Malaysia’s Islamic Finance Industry Urged To Embrace Fintech
Islamic banks and financial service providers in Malaysia, which is currently riding out a slowdown in global growth of the sector, have been told they should develop more new products and embrace innovative tools from financial technology (fintech) startups in order to better navigate through the current disruptive phase the global financial sector is experiencing.
Islamic finance fintech has indeed already found influential supporters. According to Marzunisham Omar, the assistant governor of Malaysia’s central bank, the growth of fintech provides “innovative opportunities” within the entire financial sector and thus cannot be ignored by the Islamic finance industry, particularly in Malaysia, where Islamic banking assets are at close to 30% of the entire banking system and where the number of digitally knowledgeable consumers and mobile banking users is rapidly growing in line with most other Southeast Asian countries.
Omar, who spoke at the Islamic Fintech Dialogue 2017 held on October 10 in Kuala Lumpur, said that the Islamic finance industry in Malaysia should invest more in financial technology and support fintech startups and talent, while, at the same time, they would have to reassess and re-engineer their traditional business models and open up to digital transformation as a new strategy on all company levels, be it operational, structural or cultural. This could best be done by entering digital partnerships and alliances with fintechs, like many conventional banks in Europe, America and Japan are doing, Omar said.
He noted that – while the number of Islamic fintech startups, innovation labs and incubators are generally on the rise – they are not as visible in the Islamic finance world as their conventional counterparts. This would underline the necessity of established Islamic finance institutions supporting the upcoming segment and help develop solutions that make Islamic banking quicker, cheaper, simpler, more efficient and more convenient. This would enable them to open up new digital markets that were barely thinkable just a few years ago by deploying digital financing platforms for small and medium companies or robo advisory for Islamic investors or online takaful, just to quote a few examples of what would be possible.
Nazrin Shah, Sultan of the Malaysian state of Perak, in his role as the financial ambassador of the Malaysian International Islamic Financial Center, at the opening of the 14th Kuala Lumpur Islamic Finance Forum 2017 on October 3 also reminded the Islamic finance industry that embracing fintech was imperative at a time when digital technologies are rapidly developing and disrupting the entire financial sector. He added that Islamic finance needed to keep pace with the fast changing global financial industry which is exposed to new digital technologies, while not compromising on Shariah principles and Islamic ethics.
Besides fintech, Shah also saw high demand for more Islamic finance products in general. He noted that – while Islamic banking assets such as sukuk and investment funds currently account for around 80% of the global Islamic financial system – Islamic capital products make up just the rest of around 20%. To increase the latter’s share and attraction, more alternative Islamic asset classes needed to be developed at a “much faster rate,” Shah said, naming mutual and venture capital funds, private equity, insurance products, microfinance, crowd funding and, generally, more tailored and structured financial solutions. Furthermore, innovative financial solutions such as crowd or peer-to-peer funding would in fact be ideal fits for Islamic finance, given the participatory character of their profit-and-loss sharing schemes, he added.
However, analysts noted that Malaysia also needs to open up for fintech on the regulatory level as long as the sector is still in its infancy. For example, the Malaysian government’s stance on cryptocurrencies is still unclear as it is currently drafting cryptocurrency regulations to be issued by the end of the year, which could include a tightening of their use or even an outright ban. Also, the vast amounts of Big Data being generated and being made accessible to banks and financial institutions, enabling them to manage, analyse and customise products for businesses and individuals, implies the need for a clear legislation on how to protect such data and regulate access to it.
Meanwhile, another strong supporter of Islamic fintech on a global level, no less an institution than the Islamic Development Bank, recently launched its new initiative, the FinTech Islamic Finance Challenge, a competition for startups with innovative solutions, business models or products for Islamic finance or simply people with fresh concepts in the area. The competition (http://isdbfintech.net), which lures with attractive prize money, accepts ideas at all stages, the only requirements are that the projects must be based in one of the 57 member countries of the Islamic Development Bank and that they have to be submitted by November 30, 2017, at the latest.