Operating on the back of an estimated $2 trillion global Islamic finance market, Shariah-compliant fintechs should be attracting more interest from investors and higher funding amounts.
The giants of the field, such as Wahed Invest and Alami, may be flush with funding, but some of those down the food chain find they are scrapping for crumbs, despite the much-hyped potential of the segment—at least by those within it.
“We have got used to lowering our expectations and are prepared for a long slog,” said the founder of one disheartened fintech to Salaam Gateway.
“We think everything stacks up for a good proposition, but getting serious interest from investors, and for them to follow through… it’s not what we’d hoped for.”
According to Umar Munshi, co-founder and managing director of Ethis, a Malaysian group of crowdfunding and fintech companies focused on impact investment and participatory finance that is at the early stage of fundraising, venture capital funds “need a better understanding of the opportunities” of Islamic fintech. Only when they get to know the segment better will there be higher valuations.
“Not many VCs are aware of the size and scope of the Islamic economy,” he told Salaam Gateway, adding that some VCs that are more focused on spreadsheets and forecasts than on religion are put off by this aspect. “Of course, there are still founders who are not motivated by religious purposes and are very passionate about what they do."
In its assessment of the global Islamic fintech arena last year, the Economist Intelligence Unit noted that investment was only “trickling” into the segment, with many VC and private equity backers put off by its novelty, choosing to wait and see what direction it takes.
“This seems to be a very valid observation from what I’ve seen in the market over the years, except for the handful of start-ups that have been quite successful in fundraising,” said Umar, adding that increasing consumer adoption has the potential to change things.
“Muslims are getting more and more exposed to Islamic fintech, and it looks like they are starting to get on board [with Islamic finance]. Muslims may not be aware or familiar with Islamic finance—even practising Muslims.
“We are also seeing that more non-Muslims are becoming much more open to Islamic finance, but a lot more markets need educating about it,” Umar added.
Of all Islamic fintechs, New York-headquartered Shariah robo-advisory Wahed Invest and Indonesian Islamic-based lending platform Alami, both founded in 2017, have been dominating the headlines with reported funding values of $40 million and $37.5 million respectively.
Among older start-ups, British personal finance fintech IslamicFinanceGuru secured a round worth 3 million pounds ($4.1 million) earlier this year and Malaysia-based MyMy, that has ambitions to be the first Islamic digital bank and has already been issued a conditional e-money licence from the country’s regulator, is listed as having gained $4.1 million funding in total.
By contrast, Ethis, which started in 2014, around a year earlier than IslamicFinanceGuru, last month celebrated securing roughly $1.6 million in a pre-series A round from angel investors.
“We went the path of angels because we realised what we wanted to accomplish was to seed the landscape for Islamic finance, which was at a nascent stage. The next round will be a corporate round with VCs or corporate investors,” said Ethis co-founder Umar.
“Corporate investment is an interesting area. It’s quite exciting that there are a lot of big companies in the Islamic finance industry that may want to enter Islamic fintech, so it will be an interesting opportunity for them to invest. But they may not have the kind of valuation appetite for technology investment as VCs.”
Nevertheless, the British pre-seed company that Salaam Gateway spoke to—but refused to be named as its founder did not want to give the impression that the start-up was struggling for investment—said extra funding is required to support its Shariah credentials.
“We needed to form a Shariah committee, which costs money and slows us down a bit. All our processes have to be separate from those of conventional finance. Worst of all, investors think that we are supplying a niche within a niche of fintech; they switch off when we try to persuade them about the scope of the global Islamic market,” he said.
From the point of view of investors, Jamaludin Bujang, managing director of Gobi Partners, which has had more exposure to Islamic fintech plays due to the VC’s interest in investing in Islamic start-ups, believes that whether an Shariah-compliant fintech is tempting “all boils down to “that investment being valued at the same level as a conventional company”.
“If we are looking at two companies in the same space, and one is focusing on the Muslim market and the other conventional, at the end of the day, we consider whether the Shariah start-up is cheaper to buy and if it has a big potential market.
“If conventional happens to have more potential and is easy to exit, and the other company will be probably more difficult to scale, the chances are we will invest in the first one,” he added.
Jamaludin said his so-called Taqwatech fund has its eye on Ethis, calling it “the next big thing we have to watch in Malaysia”.
“I’m going to be looking at them more closely since they have some money to scale up now. I’m putting them on my radar,” he added.
Also being scanned by Gobi are peer-to-peer (P2P) fintech plays with the promise of about 10-times forward revenue on their valuations. Likewise, equity crowdfunding platforms, with higher multiples and the opportunity for direct access to dozens of start-ups offering equity through them, are also attractive to Jamaludin.
Of particular interest are investment fintech plays, although these are yet to take off.
“Investment fintechs would definitely be interesting to us. When you talk about banking products, there are lots of choices, but when it comes to investment, there is not a lot right now—the only one I can think of is Wahed. Apart from that, there aren’t many companies focusing on investment-related products for the Muslim market,” he said.
© SalaamGateway.com 2021 All Rights Reserved