Jakarta: Despite its promising outlook and early results, Bank Syariah Indonesia (BSI), Indonesia’s largest Islamic bank, has its work cut out to achieve the economies of scale demanded to compete nationally and globally where the knowledge of Sharia-compliance banking systems remains poor.

BSI was formed in February 2021 following the merger between the Islamic banking units of Indonesian state-owned banks Bank Syariah Mandiri, BRI Syariah and BNI Syariah, producing the country’s seventh largest bank with a 2.5% share of industry assets. Medium-term plans are to be among the top 10 Islamic banks globally by 2025.

However, analysts and officials said this could be challenging as the share of Islamic services in the overall Indonesian banking market remains stagnant – less than 7% over the past few years. This is despite its status as the world’s largest Muslim-majority nation with nearly 90% of its 270 million people following the faith.

By contrast, the market share of Islamic banking in neighbouring Malaysia is around 30%.

“The merger has not resulted in an increased market share for Islamic banking in Indonesia. There are more steps that need to be taken by the government to that end, including increasing capitalisation of Islamic banks to improve the economies of scale and make them more competitive vis-à-vis conventional banks,” Aziz Setiawan, a researcher in Islamic finance at the SEBI School of Islamic Economics, West Java, told Salaam Gateway.

This includes unique business models; investment into digitisation and improved human resources as key elements to future growth. He said for Indonesia to be a global Sharia financial hub, it must increase the market share of its Islamic banks and make bold regulatory steps.

Among its innovations to achieve goals would be allowing Islamic banks to improve product and service quality by working in synergy with conventional banks in areas like information technology (IT), networking and other infrastructure.

Setiawan believes this would enable BSI to expand on the real growth that has occurred since its launch. The bank recorded a 33% increase in net profits in the first-half of 2022, boosting confidence in sustainable future growth, the bank said in a statement late April.

Hery Gunardi, SBI president director (CEO), added that cost efficiency and expansion of cheap funds had supported healthy and solid financing.

Earlier this year BSI opened a representative branch office in Dubai, United Arab Emirates, as part of its efforts to tap into the Middle Eastern Islamic banking market and expand its customer base.

“This proves people are increasingly interested in experiencing Islamic banking services in all segments. The growth is also an injection of enthusiasm for BSI to expand its market globally with Dubai being the first,” Hery said.

The bank’s assets grew 15.73% year-on-year in the first quarter of 2022 to Rp 271.29 trillion rupiah ($18.6 billion), while capital adequacy rose to 150.09% and the efficiency ratio to 75.35%.

BSI operates under the Islamic tenets that forbid charging and paying interest, as well as trading assets deemed haram. In Islam wealth can only be generated through legitimate trade and investment in assets meaning making money from money is forbidden.

Hery said this year BSI would focus on developing the Islamic ecosystem by expanding its reach to mosques, hajj and umrah pilgrimage travel industry, alms and donation payments, Islamic educational institutions, as well as the modest fashion and halal industries.

He added this was a potential segment on which BSI must continue to work; having the uniqueness and characteristic to develop a halal and Muslim ecosystem.

Meanwhile, the number of people using the bank’s BSI mobile app (available to any device with an Indonesian phone number) grew 124% year-on-year to 3.77 million in the first quarter of 2022. The bank said the increase was driven by people switching to BSI mobile e-channels from ATMs and internet banking with more than 96% of its customers now digital savvy.

Going digital, expanding global network

The bank had also taken steps to improve online user experience, allowing customers to not only use basic features such as opening accounts or making payments, but also access “spiritual” features including prayer times; the direction toward Mecca for prayer and technical assistance when contributing to charities.

It was also creating a network of financial institutions to raise its profile. In March the bank signed cooperation agreements with several Dubai-based banks including the Abu Dhabi Islamic Bank, UK-based Standard Chartered Bank’s Islamic section and Malaysia’s Maybank Islamic to expand its network.

These innovations will enable BSI to improve its position, but its small domestic market base may mean it takes time to realise the ambitious growth goals, said Lucky Ariesandi, analyst at Fitch Ratings, the global credit rating agency.

“Growth potential for BSI is big in line with the potential for the Islamic banking sector due to its small market share and a strong preference for Islamic banking. However, growth will be gradual because there are still many processes that need to be addressed before Islamic banking can reach its potential,” he said.

Notably, Indonesia is a long way off from becoming a global hub for Islamic finance, he said. BSI’s focus was on improving its local competitiveness to compete for less exploited banking sub-segments like corporate and retain banking. Given the bank’s current phase, the Indonesian Sharia ecosystem may still require time to improve.

Lucky said BSI might help small Muslim entrepreneurs, currently reluctant to bank because of their religious views, gain access to funding. However, this would only benefit BSI if the bank could reach and provide value-add to those communities.

This included providing loans with affordable yields without sacrificing pricing for the risks the bank took.

Yet, there is little doubt Islamic banking was growing in Indonesia. Overall assets grew 12.3% in 2021 to Rp 646.2 trillion ($44.4 billion), according to the Financial Services Authority of Indonesia (OJK – Otoritas Jasa Keuangan).

“There are growing opportunities for Islamic banking development, supported by a vast growing in the halal industry and rapid technological advancement,” said the OJK in its Indonesia Islamic Banking Development Roadmap 2020-2025 report.

However, the OJK warned it may struggle to maintain such growth, given “the strategic issues currently facing Islamic banks, such as …low competitiveness”. Islamic banking in Indonesia was impeded by a lack of business model differentiation, sub-par manpower quality and low financial inclusion and literacy, said the regulator.

Islamic banking services also lacked digitalisation compared with conventional banks, stemming from lower supporting IT infrastructure capacity. However, as with any challenge in an immature market, should solutions be discovered, success would follow.

The OJK said following its 2019 regulation on banking synergy that allows Islamic banks and their affiliated conventional banks to optimise resources, Islamic banks are expected to leverage the available infrastructure from any corresponding parent bank.

This meant they performed a gap analysis of existing digital banking services and compiled an action plan for services to be developed. While BSI does not have a parent, should it follow such a sensible strategy, growth will surely follow.

© SalaamGateway.com 2022. All Rights Reserved

London: Sharia-compliant fintech is poised for explosive growth across both Islamic and western jurisdictions with Refinitiv expecting the market to reach $4.9 trillion within three years.

The American-British global provider of financial market data owned by the London Stock Exchange (LSE) forecast the growth figures in its Refinitiv Islamic Finance Development Report 2021. The report states Islamic fintech providers were among the standout performers in the sector during 2020 “as regulators have moved fast to facilitate Islamic fintech players and digital banking after years of ‘sandboxing’ and building foundations”.

The Islamic Global Connect Forum Report 2022, published in March 2022 by Malaysian bank Maybank, stated 89% of respondents believe fintech has already accelerated digitalisation of Islamic finance products. They also believe fintech has made them more accessible globally, while improving client experiences.

A month earlier the bank conducted research among 143 Islamic finance professionals across banking, insurance, asset management, asset ownership, private equity, regulation and fintechs.

Zaakira Allana, a Birmingham, UK-based dispute resolution director at international law firm Fieldfisher, said this was important given consumer demand was accelerating Islamic finance fintech from mobile banking to digital lending, trading and cryptocurrency.

She said fintech expansion varied by sub-sector, “but the direction of travel is towards a broader, more inclusive market for Islamic consumers, of which there is a huge global untapped reserve”.

Perhaps unsurprisingly, Middle East and south-east Asian countries with mature international financial systems sport the most Islamic fintech.

According to the 2021 Global Islamic Fintech Report produced by DinarStandard (the parent company of Salaam Gateway) and London-headquartered digital structured finance firm Elipses, Saudi Arabia, Iran, United Arab Emirates (UAE), Malaysia and Indonesia are the leading countries in terms of Islamic fintech transaction volumes within Organisation of Islamic Cooperation (OIC) countries.

The report estimates 241 Islamic fintechs operated globally across OIC and non-OIC countries and that the market for fintech in OIC countries was worth $49 billion. Outside the Islamic finance hotspots, countries with less developed financial systems could be significant drivers for the Islamic finance market if fintechs successfully mobilised their customer bases.

Central Asian fintech

Central Asian countries with large Muslim populations, such as Kazakhstan where around 70% of the population practices Islam, are among those with the greatest potential for Sharia-compliant fintech products to take off, said Marina Kahiani, an Almaty, Kazakhstan-based partner at GRATA International, a law firm with a special focus in central Asia and eastern Europe.

“Kazakh companies are trying to develop Sharia-compliant fintech products. However, they are just at the beginning of the process,” she explained.

In 2019 Kazakhstan unveiled its Islamic Finance Master Plan 2020-2025 complete with developing a fintech hub to support industry innovation. It was coordinated by the Astana International Financial Centre (AIFC), based in the country’s capital Nur-Sultan (formerly Astana).

The AIFC was established in 2018 as a special zone to foster growth in Kazakh financial services companies. Its legal system is based on English law principles rather than Kazakh law – a significant move as the former is less restrictive and has wider international application for transactional rules.

In its fintech section, the Master Plan acknowledges that Kazakhstan financial inclusion is “relatively low” with one key reason being the country’s financial service providers focusing on business and wholesale work rather than consumer products.

According to the plan and data reported by the World Bank in 2017, only 59% of adults (aged 15 years and older) in Kazakhstan hold an account at a formal financial institution. Some of the reasons included a “lack of awareness and understanding on fintech and Islamic finance; lack of funds and disposable income; trust deficit towards the financial system and currency accessibility”.

However, Kahiani notes the stagnation was lifting with fintech products aimed directly at Islamic consumers now being launched in the country. She said successful early movers were those with international partners who had more fintech experience.

“The first digital Islamic card was recently launched in Kazakhstan by Islamic fintech company Tayyab in cooperation with Kazakhstan’s RBK Bank and Visa with Dubai Fintech Ventures as an investor”, said Kahiani.

The Tayyab card, issued to users’ mobile phones when they download the Tayyab mobile app, is fully Sharia-compliant, a status confirmed by the Shariyah Review Bureau of Saudi Arabia. It does not charge interest on customer card balances (haram under Sharia law) and allows users to make contactless payments and instant transfers via Apple Pay and Samsung Pay. Plastic Visa cards can be issued to users on request.

The Tayyab card also allows customers to store funds in four currencies (Kazakh tenge, US dollars, Russian roubles and euros) and withdraw cash from any ATM worldwide. It was also set up to prevent it being used for haram activities such as in casinos and other gambling outlets, alcohol and tobacco stores, bars and nightclubs, through restrictions built into the technology that recognise such transactions.

African fintech

African countries with large populations of young Muslims are also embracing Sharia-compliant fintech. The 2021 Global Islamic Fintech Report noted sub-Saharan Africa and Middle East and north African (MENA) countries (excluding Gulf states) “have gaps” across the nine key fintech services of social finance, insurance, wealth management, deposits and lending, raising funds, payments, capital markets, digital assets and alternative finance.

This indicates “ample opportunities for growth”, said the report.

In July 2021 Nigeria launched eTijar, a Sharia-compliant fintech platform delivering Islamic investment and saving services to Muslims and non-Muslims. According to Bashir Yusuf, founder and CEO of eTijar, when his team began working on the platform in 2018, they identified a major vacuum in the country’s consumer finance market.

“Many young Muslims who are on a good income are not even saving or investing. We had to build the technology infrastructure to allow the younger demographic accessible ways to save and invest their money,” he said, adding the problem was more acute in rural areas, where most people were excluded from financial systems through a lack of knowledge and physical access.

The platform allows users to build investment portfolios from funds screened by eTijar and approved as Sharia-compliant. The platform takes a management fee rather than charging interest on users’ funds.

Yusuf said by cooperating rather than competing with Sharia-compliant fund managers and Islamic banks, eTijar was expanding the market for all Islamic financial service providers.

However, despite generally positive growth, Islamic finance fintech still faces challenges including regulatory barriers especially in Muslim-minority countries. Lingxi Wang, managing associate at UK law firm Foot Anstey, said during an Islamic finance roundtable the firm hosted in 2021, the general consensus was that a significant amount of time and resources were being spent trying to explain to the UK’s Financial Conduct Authority (FCA) how their products fitted into the current regulatory regime.

“This pushes back the initial launch dates. They also found even when being referred to an FCA specialist function, those experts did not have the requisite knowledge and understanding of Islamic finance to provide our panellists with immediate effective solutions,” said Wang.

He said while the FCA accommodated Islamic finance through its current regulatory regimes, creating a bespoke product in the UK required a lengthy statutory consultation process. He contrasted the UK’s approach to Malaysia, a country proactively promoting a strong Islamic fintech ecosystem.

Islamic fintech in Malaysia and the Middle East

In August 2020 the Securities Commission Malaysia announced a collaboration agreement with the Financial Services Authority of Indonesia (Otoritas Jasa Keuangan – OJK) on sharing knowledge about on fintech trends and regulatory developments.

“The UK could learn lessons ... from Malaysia in their proactive approach in creating a regulatory background for Islamic fintech. Also, some aspects of new Islamic fintech may run into problems, especially in non-Islamic jurisdictions,” Wang said.

For example new Sharia-compliant challenger banks and services may not have full banking licences and may need services and funds from conventional banks, thus creating a grey area when it comes to their regulatory and Sharia-compliance obligations.

Another area of confusion is the Sharia-compliant status of cryptocurrency, the lifeblood of some fintechs. In May 2022 Qatar Central Bank released a statement warning the country’s financial services from dealing with unlicensed financial institution or service providers, stressing Qatar currently has not licensed any virtual asset service providers (VASPS) including cryptocurrency operators.

The Maybank report said innovation may provide answers to these problems with regulatory technology being created to deliver robust digital tools certifying compliance with both Sharia and national government requirements through smart contracts on blockchain.

In a 2019 lecture, Fahad Yateem, director, Islamic financial institutions supervision for the Central Bank of Bahrain, explained essentially, regulatory technology and supervisory technology in Islamic finance aimed to enhance the transparency, consistency and standardisation of regulatory processes to promote a proper interpretation of regulatory standards at a lower cost and ensure risk-based supervision for Islamic banks’ regulators.

Examples of Sharia-compliant regulatory technology developers include UK and Jordan-based ICS Financial Systems (ICSFS), an Islamic banking and finance software provider. ICSFS' Islamic software suite is designed to cover all Islamic banking requirements including Sharia law compliance.

In February 2022 Hassan Baan, a member of the International Committee at the Iranian Association of Islamic Finance wrote a blog stating Islamic regulatory technology was “not about regulatory reporting, risk management, identity management and control or transaction monitoring”, but rather about finding “a solution for Sharia-compliance that includes real-time monitoring and tracking of the current state of Sharia-compliance and upcoming regulations in Islamic banks and fintech platforms”.

According to the Maybank report, 34% of respondents believed the impact of regulatory technology on growth would increase dramatically over the next three years, while 47% predicted it would increase slightly.

Should Islamic fintech and regulatory technology combine forces, this important Islamic finance segment may grow even more robustly than projected.

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