The IFN US Forum 2017 was held in New York City at PWC headquarters on the 19th October, and it had an IFN Fintech Session. As moderator and participant, Rushdi Siddiqui shares some of the topical issues discussed with the CEO of Guidance Residential, Kal Elsayed, and the chief strategy officer, Harsh Khurana, of Wahed Investment.
Does innovation exist in Islamic history?
The world believes that words/concepts like ‘disruption,’ ‘innovation,’ and ‘invention,’ are attributed to the global technology hub called Silicon Valley.
The reality is the world’s first ‘silicon valley,’ was from the 7th century to the 13th century, and it was from Spain to Morocco to Mecca to Egypt to Baghdad (where the ‘House of Wisdom’ was based) and was called the Islamic Golden Age or in today’s lingo: Startup Nation. Muslim inventors/innovators disrupted the areas of healthcare, medical care, agri-tech, payment gateway, empowerment of women, etc, and it spread by way of trade.
But something happened, and the Muslims went from producers and suppliers to consumers, from innovator to imitators, from engineering to reverse engineering, from exports of people (brain drain) and capital (acquiring trophy assets) to importers of debt-fuelled consumerism. Today, the Muslim world economy GDP is biased toward agriculture, garments, commodities, basic manufacturing and commercial banking; and an examination of sectors of stock indices in Muslim countries aptly tells the story. The bank/debt culture dominates, and, it’s well established that innovation is not sparked by debt or Sukuk. Equity culture, risk-taking capital, failure as learning are the DNA ‘grease’ of innovation.
Recently, the deputy governor of the Malaysian central bank, Abdul Rasheed Ghaffour, said what is acknowledged, “the days of double digit annual growth are now behind the industry. The industry must now seize opportunities in new growth areas; reinforce the core strengths of Islamic finance; unlock its potential; and realize its intended promises…these being the rise of entrepreneurship, the growing interest in Halal economy; and the global large infrastructure financing needs…”.
The challenge is blue printing the lofty vision for the road ahead with attainable timelines and accessible milestones. But, because the 56 Muslim countries are at various stages of economic development, capital market maturity, knowledge and awareness of Islamic finance, one size entrepreneurship does not fit all, hence, country/regional approach is the preferred approach.
The fintech space is broad and deep with focus on financing, investing and savings. Fintech application to the Islamic digital economy is both (disruptively) inevitable and a white space opportunity because of inefficiencies, limited product offerings, rising cybersecurity threats, and, most importantly (from my point of view), inclusion. It’s acknowledged that Islamic banking is evolving from a low technology base and has been moving forward with internet banking, mobile banking and now digital banking, but, the question is, ‘what have been impactful innovations in the last five years?’ If none/few, how will growth and expansion, especially toward future customers, digitally savvy and social media-oriented Muslim millennials, take place?
To overcome the lack of meaningful and dedicated (Islamic) venture capital in the Muslim world, efforts such as crowd sourcing and peer-to-peer lending have been initiated and traction will take time. Additionally, accelerators (and work space), incubators and venture builders dedicated to Islamic digital economy verticals are at concept stage. But, as Islamic venture capital starts funding Series C and beyond, private equity (which is more prominent in OIC) will be looking at these Islamic digital economy start-ups.
It is expected that initial coin offerings will become a part of the Islamic digital economy conversation in the future as a funding alternative. Furthermore, special purpose acquisition corporations may also become an alternative to traditional start-up (exit) IPOs, without the challenges and distractions of going public; Silicon Valley-based Social Capital (Hedosophia) may well be a good case study to examine.
Where there is fintech, regtech must shadow it. The financial industry is one of the most regulated (and rightfully so) to prevent fraud/scams and protect the ‘man on the street’ without stifling innovation. This means regulatory staff must have the necessary fintech background to ask the right questions. The ‘regulatory sandbox,’ is the intelligent way forward in finding a balance between maintaining integrity and encouraging innovation.
The findings of IFN Fintech’s Islamic Fintech Landscape identified 103 fintech startups across 24 countries, encompassing nine verticals, with 67% comprising crowdfunding, banking software and payment/remittances, and with fintech headquarters in Malaysia (Islamic finance hub), UK (Islamic finance hub), Indonesia, UAE (Islamic finance hub) and US (surprise).
There are a few important takeaways:
- Technology is a change agent and a ‘welcome mat’ for young people to the start-up ecosystem.
- There are Islamic finance start-ups, attested by having a Shariah advisor/board, but there are also firms with the technology, open source or off-shelf solutions, that apply to such start-ups, hence, they are also part of the Islamic digital economy.
- The focus has to expand beyond Islamic finance fintech to include Halal travel, modest fashion, Halal food, and other verticals of Islamic digital economy, as the common denominator for growth and scale is finance.
Islamic cryptocurrency (Dinar)
In all the noise about the 1,000 plus cryptocurrencies from bitcoin to Ethereum and valuation to usage, it’s a matter of time before we hear about developments of an ‘Islamic dinar’ cryptocurrency to address payments and to de-link from G7 currencies. Obviously, there are Shariah compliance issues, from underlying assets to trading as an asset class, but the Islamic digital economy will need to be powered by an Islamic digital currency. The acceptance of cryptocurrencies by governments for taxes will greatly help in the adoption of such currencies, otherwise it becomes a continuous challenge.
Time limitations prevented discussion on a number of pressing topics including smart building and tech tourism, mosque-tech challenges (youth reconnecting via hack-a-thons to work space), identity management (important source of inclusion for Islamic finance), blockchain for Halal food supply chain, agri-tech (drones, computer vision, AI/ML, data), healthcare-tech (poverty and diabetes), knowledge fund, with OIC SWFs as LPs, modeled after Softbank’s US$93billion Vision, but deployment within OIC, etc.
The smartphone is a building block foundation for the likes of unicorns and decacorns like Instagram/Pinterest, Twitter, Uber/Lyft/Grab, AirBnB, etc. Will it also produce an Islamic digital economy version of Facebook, Amazon, Alphabet, Apple and Microsoft?
The challenge in building an Islamic digital economy unicorn is generally not talent or ideation, but of a capital intensive nature. For example, artificial intelligence (talent, huge amount of data, crunching, predictive analytics), autonomous cars, internet of things and drones (expensive to build, bring to market and scale), and even healthcare (Research and development, clinicals, regulations, patents, etc) are example of up to, say, Series D and then exit. Today, the Islamic digital economy is struggling with pre-Series A with bias towards consumerism (demographic capture) over enterprise.
The Muslim world recognizes the new Golden Age is a knowledge-based economy powered by technology and young people. There are many pain points in Islamic digital economy, but, those are also opportunities to build unicorns!