There has been a lot of talk about digital banks in different parts of the world. Malaysia, having the most advanced Islamic economy ecosystem, has finalized the regulatory framework for digital Islamic banks. The following article discusses this issue in further detail.
Malaysia’s central bank Bank Negara Malaysia is pushing the financial sector to join the digital banking revolution: It is preparing the issuance of the country’s first five digital banking licenses to “qualified applicants,” both conventional and Islamic banks and both local and foreign financial institutions. The move to support the development of digital banks in Malaysia follows efforts undertaken by regulators in Singapore and Hong Kong, which have each issued similar licensing frameworks in the past two years, but Malaysia’s roadmap is the first that explicitly includes Islamic banks.
“The issuance of digital banking licenses is part of a series of measures adopted by the central bank to enable innovative integration of technology to the financial sector,” the central bank said in a statement.
Digital banks – also named virtual banks, neobanks or challenger banks– predominantly deliver banking services through digital channels such as Internet portals and smartphone apps with minimal, if any, brick-and-mortar presence. Typically, their services are taken up by tech-savvy younger clients or “unbanked” or “underserved” customer segments who otherwise have no access to banking such as low-income individuals or early-income millennials, as well as those who look for tailored small business banking services which high-street banks do not offer, such as start-ups, small and medium enterprises, entrepreneurs and freelancer.
In the conventional banking segment, digital banks are usually operated by a variety or mix of e-commerce companies, technology, and telecommunications corporations and financial technology firms that act alone or in cooperation with established banks. Among the largest standalone digital banks globally are currently N26 from Germany, Monzo, Starling and Revolut from the UK, Chime from the US, Tangerin,e from Canada, Nubank from Brazil, Neat from Hong Kong and WeBank from China.
As of 2018, the digital banking market volume was around $5.2bn in terms of assets under management and is expected to reach $16.2bn by 2025 based on a compound annual growth rate of 15.3%.
The Islamic financial industry has been a bit slower in adapting to the new digital opportunities, and while there have indeed already some Islamic digital banks been launched in the recent past, they are neither as large as their conventional counterparts nor as well-known. Examples are insha, a co-operation of Turkey’s Albaraka Turk Participation Bank with German solarisBank, and some others such as Boubyan Bank. Adding to this, Qatar Islamic Bank as part of its digital transformation has developed a fully digital financing services arm for which it already received a number of awards.
Malaysia could potentially join with digital Islamic banking services in case Maybank and CIMB receive digital banking licenses. Both are established Malaysian banks with large Islamic windows which reportedly applied for a dig frontal banking license.
Industry analysts widely agree on the notion that digital banking is the way to go also for Islamic banks as consumers and businesses have become more sophisticated and selective these days as a result of technological advancements. In turn, banks would get access to customer
the information which would allow them to mine data and employ data algorithms in order to adapt business models and understand their customers better, which entails opportunities for growth especially in the lending business and the development of new services.
The emergence of digital banking is also an opportunity for Islamic banks that comes amidst slower growth in the industry over the past three years. Apart from the “underbanked” and small and medium enterprises, which would welcome digital banking in a first phase, there is an entire new customer segment to address as Islamic finance customers have become younger and more affluent and are taking advantage of e-commerce in sectors such as tourism, fashion, health, beauty, as well as media and entertainment. There are 60mn potential youthful clients in the GCC alone, and many of them are equipped with the latest tech gadgets and thus are increasingly mobile with better access to technology than ever before.
With the digital banking roadmap open for Islamic banks, Malaysia could become a role model for other Islamic jurisdiction to issue digital banking licenses as the country signals that digitizing banking services are no longer a niche program, but a commercial necessity.
Originally published on www.gulf-times.com
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Bishop David Oginde’s opinion piece “Why expansion of Sharia laws remains perturbing” published in the Sunday Standard last weekend gave the impression that some proposed reforms in the Finance Bill 2017 portend danger simply because they touch on Islamic financial products. Bishop Oginde was clever in his approach but his message was loud and clear; Reforms to help promote Islamic financial products in this country should be viewed as a grand scheme of Islamisation, subtly disguised in a policy cassock. Here is why his arguments do not hold water: First, the good Bishop’s opposition to the institutionalisation of these reforms seems to be on the basis that they are discriminatory and would marginalise non-Muslims. Bishop Oginde notes, “The concern therefore is that such a move may result in a situation where the Muslim community enjoys preferential exempt status by government in the raising of taxes to fund national obligations, while non-Muslims continue to shoulder the burden.” This is laughable! How can such a statement be true when these products are available to every individual, irrespective of their religious leanings and will be traded by the Barclays, CBAs and KCBs of this world? This is not religious zamzam water being availed in mosques only. These are financial products available in the market for all Kenyans. How is it then that the non-Muslims will be subsidising the Muslims? Gai! Second, who says non-interest based financial transactions are based purely on Islam? It is not Islam only that prohibits interest and usury. Christianity and Judaism also condemn it. The Bible condemns interest and usury and one would expect a bishop like Oginde to know this. In fact after the recent global financial crisis, Osservatore Romano, the Vatican Newspaper published an article extolling the merits and successes of Islamic banking and voiced its approval of Islamic finance. It asked banks to look at the rules of Islamic finance to restore confidence amongst their clients at a time of global economic crisis. “The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service” it wrote. May be Bishop Oginde is more Christian than the Pope himself. Furthermore, would not a Christian bishop having issues with an ethical based financial arrangement not give the impression, albeit a subtle one, that the conventional interest-based financial institutions that many Kenyans detest today, are indeed Christian? Why would a bishop, of all people, have a problem with any system meant to ensure people are not exploited and taken advantage of, just because it is the brainchild of another faith? If Kenyan Christians want to establish banks or products that go with their ‘no usury’ Christian principle, why wouldn’t that be welcomed by even say the Muslims? Bwana Bishop, we Muslims have absolutely no problem with Saturdays and Sundays being rest days, not to mention the many other Judeo-Christian based laws of our constitution. Finally, Bishop Oginde thinks Kenya’s plan to join the Organisation of Islamic Countries (OIC) is a well calculated move to Islamised the country. What he ignores is that many other countries, like Ghana and even our neighbour Uganda, with negligible Muslim population, are already in it. Kenya, like these other countries, wants to join IOC for financial not religious reasons. It wants to access loans from the Islamic Development Bank (IDB). Such loans will benefit all its citizens. People like Oginde would probably opine that Kenya does not need the IDB since it is ‘Islamic’. They would rather we take loans from the IMF and the World Bank because these institutions in their misconstrued judgments are ‘Christian’? Countries such as the UK, China, Japan, US and South Africa, which have minority Muslim populations, have amended their legislation to accommodate these products. Even the World Bank recognises Islamic finance as an effective tool for financing development worldwide, including in non-Muslim countries. It is an industry with $1.5 trillion in assets and Kenya cannot ignore it. Kenya needs an integrated financial system with deep and efficient financial markets capable of improving financial inclusion and wooing international investors from all corners of the world. Before the introduction of Islamic banks and Islamic windows in the conventional banks, we had a deliberately unbanked citizens who did so in order to maintain their religious sanctity. The proposed reforms in the Finance Bill 2017 are meant to attract this group. They are also geared towards attracting investments from the Islamic axis of the liquidity rich Middle East, South Asia and North Africa, open up investment opportunities in our financial institutions and ultimately create jobs for Kenyans of all faith. These are the reasons behind the amendments being made to the several finance related laws in the Finance Bill 2017. Bishop Oginde should see these issues in terms of their substance and not in their identity.
CONVENTIONAL banks aside, there is a push by industry players for mergers and acquisitions (M&A) to take place in the crowded Islamic banking as well as the non-bank lender space.