Malaysia shifts Islamic fintech gear; the world takes notice

As one of the most sophisticated Islamic finance hubs in the world, it seems only natural for Malaysia to take a leading role in Islamic fintech as well. While having an existing robust Islamic regulatory architecture in place would be a competitive advantage in carving an Islamic fintech proposition, it does not guarantee success. Malaysia — like any other Muslim markets — faces intense competition from both other Islamic finance leaders as well as fintech centers in capturing the Islamic fintech market. The Southeast Asian nation, however, has been quietly laying the bricks down to build a solid foundation for this new vertical and is beginning to reap the rewards with new Islamic fintech ventures joining the fray.

Global standing
Malaysia ranks top three globally when it comes to the concentration of Islamic fintech providers. At 24 start-ups, the country ties for third spot with the UAE, according to the IFN Islamic Fintech Landscape as at the 1st June 2021. The UK houses the largest number of Islamic fintech start-ups at 39, followed by Indonesia at 34.

The composition of this global league of Islamic fintech leaders illustrates how dominance in the Islamic finance industry does not necessarily tally with Islamic fintech growth. After all, as compared with the UK and Indonesia, Malaysia holds the lion’s share of the market across the Islamic capital markets, Shariah banking and Takaful sectors.

That is, in many respects, the beauty of fintech which has enabled countries across the world, including non-Muslim-majority nations such as Canada, the US, Australia and Singapore, to have greater access to Shariah compliant financial services through technology-enabled platforms, and it brings a breath of fresh air into the Islamic finance narrative which has generally been dominated by Muslim-majority markets.

Malaysia knows this and is certainly not resting on its laurels. With markets like Dubai, Bahrain and Indonesia aggressively pushing to be the preferred global destination for Islamic fintech, and with established fintech hubs such as the UK and Singapore attracting foreign Islamic fintech start-ups and nurturing local Islamic fintech start-ups, Malaysia has its work cut out.

Table 1: Leading Islamic fintech markets by number of Islamic fintech start-ups as at the 1st June 2021

Behind the scenes
Over the last few years, the Malaysian government and regulators have been proactively engaging market stakeholders with hopes of building a conducive Islamic fintech ecosystem. One of these engagements is the Islamic Fintech Dialogue Series, an initiative by government agency Malaysia Digital Economy Corporation in partnership with IFN. Three dialogues have been executed since 2019, out of which two sets of recommendations, covering different areas, have been drawn up with a third set of recommendations on the way. Findings from the dialogues can be downloaded here.

The Securities Commission Malaysia also recently launched an Islamic fintech accelerator program, FIKRA, in partnership with the UN Capital Development Fund. FIKRA is Malaysia’s first fintech accelerator program designed specifically for the Islamic capital markets, and is indeed a confirmation of the country’s commitment to developing its Islamic fintech proposition.

While Malaysia may not have been quick to verbalize its Islamic fintech ambitions as its counterparts have, Malaysia nonetheless had not wasted any time in putting together the components needed to start its Islamic fintech engine — over the years, it introduced regulations for crowdfunding and peer-to-peer finance, digital investment management as well as digital banking, all of which accommodate Shariah compliant uniqueness. And with recent developments such as FIKRA, many are seeing the country emboldening its Islamic fintech drive. This commitment by Malaysian authorities, coupled with its deep experience, repertoire as well as advanced Islamic finance ecosystem, is bearing fruit.

New fish in the sea
The most telling indicator of the country’s Islamic fintech progress is its healthy pipeline of incoming newcomers. For example, Australia’s publicly traded tech venture firm, Fatfish Group, last week revealed that it is setting up a new subsidiary in Malaysia which will undertake a digital Islamic financing business.

“Fatfish has chosen to launch iHarap in Malaysia as it is among the global leaders of Islamic finance globally, due to its successful development of a complete Islamic financial system including Islamic banking, Islamic capital market and Islamic insurance.” Fatfish said.

The Australian company, which has businesses across Southeast Asia and the Nordic European region, is banking on Islamic fintech to further expand its fintech business in Southeast Asia. Its Islamic financing business will complement its buy-now-pay-later services which it will roll out. The iHarap platform will share common technology and back-office components to develop economy of scale at marketing differentiated financing products to the Southeast Asian audience.

IFN understands that Fatfish is one of several foreign entities looking to expand into Malaysia by riding the Islamic fintech wave. Other players include existing Islamic fintech start-ups in Europe and Indonesia.

At home, new start-ups are also sprouting and established market players are raring to jump into this space. Public-listed homegrown tech group Privasia Technology is one of them. The information and communications technology heavyweight recently soft-launched its digital Islamic supply chain platform and is preparing for a 2021 public launch.

“We as a group have been talking to many stakeholders in the market, particularly in the factoring space, to explore how we can narrow the SME financing gap, especially as we have seen how SMEs have struggled greatly during the pandemic to secure funding for their business,” Puvanesan Subenthiran, group CEO and managing director of Privasia Group, told IFN. The move toward fintech was certainly demand-driven from its client base.

After consultation and initial consideration to potentially form Islamic fintech joint ventures with other market players, the tech group decided to leverage on its existing tech capabilities and wealth of data from its e-procurement business — ProcureHere — to launch an Islamic fintech supply chain platform, known as FinansHere.

“It was important for us to have a separate brand for the new platform as one is a business tool, an extension to an ERP [enterprise resource planning] tool while the other is a fintech solution. We are also conscious that data should be kept independently,” Puvanesan explained. The Kuala Lumpur-headquartered company assembled a dedicated team, led by Islamic finance veterans, to spearhead this initiative.

Response from the soft launch by a closed loop of stakeholders has been very encouraging and IFN understands that FinansHere will open its platform to the wider market soon.

Also encouraging is the fact that this drive for tech-enabled Islamic financial solutions is not only being embraced within the start-up space, but also within incumbents. Lenders such as Maybank and HSBC are all bolstering their digital architecture to cater to the Islamic segment. Maybank for example has improved its digital experience which has generated greater response for its Zakat and Islamic MSME portfolio; Maybank Islamic also recently unveiled a digital Islamic gold trading platform. HSBC Malaysia on the other hand forayed into the digital investment space with its online investment platform which offers clients access to Shariah and conventional investment funds.

Vibrant and healthy
With a strong lineup of Islamic fintech service providers preparing to make their Malaysian debut, and with new ones likely to be incubated and accelerated through the FIKRA program, the future for Shariah fintech in Malaysia is looking brighter than ever. More importantly, with markets such as the UK, Indonesian and the US making giant strides in this realm, Islamic finance as a whole is gaining greater recognition on the mainstream stage, and this bodes well for the industry.