In Malaysia, Islamic fintech is used as an enabler for financial inclusion

This article is part of a sponsored series by the Malaysia Digital Economy Corporation (MDEC). 

The synergy created by the principles of Islamic finance and fintech will drive financial wellbeing in Malaysia.

The country has near universal financial inclusion, with 95% of citizens holding bank accounts. But having an account or e-wallet does not always translate into being financially included. To have meaningful inclusion, which the United Nations Capital Development Fund (UNCDF) is promoting as financial health, or well-being, is to have more control over one's personal finances, from being able to pay off debts, to handling a financial shock, to meeting financial goals and being able to save for the future.

“There is a move towards financial health, for financial resilience, control and freedom. Finance is not an end goal, but a means to an end,” said Jaspreet Singh, Global Innovations Lead and Regional Technical Specialist Asia, UNCDF in Kuala Lumpur.

For the past two years, the UNCDF has been working with government entities and companies, including the Malaysian Digital Economy Corporation (MDEC), to develop digital solutions that reinforce MDEC’s focus areas. These include empowering digitally-skilled Malaysians, enabling digitally-powered businesses and attracting digital investment.

“While Malaysia has come a long way in terms of inclusion, the bottom 40% (B40), or rural population, is left out, even if they have bank accounts. Our work is primarily focused on how solutions can be built from a consumer perspective, to improve their financial lives,” added Jaspreet.

The financially excluded

The B40, around 15 million people, live on less than 4,849 ringgit ($1,162) a month, the middle 40% (M40) earn 4,850 - 10,959 ringgit ($2,626), and the Top 20% (T20) earn above 10,960 ringgit per month, according to a Department of Statistics report. Some 17% of Malaysians are self-employed.

The COVID-19 pandemic has pushed the need for financial well-being, whether among under-served micro, small and medium sized enterprises (MSMEs) in the cities struggling to stay afloat, or Malaysians in rural areas that are excluded in part because of their location.

As a result, Malaysia, through MDEC, is ramping up efforts to better utilize Islamic fintech, which complements its Shared Prosperity Vision 2030, launched last year, and highlights the digital economy and Islamic finance as key catalysts for development.

“Digital financial inclusion is the availability and equality of opportunities to access financial services through digital means. Aligned with its Islamic and inclusive fintech agenda, Malaysia should lead the way in championing the digital financial inclusion agenda infused with a Shariah-compliant proposition,” said Deputy Finance Minister, YB Tuan Mohd Shahar bin Abdullah at the Islamic Fintech Week 2020 in Kuala Lumpur in September. 

Financial health challenge

To develop innovative solutions to improve the financial health of the B40, the UNCDF’s Financial Innovation Lab, in partnership with Bank Negara Malaysia (the central bank), MDEC and the MetLife Foundation, launched the B40 Challenge in December 2019.

Out of 18 fintechs involved in the Challenge, five are Shariah-compliant: HelloGold, microLEAP, Wakaful, Kasih Rakyat, and Madcat World. “With the B40 challenge we are seeing what the ecosystem requires and how business models address that,” said Jaspreet.

Three of the fintechs will be selected for long-term support from UNCDF to commercialize and scale-up their offerings.

As part of the Challenge, HelloGold, the world’s first Shariah-compliant gold trading platform, started a digital financial inclusion platform through asset-based savings and lending products. This required handling cash, going in and out.

“This became very important, as those on low or moderate incomes still want to deal in cash, and not just with bank accounts or digital channels. We need to keep these issues in consideration as people in rural areas may not be very digitally savvy,” said Jaspreet.

Platforms like microLEAP have brought together microfinancing and peer to peer (P2P) financing using murabahah, a Shariah-compliant structure. So far, the fintech has supported six conventional, and 10 Islamic micro-enterprises, such as a halal confectioner, and a t-shirt printer in Northern Malaysia, which required financing of between 1,000 ringgit ($239) and 50,000 ringgit ($11,985).

“It is more than just ‘here is your money’. We provide, for free, online video training, debt management and counseling, enabling people to learn how to do, say, basic accounting,” said Tunku Danny Nasaifuddin Mudzaffar, Chief Executive Officer of microLEAP.

Free personal accident insurance to a borrower enables funds to be covered, for both the borrower and the lender. MicroLEAP aims to raise through P2P some 30 million ringgit ($7.1 million) over the next two years.

Social financing

Crowdfunding is a further avenue being utilized to bolster financial inclusion, with platforms appealing to Muslims’ benevolence and obligatory alms-giving (zakat). Islamic fintechs like Ethis Ventures Malaysia, an Islamic equity crowdfunding (ECF) platform, are appealing to financial institutions and capital market players to be involved.

“They have social funds, either corporate zakat or allocations for corporate social responsibility (CSR), so we want to help manage these charity funds to provide micro-loans through our implementation partners,” said Umar Munshi, Co-Founder of Ethis.

Ethis has launched Qard Hassan, a benevolent loan platform under its Global Sadaqah site, which aims to raise 600,000 ringgit ($143,768) in three tranches for microfinancing loans.

“The key value that is created is we help the lowest spectrum of society be more self-sufficient faster. Because it is a zero interest loan, the accountability is on their side. They have to pay it back, but at the same time the spirit of Qard Hassan is that it is a benevolent and altruistic loan, so if cases of difficulty arise and a borrower is not able to pay the loan back, we need to be able to write that off, which is why the source of funds is from charity,” said Umar.

Due to the financial impact of COVID-19, such loans give businesses a kick-start, while for corporate backers there is a visible financial impact and they contribute as an enabler of sustainable change, Umar added.

“This is a pilot, we want to learn the behavior of people when given a loan, and build more robust technology around the platform and scale up the volume. As we get more data and information, the platform will evolve to be more skewed towards supporting best practices. We are not experts in micro finance, but by working with different partners the platform will be useful as a tool for microfinance,” he said.

With the UNCDF, MDEC and other sectoral players supporting the development of the Islamic fintech ecosystem, the goal of improving the financial health of the B40 will be increasingly met over the years to come.

“Achieving these goals will depend significantly on the collaborative efforts of industry players and the fintech community. As Malaysia continues to reinforce and expand its leadership in Islamic finance and fintech, MDEC will continue to galvanize ecosystem partners to shape a wholesome, all-inclusive digital society that can easily access financial services,” said Surina Shukri, Chief Executive Officer of MDEC at the Islamic Fintech Dialogue.

“Let’s build together on these ongoing efforts and strive to make shared prosperity in the digital-driven economy a reality for all.”

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This article is part of a sponsored series by the Malaysia Digital Economy Corporation (MDEC).