2020 is tumultuous to say the least. The global economy is kneecapped as countless industries continue to suffer from the ongoing coronavirus shock. As we brace ourselves for what the World Bank is forecasting to be the worst recession since the Second World War this year, the Islamic fintech sector may be one of the few that could stand to gain more rather than lose out from this crisis.
The global COVID-19 pandemic has forced upon the world many difficult revelations: from how fragile our health system is to how dangerously interdependent our economies are, and from how horrifying disinformation and misinformation can be to how vulnerable our livelihoods are and how wide the digital divide is. But amid these difficult truths, we are also learning how to adapt, and to finally embrace, accelerate and implement — if we have not already — digitalization as a survival strategy.
New rules
For years, the (Islamic) finance industry has been preaching the merits of digitalization, and the coronavirus was its litmus test. Unfortunately, not all passed. Even well-resourced banks had to upgrade their delivery system and tweak their operating model when they could no longer rely on their physical strategy.
It is a sobering wake-up call for the finance community, including regulators, on how digitally prepared (or not) they are. Pakistan, for example, in March had to mandate banks to activate online financing repayments (a service widely available in other markets), one of a number of requirements the State Bank of Pakistan had set to push the banking community to be digitally self-sufficient by the end of the first half as Prime Minister Imran Khan’s government prepared for a national lockdown. Unfortunately, the regulator had to extend the timeline for phasing out person-to-person transactions to branchless banking by another six months to the 31st December 2020, signaling how (in)effective banks have been able to cope with going digital.
We also see regulators enacting a slew of digital innovation regulatory changes along with a raft of policies to mitigate the impact of COVID-19: the Central Bank of Nigeria recently released its guidelines on digital payment services after urgently introducing new Islamic financing facilities to support its MSME sector, Saudi Arabia released regulations for debt-based crowdfunding while Bank Negara Malaysia (BNM) issued its long-awaited draft framework for virtual banks. BNM’s Shariah Advisory Council also resolved that it is permissible to invest in digital currencies and virtual tokens listed on regulated digital exchanges after the Securities Commission Malaysia (SC) published its digital assets guidelines. Indonesia is also expected to release an Islamic fintech framework sometime this year.
BNM confirmed with IFN that it has received keen interest for is digital banking license, including several Shariah digital banks, while the next Islamic bank to open in the Philippines may be in the form of an online-only bank. IFN learned that at least two foreign entities — including an online wallet — are exploring the possibility of launching Islamic financial services in the Philippines within the country’s digital banking framework.
At an institutional level, Islamic financial entities in Southeast Asia as well as in the Arab world are fast-tracking their digital initiatives, taking concrete actions to meaningfully address one of their biggest concerns: rapidly evolving technology. PwC’s latest Global CEO Survey revealed that 70% of financial services leaders agree that the rate of technological change is a significant concern. Here are some examples of Islamic financial institutions’ digital activities: Khaleeji Commercial Bank launched its open banking services, Bank Islam Malaysia set up a new unit to focus on offering digital banking products by 2021, FWD Takaful rolled out new digital products including a chatbot and Abu Dhabi Islamic Bank introduced new online services.
In other words, the pandemic has strong-armed Islamic financial institutions and regulators to accelerate their digitalization strategy as a top priority, leaving little room for institutions to drag their feet on their fintech plans and removing any hesitance about making investments into upgrading their digital architecture.
McKinsey & Company predicted that new fintech investments will exceed US$30 billion this year, a phenomenal surge from a mere US$1.8 billion in 2011.
Force for good
Another silver lining of the dark pandemic cloud is the recognition of the fundamental importance of Islamic social finance instruments, particularly digital-enabled tools, in sustaining, protecting and uplifting a society, especially vulnerable communities. As expected, COVID-19 (like most disasters) disproportionately affects poorer communities, revealing the ugly socioeconomic and digital divides of our world.
Multilateral institutions, governments and Islamic financial institutions acted swiftly to mobilize Shariah compliant social finance solutions via fintech to assist communities hard-hit by the virus. The IsDB, which in recent years has been transforming into a digital-driven institution, launched a series of COVID-19 fintech initiatives including developing and rolling out a blockchain-powered platform to distribute financing to its member countries as well as providing tech grants supporting innovations in line with the UN Sustainable Development Goals (SDGs). Its subsidiaries such as the Islamic Corporation for the Development for the Private Sector is also exploring blockchain Waqf and crowdfunding solutions while the Islamic Research and Training Institute partnered with Samsung-backed blockchain technology firm Blocko to launch the Smart Credit Management Platform.
In Muslim markets like Malaysia, fintech public–private partnerships are being formed. The nation’s pilgrim fund, Lembaga Tabung Haji, in May formalized an agreement allowing it to invest in projects via Shariah bank-mediated crowdfunding platform Investment Account Platform (IAP). It is also learned that the IAP is exploring crowdfunding-enabled investment opportunities with the IsDB. Malaysia Digital Economy Corporation (MDEC) also partnered with crowdfunding platform GlobalSadaqah to launch a national campaign to support frontline COVID-19 workers.
MDEC, which is spearheading the formation of a national Islamic fintech taskforce to drive financial inclusion, also launched e-Berkat, an initiative to raise financial literacy and facilitate access to financial services (including Islamic) among the B40 (bottom 40% of income earners) and MSMEs. The latest digital initiative is a collaboration with 12 fintech players.
Such engagement is also seen in Indonesia, most notably, through LinkAja Syariah — the country’s national Islamic payment platform which made its debut in April. LinkAja Syariah partnered with several state-owned Islamic banks as well as Halal merchants to build an end-to-end Islamic e-commerce ecosystem. It is hoping to garner one million users by the end of 2020 as it continues its Islamic finance public awareness campaign in partnership with local governments, Islamic boarding schools and religious councils. It is also worth noting that the financial regulators of Malaysia (SC) and Indonesia (Otoritas Jasa Keuangan) also recently inked a partnership to support the expansion of respective fintech ecosystems through collaborative opportunities, including in Islamic fintech.
“Digital finance’s dramatic potential for transformative impact is being revealed by the COVID-19 pandemic. Digital transfers enable governments to get support to people in need, crowdfunding platforms have mobilized funds for medical supplies and emergency relief and algorithmic lending means small businesses have quicker access to funds. The speed of the recent spread of these technologies is astonishing, but progress is not automatic,” noted Achim Steiner, the administrator of the UN Development Programme and co-chair of the UN Secretary-General’s Task Force on Digital Finance. “For digitalization to be a true force for delivering on the SDGs, technological advances must combine with sound policy that empowers citizens and enables our financial system to meet the urgent investment challenges that must be overcome to build forward better.”
Promising growth
Necessity is the mother of invention and this perhaps could be best exemplified by the emergence of digital retail Sukuk. While it is not a new concept — having been pioneered by the Indonesian government in 2018 and Blossom Finance which issued a blockchain retail Sukuk facility a year later — more are entering the market, most notably Malaysia, where retail Sukuk have been few and far in between. The Malaysian government in August launched its first digital retail Sukuk facility — one designed with SDG themes as proceeds will be channeled toward COVID-19 relief efforts including medical research and development and women empowerment projects. Choosing a digital route was a strategic decision to expand the investor base.
Saudi Arabia’s Wethaq Capital, licensed by the Saudi regulator this year, expects to arrange the Kingdom’s pilot digital Sukuk offering in the final quarter of 2020. Meanwhile, Indonesia is likely to tap the retail market again as it has so far received encouraging demand via its online distribution channels, particularly from millennials and Generation Z.
Admittedly, it is not all hunky-dory for Islamic fintech. Start-ups have expressed their struggle to stay afloat because of the pandemic. IFN has learned several have downsized as margins are compressed while some have had their fundraising exercises halted. It is likely we would see the shuttering of a few start-ups, but new players or more established start-ups would likely fill the void.
This is already the case in 2020. As at the end of August 2020, the IFN Islamic Fintech Landscape has registered 145 Shariah fintech service providers, almost 21% more than in December 2019. In 2020, new players such as Hassed Investing Company secured regulatory approval in Saudi to test its robo-advisory service, US-based digital investment platform Newday Impact Investing debuted its Muslim-friendly portfolio and Shariah compliant e-money platform MyAhmed secured a place in the UK’s Financial Conduct Authority’s regulatory sandbox, while established names such as Wahed Capital and Wethaq expanded their geographical reach.
And the pipeline is looking strong. Malaysian conventional P2P lender MoneySave has sought regulatory approval to offer Islamic products, and IFN understands a few more conventional platforms are thinking the same; while Islamic Bank of Australia — an endeavor almost a decade in the making — is expecting to open doors next year as an Islamic digital bank, the first fully-fledged Shariah bank in Australasia. While the storm is not over, there are certainly rays of hope for Shariah fintech.