Islamic Finance

Bullish about Malaysia’s Islamic fintech

Malaysia is fast becoming the global hub for Islamic fintech. Utilising its burgeoning Islamic financial sector and governmental support to expand the digitalisation of the economy, an ecosystem is being carved out for fintech start-ups to flourish.

Indicative of Malaysia’s rising appeal is British start-up IslamicMarkets, a market intelligence platform, which opened an office in the capital Kuala Lumpur earlier this year. The move was driven by the country’s strategic positioning in Southeast Asia’s Islamic finance corridor, which runs from Kuala Lumpur through Singapore to Jakarta, Indonesia, with enough sectoral players and related services to tap into the demand for Shariah-compliant finance. 

Out of the 138 Islamic fintech start-ups globally, 41% are in Asia, with 26 in Malaysia, outpacing the UK’s 19 providers, the UAE’s 16, Indonesia’s 12 and the USA’s ten providers, according to a report on the sector published by the Malaysian Digital Economy Corporation (MDEC). 

While attracted by Malaysia being a leading Islamic financial sector, IslamicMarkets’ move from one of the world’s financial centers to Southeast Asia was equally driven by demographics, with the region home to over a quarter of a billion Muslims. Out of the five-year old start-up’s 250,000 users, half are in Southeast Asia. "We’ve been able to hit the ground running because we have this reach here," said Shakeeb Saqlain, founder of IslamicMarkets. 

Kuala Lumpur is also home to Gobi Partners, a venture capital firm, which last year backed TaqwaTech’s start-up competition, with IslamicMarkets winning a $1 million investment from the firm. Such events, including the world’s first Islamic Fintech Summit hosted in 2018, have created a buzz around the sector.

Private sector initiatives have been accompanied by the government acting as an enabler, with its Shared Prosperity Vision 2030 including Islamic finance and the digital economy as key pillars. More sector-specific, a fintech academy has been established, while fast-track visas were greenlighted for new and established entrepreneurs to come to the country. 

Regulations are also keeping pace with global developments, with Bank Negara Malaysia, the central bank, approving four fintech firms as participants in a regulatory sandbox in 2017, and granting the first Islamic fintech crowdfunding license. Earlier this year, BNM’s Shariah Advisory Council permitted the use of electronic money as a payment instrument.

MDEC has developed an Islamic digital economy guide, or Mi’yar, to serve as a reference for start-ups, venture capitalists and other supporting players in Islamic technology that wish to explore opportunities in the sector.

"Initiatives like the Mi’yar are helpful for start-ups in the Islamic finance space to define themselves and understand what is needed," said Mohammad Ridzuan Abdul Aziz, President of the Fintech Association of Malaysia.

Demand for Shariah-compliant financial services has surged worldwide over the past decade, with the sector valued at $2.4 trillion, and forecast to reach $3.8 trillion next year, according to DinarStandard. 

While Islamic fintech has not developed at the same pace globally as conventional fintech, this has given start-ups some room for testing the waters, with Malaysia considered the right kind of market to do so. 

"When you are a start-up you want a market that has the greatest number of people in your target segment, and we see Malaysia as neither too big nor too small to test a product before expanding to other countries. The vast majority of Malaysians have bank accounts but have not been buying into financial products," said Robin Lee, founder of HelloGold. 

The world’s first Shariah-compliant gold trading platform, HelloGold raised $4 million in Series A funding from Silicon Valley’s 500 Startups in 2018. 

Fintech adoption is growing fast in Malaysia and the region with consumers, as elsewhere in the world, wanting more financial inclusion, better fees, and easier ways to transfer funds. 

Faster broadband and better digital literacy is also driving adoption, with investors taking notice. Annual revenues in Southeast Asia’s conventional fintech space are forecast to treble from $11 billion in 2019 to $38 billion by 2025, according to Bain Capital. Digital payments are reflecting this trend, with 22% of Malaysians using e-wallets and 28.2% cards, according to fintench service company Rapyd’s 2020 Asia Pacific eCommerce and Payment Study.

The spike in the use of digital financial services worldwide due to the novel COVID-19 pandemic is expected to further accelerate fintech, and with that, demand for Islamic fintech. 

"The time is right for Islamic fintechs to step up and understand that users are demanding a new user experience, a faster and more cost-efficient service by using technology," said Harris Irfan, chairperson of the UK Islamic Fintech Panel. 

Areas that can be developed by Islamic fintech, said Fintech Association of Malaysia president Mohammad Ridzuan, include halal payment gateways, digital ar-rahn pawnbroking platforms and Shariah-compliant versions of successful conventional financing that use blockchain and smart contracts.

"SMEs are calling out for loans and credit. E-wallets can be used to capture value and moved from one wallet to another. With a little imagination, this could become a current account or savings account and loans could be bigger. That could take the existing ecosystem even wider," said Mohammad Ridzuan. 

Last year, Malaysia was ranked the top Islamic economy globally, as well as for its Islamic finance sector, in DinarStandard’s State of the Global Islamic Economy report. 

Islamic fintech has a ready audience in the Islamic economy, which ranges from halal food, cosmetics and pharmaceuticals to Muslim-friendly travel and entertainment, with halal-certified companies seeking out Shariah-compliant financing and services. Such demand taps into the rise in e-commerce in Malaysia and the region, valued at $100 billion in 2019 and expected to grow to $300 billion by 2025, according to Rapyd.

With digital adoption to be part of the ‘new normal’ amid the COVID-19 pandemic, it is an area ripe for development and innovation by Islamic fintech entrepreneurs with Shariah principles to the forefront that are in keeping with changing consumer demands. 

"I think Islamic fintechs need to show what they are doing is unique and can’t just be done by an established conventional player developing a Shariah-compliant version of itself. Hopefully Islamic fintech can take a different approach that says growth at all costs is not what we really value," said Blake Goud, chief executive of RFI Foundation, a responsible finance think-tank headquartered in London. 


This article is part of a sponsored series by the Malaysia Digital Economy Corporation (MDEC). You can download MDEC’s Islamic Fintech Report 2019 from here:  https://mdec.my/news/mdec-islamic-fintech-report/

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