to BBA Home Financing which is more prevalent in Malaysia, the motivation for Malaysian banks to offer Musharakah Mutanaqisah based products is very clear. To make Malaysia a global hub in Islamic Finance industry, it is crucial for Malaysia to offer products that are aligned to globally accepted Islamic principles.

However, banks in Malaysia are still quite slow in adopting Musharakah Mutanaqisah. Instead migrating to Musharakah Mutanaqisah based financing, banks in Malaysia seems to be moving towards Commodity Murabahah based financing which is another debt based financing. At least two banks, KFH Malaysia and Citibank Malaysia, have discontinued their Musharakah Mutanaqisah based home financing products. One of the key reasons, there are still a number of unresolved issues if these banks were to strictly follow the rules of Musharakah Mutanaqisah contract. It is not that it is impossible. But, to implement it within the existing banking framework and legal regulations, operationally there are some challenges. Bankers have to change their mindset to be more “landlord” likes.

One of the main considerations for banks to offer Musharakah Mutanaqisah is the risk management aspect. The application of Shariah principles in Musharakah Mutanaqisah contracts creates distinct relationships, rights and obligations of the parties to the contracts. As a result, banking institutions are exposed to both market risk associated with the joint ownership of the underlying asset, as well as credit risk associated with the obligation on the part of the customer to acquire, and on the banking institution to sell, its share of ownership in the asset. Therefore, banks will have to have a more robust risk management system.

Although there are some issues and challenges for banks to offer Musharakah Mutanaqisah, these should not discourage them. Rather, a more collective efforts needs to be put in place to address these issues/challenges so that the Home Financing Products based on Musharakah Mutanaqisah principle will become more popular especially because the contract is more in line with higher objective of Shariah as proven by global acceptance of Shariah scholars on the permissibility of the contract."

Digital Economy and Islamic Finance - Opportunity or Disruption

Islamic Banking & Investment, Asia - Middle East Congress 2016 was held on the 6th of April 2016 at the Intercontinental Hotel Singapore. I was invited to be a panel member in discussing the topic of Digital Economy and Islamic Finance - Opportunity or Disruption. 

In my view, Digital Economy is both Opportunity and Disruption to Islamic Finance. Fintech companies, which play significant role in the digital economy, have created various opportunities for Islamic finance consumers and Islamic finance industry. At the same time, these fintech companies have disrupted traditional financial services players.

The picture below illustrates the impact of fintech to Islamic finance and digital economy.

Shariah-Related Parameters for Islamic Bank IT systems

WHILE going through one recent social media posting, I came across a question: How can we “Islamise” an information technology (IT) system in a bank? Someone with the right qualification and experience in Islamic finance answered it.

I summarise the answer as the system needed to be developed with features and functions that could support Shariah requirements of products and services of an Islamic bank.

This relates to one of my past column entries on whether an IT system can be certified as Shariah-compliant.

My view is that an IT system by itself cannot be certified as Shariah-compliant due to the fact that an IT system is just an enabler to support financial institutions’ products and services. The characteristics of the products and services would dictate the system behaviour.

An IT system of a particular Islamic financial institution (IFI), which has been configured with the requirements of its products and services, could be audited to ensure the behaviour of the system fully complies with the Shariah requirements.

In order to support Shariah requirements of Islamic banks’ products and services, the IT systems must come together with relevant Shariah-related features and functions. I refer to these as Shariah-related parameters.

Allow me to share some of the key parameters which I have gathered over 19 years of my experience providing IT systems to IFIs in Malaysia and abroad.

Top in my list is fund type. IFIs clearly differentiate their sources and uses of funds. The sources of funds can be internal (shareholders’ funds) or external (customer deposits or investments).

The external funds are further segregated into restricted funds and unrestricted funds. Restricted funds can only be used by IFIs for a specific purpose, pre-agreed with the funders whereas the unrestricted funds can be used on a general pool basis to finance banks’ fund-based products. The segregation of funds is important for profit distributions to depositors and investors.

The next important parameter is Islamic concept. An Islamic concept can simply be a single Islamic contract such as Mudharabah and Ijarah, or combinations of a few Islamic contracts such as Musharakah Mutanaqisah and Ijarah Thumma Al-Bai’ (AITAB).

Both Islamic-bank sources-of-fund products (deposit and investment) and uses-of-fund products (financing) are developed based on certain underlying Islamic concepts. These concepts govern the behaviour of the products such as the types of documents to be signed, the profit computations, the exit conditions, etc.

Some products are also designed with additional supporting Islamic concepts. For example, Tawarruq-based products can be with or without Wa’ad.

Different Islamic concepts require different sets of additional parameters. For example, Musharakah- and Mudharabah- based products require a profit-sharing ratio. Ijarah-based products require parameters for rental computations and method of ownership transfers. Tawarruq or Commodity Murabahah products require commodity types and counter parties. Ar-Rahnu products require storage fees calculation options and gold-related parameters.

In addition to parameters that are unique to a particular Islamic concept, there are some common parameters for certain categories of products. For example, common to all “sale-based” Islamic financing such as Bai’ Bithaman Aajil, Murabahah, Tawarruq and Istisna’ concepts, parameters for sale price computations are required. A sale price is as simple as financing amount plus total profit margin.

However, the profit margin needs to take into considerations the period of financing progressive disbursement (for financing of property under construction) and the period after the financing has been fully disbursed.

Rebate options are another set of parameters common for sale-based financing. Due to the progressive disbursement of financing for property under constructions, higher rates used for sale price computations, prepayments of sale price and early settlement of the financing facilities, the actual banks’ profit earning could be lesser than a contracted profit margin. The difference between the upfront profit margin and actual bank earnings will be rebated to customers by offsetting the sale price balance.

Finally, a set of important parameters very unique to IFIs are those related to the rate of return (ROR) calculations.

In Malaysia, the ROR computation is governed by Bank Negara Malaysia Rate of Return Framework. Two main components of the framework is calculation table (CT) and distribution table (DT). CT is to derive banks’ distributable income and DT is to prorate the distributable income into bank’s various types of deposits and investments. The ROR for each deposit and investment product will be derived based on the prorated distributable income for that particular product.

In summary, some parameters are required for overall Islamic banks operations, some are common by Islamic concepts and some are unique to a particular Islamic concept.

Islamic concept is key because all Islamic products and services are backed by certain underlying Islamic concepts. These concepts give rise to options or parameters to govern the behaviour and the operations of the products and services. The specific details above are merely examples. There are many more parameters required to support Islamic-bank products and services of varying degree of complexities.

My column as appeared in The Malaysian Reserves on 8 August 2016

Islamic Finance Conference 2016

I was invited to speak on Fintech during Islamic Finance Conference 2016 jointly organized by Islamic Banking and Finance Institute Malaysia (IBFIM) and Malaysian Institute of Accountants (MIA). The conference was held at Istana Hotel, Kuala Lumpur on 23rd March 2016.


I spoke about the impact of Financial Technology (Fintech) on Islamic Finance. The following were the observations and recommendations that I shared with the audience:

Observations:

•Fintech Penetration into Islamic Finance is still at infancy stage with small number of participants

•“Islamic Fintech” are mainly in the area of crowdfunding and P2P Lending

•Emergence of Fintech in Islamic Finance space is a blessing as it provides more choices for the consumers as well as providing platform for a more “genuine” Islamic financing

Recommendations:

1.For Fintech entrepreneur wannabe, it is a huge untapped industry. Consider beyond P2P and crowdfunding.

2.For traditional providers, adopt Fintech innovation. Embark into digital banking journey by collaborating with Fintech companies

Other speakers were as depicted in the picture below.

Chairman of New Zealand Rugby Union at Global Islamic Finance Forum

Knowing that the company that I work for has connection with Mr. Brent Impey, the Chairman of New Zealand Rugby Union, the organizing committee of Global Islamic Finance Forum (GIFF) 5.0 had requested for my assistance to bring him to speak at GIFF 5.0. We were lucky to get Brent to agree to honour the request.

This picture was taken during lunch specially hosted by Dato' Redza (CEO of Bank Muamalat Malaysia, also Chairman of Associations of Islamic Banking Institutions Malaysia) for Mr Brent Impey. Also seen in this pic is Tan Sri Munir (Chairman of Bank Muamalat), Mr. Goh Peng Ooi (Silverlake Executive Chairman), Dr. Raymond Kwong (Silverlake Axis CEO).

With Brent and Dr. Raymond at my company's booth at GIFF 5.0. Rugby and Islamic Finance, it has never happened before!

Impact of Fintech to Islamic Finance

Fintech has been a favourite topic at Islamic finance forums lately. It was the focus at the World Islamic Banking Conference 2015 held in Manama, Bahrain, in December 2015. 

The topic also made its rounds at the Euromoney Islamic Finance and Investment Conference (February 2016, London, UK), Islamic Finance Conference 2016 (March 2016, Kuala Lumpur, Malaysia) and Islamic Banking & Investment Asia/Middle East Congress 2016 (April 2016, Singapore). I happened to be a speaker at the latter two of these events.

What is Fintech?

Fintech, the contraction of the words finance and technology, broadly refers to the application of technology within the financial industry. It covers a wide range of activities including financing, payments and infrastructure, operation and risk management, data security and monetisation, and customer interface. 

Fintech applies to the segment of the technology start-up that is disrupting sectors such as mobile payments, money transfers, loans, fundraising and asset management.

The fintech revolution started post 2007-2008 financial crisis. At that time, policymakers were busy supposedly making finance safer while financial institutions were investing heavily in the solutions for the newly introduced compliance requirements. In between, information technology “geeks” partnered with venture capitalists to introduce a solution that was set to disrupt traditional financial services. The financial solution was technology-based, more convenient, more accessible and more cost effective.

Since then, fintech has been growing rapidly with a global investment reported to be US$12 billion (RM46.92 billion) in 2014 compared to only US$4 billion the year before.

The main types of fintech services are peer-to-peer (P2P) lending, crowdfunding, money transfer, mobile payments and trading platforms. There are also fintech services for other sub-sectors such as wealth management, insurance, etc. Some names involved in fintech are Funding Circle, FundedByMe, TransferWise, TradeCrowd and Kantox.

Fintech has also penetrated the Islamic finance space. A few prominent fintech companies that offer Shariah-compliant financial solutions are Dubai-based Beehive, Jakarta-based Blossom Finance, and Singapore-based KapitalBoost and ClubEthis. These fintechs are in the segments of P2P lending and crowdfunding.

Fintech’s penetration into Islamic finance is still in its infancy with a relatively small number of participants. However, the potential disruptions to traditional Islamic finance should not be underestimated. The disruptions can swing both ways.

From the Islamic finance consumer perspective, fintech disruptions are largely positive. Fintech innovation provides choices which are more aligned to individual needs. With more options, consumers enjoy 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 a superior customer experience.

Crowdfunding and P2P financing options from fintechs are also a blessing for individuals or SMEs (small and medium enterprises) that require financing but do not qualify for financing from traditional Islamic financial institutions (IFIs). Investors are also entitled to higher potential returns by investing directly into the business ventures that they finance via the online financing marketplace. 

Furthermore, one of the best things that has happened with fintech is that it is able to provide access to financial solutions for the roughly two billion adults who are currently unbanked, as reported by World Bank.

On the flip side, traditional Islamic finance providers face more intensified competition with fintech sharing their pies. In order to remain competitive, they have to reduce financing profit margins and service fees. 

With consumer options to invest through the online P2P and crowdfunding marketplace, IFIs may end up with reduced deposit and investment portfolios. 

With customers spoilt by the fintech innovations of convenient online services anytime, anywhere, integrated and automated, IFIs are facing demands for digital channels to perform transactions. 

The impact is not all negative for traditional IFIs. It is worth noting that fintech is not about to kill traditional players. There are still sizeable customer segments that are only comfortable dealing with brick and mortar banks. 

However, over time, traditional IFIs may face significant reduction in their customer base when digital natives (those who have grown up using the Internet and mobile devices) form the majority of the population unless the traditional IFIs embark on the digital banking journey. 

Traditional IFIs need to consider collaborating with fintech players and leverage on their technology partners. At the same time, IFIs can focus on specialisations in the business segments that cannot be easily replicated by non-traditional players.

On the overall Islamic finance scene, fintech in the Islamic finance space positively contributes to the evolution of the Islamic finance products and services offering. Elimination of credit intermediaries results in lower prices and/or higher potential returns. 

Last but not least, crowdfunding and P2P financing provides the platform for Musharakah- and Mudharabah-based equity financing, which have not been very successful in the traditional IFI environment.

My column as appeared in THE MALAYSIAN RESERVE 11 April 2016