Image credit: he Halal Times
The Islamic fintech space is growing in Malaysia, with recent entrants and an expanding consumer base. Government support and related initiatives are helping to drive the sector’s development, but private investment is not yet in line with burgeoning consumer demand.
“If you look at the big opportunities out there, the U.S. (fintech) game has been played, in China and India too, but what’s left is the Muslim space, which has favourable demographics and a lot of economies are under-served. But a key challenge is capital availability,” said Taraec Hussein, Head of Investments at Gobi Partners, a regional venture capital firm.
Malaysia has carved out a strong global position as an Islamic finance hub and over the past few years it has encouraged, through regulatory changes and institutional support, the growth of an ecosystem for Islamic fintech companies to thrive. There are currently some 26 Islamic fintechs operating out of the country, including international firms attracted to a market with a sizable Muslim population that is increasingly digitally savvy.
While Malaysians have the possibility to bank in a Shariah-compliant manner, Islamic fintech has not yet reflected the same range of services that conventional fintech has offered, particularly in North America, Europe and China. Such gaps in the market have yet to be tapped, but there is a ready market for such services.
“A lot of opportunities are driven by consumer demand, which is a reason for many micro-lending companies to be Shariah-compliant, as that is what the consumer wants. People are waiting for someone to give them an offering that works with their requirements,” said Taraec.
Islamic fintechs are using Malaysia as a market to roll out and test offerings before expanding into other Muslim-majority markets, with firms eyeing the large populations of Indonesia, Bangladesh and Pakistan to achieve scale.
Bank Negara Malaysia (BNM), the country’s central bank, and the Securities Commission have allowed for innovation in fintech to encourage such expansion, while the Malaysia Digital Economy Corporation (MDEC) has created an innovation centre with 75 companies currently involved.
Although the COVID-19 pandemic has impacted the sector, the flipside has been a surge in e-commerce and digitalisation, which the government is keen to enhance.
MDEC in collaboration with BNM launched a fintech booster campaign this year. Comprised of three pillars, the first is to kickstart company development and regulatory compliance, with the campaign providing legal as well as Shariah compliance guidance. “We’ve teamed up with six panelists, including three legal companies, two Islamic fintechs, and Shariah advisors to help companies on their journey. It is about opening up opportunities for more fintech players,” said Norhizam bin Abdul Kadir, MDEC’s Vice President for Fintech & Islamic Digital Economy.
The second pillar, to be launched next year, will be on market access and business opportunities for fintech, and the third, technological integration.
MDEC has also collaborated with private investment firm RHL Ventures and the United Arab Emirates’ Ministry of Economy’s Annual Investment Meeting (AIM) Congress for the RHL-MDEC: AIM Startups Virtual Pitch Competition 2020. Malaysian roadshows to over 100 countries are aimed at highlighting the potential.
Yet while all the building blocks are there or being put in place, investors have been slow to recognise the opportunity. “The big boys - it could be funds, it could be banks, it could be anyone who is established in the market - sometimes cannot see the value of helping an SME or start-up in the market,” said Dr. Mohd Daud Bakar, Chairperson of BNM’s Shariah Advisory Council. “If I’m a start-up, it’s near impossible to get money from the banks to start out, so I have to find some magic fund, not from banking, but from other agencies to get help, in terms of ideas, perspective and funding to some extent.”
This challenge is not confined to Malaysia. In the USA, a global leader in fintech, particularly California’s Silicon Valley, investment in Islamic fintech has been wanting, and reflected in their global outlook.
“It’s always a question of whether they see a large enough market in Islamic finance. Part of that is a Silicon Valley mentality that may overlook some of the opportunities in Islamic fintech...but it is also funders not understanding the market,” said Blake Goud, chief executive of the RFI Foundation, a responsible finance think-tank based in London.
In Asia, there is a growing understanding of the potential. “There is definitely more interest from entrepreneurs, even from China for the Muslim market in Southeast Asia, so it’s a market people have now noticed,” said Taraec.
Investment in Islamic fintech in Malaysia may also be given a further boost due to geopolitical issues. “With the U.S.-China trade war we will see more capital earmarked for Southeast Asia. There will also be outward investment from India due to India-China issues, so Southeast Asia is well-positioned to accept a lot of these incoming investments,” added Taraec.
For Malaysia to attract such funds, Tunku Danny Nasaifuddin Mudzaffar, Chief Executive Officer of MicroLEAP, a fintech platform focusing on microfinance, would like to see Kuala Lumpur become an Islamic fintech hub for the region.
“We definitely need funds from richer countries that are interested in fintech, especially from Singaporean venture capitalists that are looking our way and see the value in Islamic fintech,” he said.
Malaysia is working to woo investors from Singapore, which has been growing fast in the fintech space. Last year, fintech investments more than doubled on 2018, to $861 million, with 108 deals compared to 71, according to an Accenture report. There is no current data on fintech investment in Malaysia.
A new digital bank could also drive sectoral development, with BNM granting five licenses, with one potentially an Islamic provider.
“If there is going to be an Islamic digital bank it will be a game changer, and it will also become more relevant to the broader Islamic economy,” said Raja Hamzah Abidin, Managing Partner of RHL Ventures in Kuala Lumpur.
A bigger Islamic finance participation in the digital space could also be the tide that raises other boats, and could especially nourish the growth of a unicorn that has so far been elusive. A unicorn would require significant investment and a large consumer base. “To reach unicorn level, it needs a market cap of 4 billion ringgit ($954 million) on Bursa Malaysia (the stock exchange), with sales of 250 million to 500 million. That requires a big presence in Malaysia but also the region. For that to happen, the government has to encourage Islamic finance, which they already do, but it is up to the private sector to be more active in the space,” said Jamaludin Bujang, Managing Director at Gobi Partners.
Investment in the sector can also come through collaborations with, and funding from, Islamic finance players. Last year, the Islamic capital market grew by 8%, to 2 trillion ringgit, outpacing overall capital market growth of 3%.
Malaysia’s recent track recording in fundraising is also creating opportunities. Last year, 1,449 SMEs raised funds, a 130% increase on 2018. This involved 18,730 investors, a 91% increase, and 5,612 campaigns launched, a 191% increase, according to the Securities Commission’s 2019 annual report.
Digital investment management (DIM) is a particularly strong area of growth. In just two years, DIMs reported assets under management of 74 million ringgit from over 20,000 accounts.
While opportunities in the Islamic fintech space abound, in the immediate future more investment is needed to drive the sector forward.
“We need a proper digital platform solution with stakeholders, and access to a bigger pie, from loans to insurance, so a bigger pool of capital to target investment accordingly,” said Raja Hamzah.
Source: https://salaamgateway.com/story/with-building-blocks-in-place-malaysia-says-its-ready-to-welcome-islamic-fintech-investors