Photo for illustrative purposes only. An empty bank branch in Kuala Lumpur, Malaysia, on Dec 2, 2020, amid social distancing and movement control order.

Islamic Finance

Malaysia’s Islamic fintech sector has been having a ‘good pandemic’

KUALA LUMPUR - The COVID-19 pandemic has given a shot in the arm to the digitalisation of Islamic finance in Malaysia, jolting this sluggish sector to finally move forward more quickly through collaborations between institutions and financial technology specialists.

Though the country boasts of being a hub for Islamic finance, its institutions have been slow to adopt fintech in the way that conventional finance has raced forward in the last decade. Banks in particular have been wary about delivering more digital services to their customers, but the pandemic has given them a fresh opportunity that some institutions have embraced.

“It could be true that the pandemic has forced institutions to act quickly over the last year by forming partnerships with fintechs, rather than just relying on their own developers, which they have typically done,” said Dr. Moutaz Abojeib, a researcher at the International Shariah Research Academy for Islamic Finance (ISRA) in Kuala Lumpur.

“There has been some kind of delay by Islamic banks in response to the digitalisation agenda. The whole market has felt like, ‘okay, Islamic finance has been lagging behind’,” he told Salaam Gateway.

Allying with fintechs is gradually bringing Malaysia’s Islamic financial institutions closer in line to the Silicon Valley model, in which banks routinely call on support from start-ups, with their more refined expertise in technology, to develop new services.

Many major conventional banks now have at least one partnership with a fintech. For instance, in the last couple of years, Bank of America started allowing its customers to send money in seconds through a collaboration with digital payments network Zelle and Barclays took a stake in Flux, a start-up that issues digital receipts.

Malaysian Islamic banks, however, have had more of an instinct to turn to their IT departments as they compile their digital offerings, bolting together solutions that push few boundaries. This, Dr. Abojeib says, is an institutional shortcoming.

“I’ve never heard of any bank’s management that has gone straight to dealing directly with third-parties. They will always go to their internal department with a project, they will initiate it, they will study it, then they will try to do it. At a certain point, they will recognise that it is not really doable within their timeframe.

“They will eventually start to collaborate with fintech companies because it is more efficient. But these banks will always try to handle their own technology first, which is what they’ve been doing all this time. It takes a long time to shake this mindset,” he added.


Myles Bertrand agrees with Dr. Abojeib.

The regional managing director of Mambu, a software-as-a-service cloud banking platform that has been etching out a market among Islamic fintechs in addition to its conventional clients, said the biggest challenge for Malaysian Islamic financial institutions in digitalisation is an internal culture in organisations that they need to do everything in-house through their IT department.

Recently, this culture has been quickly moving towards outsourcing technology to companies like Mambu as the pandemic forced branches to close their doors and lockdowns have limited face-to-face banking, said the Singapore-based Bertrand.

“Banks weren’t able to respond to the coronavirus quickly in terms of what they need to do for their customers, and they realised this by seeing the speed at which their typical in-house technology teams work,” he told Salaam Gateway.

“We’ve seen a really interesting shift in the past six months with a lot of organisations really moving away from big, customised technology projects in-house to much more low-code, cloud based, easy-to-implement solutions like ours because it gives them the ability to react a lot faster.”

Perhaps the highest-profile indication of a cultural change in institutions was the announcement in March that Malaysia’s Bank Islam is laying the foundations for a fully digital banking platform.

The bank opened new digital division, Centre of Digital Experience (CDX), which engaged Mambu to configure its Shariah-compliant banking products, enlisted Experian, an information services company, to provide an eKYC solution for digital onboarding and is in the midst of developing an alternative credit scoring model with local fintech, Pod.

Outlining CDX’s brief, Bank Islam’s chief executive, Mohd Muazzam Mohamed, said these collaborations will go some way to encouraging other institutions to follow suit.

“We believe they will serve as a precedent to encourage more fintech collaborations with financial institutions and ultimately contribute to the growth of our digital economy,” said the CEO of the country’s first Islamic bank.


The pandemic has also given a boost for Malaysian fintech providers offering their own services independently of financial institutions, with a number of announcements over the last 12 months.

Just a few among these include Ethis that launched what it claims to be the first fully Shariah-compliant equity crowdfunding platform in Malaysia last year, the United Nations High Commissioner for Refugees’s Islamic philanthropy office that recently announced a partnership with local fintech Tulus Digital to raise Islamic social funding for refugees, and  Sedania As Salam Capital launched an Islamic financial marketplace and a collaboration with Mambu to develop its Tawarruq platform.

Malaysia has had a good record of nurturing Islamic fintech start-ups and tops the DinarStandard-Elipses Global Islamic Fintech Index, which ranks the ecosystems of 64 countries.

The country’s ecosystem was also held up by the Kuala Lumpur-based International Centre for Education in Islamic Finance (INCEIF) that declared last September Malaysia has the potential to be the world leader in Islamic fintech due to its legacy of Islamic finance and support provided by regulators.

Nevertheless, with 25 Islamic fintech providers now operating in Malaysia, according to the DinarStandard-Elipses report, the country is losing ground to the United Kingdom (39), United Arab Emirates (31) and Indonesia (31) in nurturing start-ups in recent years. Its estimated $3 billion Islamic fintech market by transaction volume is also dwarfed by Saudi Arabia and Iran, at $17.9 billion and $9.2 billion, respectively.


It remains to be seen if the events of last year will influence Malaysia’s attractiveness, especially with this newfound collaboration between institutions and start-ups.

The country has been having a “good pandemic,” according to Sedania’s chief executive, Nisa Ismail.

“I'm sorry to say that maybe COVID-19 is a blessing in disguise. It’s been all about seamless processes, and automation is the way to go,” she told Salaam Gateway.

“In the last year people have been looking at how to review smart contracts, for example; they are looking to do digital aqad and trying to minimise as much human intervention as possible. There’s been a big flow of announcements this year.”

Now that fintech has been somewhat invigorated after a year of lockdowns, there is no reason to expect it to die down once borders open up and social restrictions are consigned to memory.

“I don’t think anything new has been added to the Islamic fintech agenda; rather plans have just been brought forward,” said Dr. Abojeib.

Banks may have had digitalisation on their agendas for four or five years in the future, but now they understand the race they are in, they need to roll it all out within two years.

“They were late and did not see it as being urgent. But when the pandemic started the whole situation changed and people are going totally online for everything. I don't think anything will slow down this process, especially if success stories come out of it,” he added.

© 2021 All Rights Reserved


Islamic Fintech