Robo-advisors ready to morph Malaysia’s Islamic finance industry

Fintech plays plow forward in Southeast Asia as robo-advisor technology emerges as an important trend in Shariah-compliant investments – especially in Malaysia

As the fintech space continues to transform Southeast Asia, robo-advisor technology is emerging as a unique trend in Shariah-compliant investments. This is especially true in Malaysia, where artificial intelligence (AI) could endanger fund managers’ jobs while introducing new investment options to stakeholders.

Robo-advisors are algorithm-based products designed to manage asset portfolios by matching individual risk appetites against stock indexes. They’ve been around for years, but have yet to truly penetrate the global Islamic fund and wealth management market, whose assets under management (AuM) at the end of the first quarter of 2017 stood at $70.8 billion, according to estimates by the Malaysia Islamic Financial Centre and Thomson Reuters.

Shariah-compliant robo-advisors emerged in Malaysia in mid-2016, said Natasha Ishak, manager of banking and financial services at recruitment agency Hays Malaysia. Ishak works closely with the country’s banking industry executives, and her work includes research into the potential disruptions that technology will bring to the sector. She estimates Malaysia will likely see a surge in robo-advisor activity within the next three years.

“Right now robo-advisors are still mainly being used for high-frequency trading, so it’s not as developed as it could be,” Ishak told Salaam Gateway. “If we look at Malaysia itself, in terms of the infrastructure and the algorithms they’re plugging into the robo-advisors, it’s not as sophisticated as I’m sure it will be ten years from now.”

Robo-advisors can potentially shake up the wealth management industry in Malaysia by offering cheaper and more efficient options to a segment that has historically not had much access to investment advice.

Malaysia is in a unique position when it comes to robo-advice due to its leading position in Islamic finance and its Muslim-majority population of middle-income earners.

Islamic finance has an established presence and is highly visible on Malaysia’s financial landscape. The country has the highest number of Islamic funds in the world, totalling 328 in 2016, with assets under management (AuM) of 149.64 billion Malaysian ringgit ($34.9 billion), equivalent to 21.49 percent of total AuM, according to Malaysia’s Securities Commission. The nation’s Islamic funds AuM is second only to Saudi Arabia. The size of the nation’s Islamic capital market was 1.7 trillion ringgit in 2016.

Policy-wise, Malaysia’s government released its five-year Islamic Fund and Wealth Management blueprint in January this year that sets out strategy to position the country as a global hub for Islamic funds, establish it as a regional centre for Shariah-compliant sustainable and responsible investment (SRI), and develop it as an international provider of Islamic wealth management services. At the same time, the country’s securities regulator and central bank are working to hash out regulations for fintech companies looking to establish themselves through a sandbox initiative, which is currently underway.