In its “call to action” published in August 2022, IFAC asked professional accountancy organisations (PAOs) and stakeholders to identify how Islamic financial instruments have been used to advance Sustainable Development Goals (SDGs). Malaysia, one of the pioneers of Islamic finance, is the first case study in this series reporting on Government, regulatory and industry efforts to support the SDGs with Islamic finance principles.

The first part of the Malaysian case study published on 7 September 2022 focused on sukuk, which provides the means to deliver more infrastructure investment to emerging economies.

The second part of the Malaysian case study looked at the concept and purpose of Value-Based Intermediation (VBI) and how VBI advances the attainment of the SDGs.

This third part of the Malaysian case study highlights the Islamic Fintech landscape in Malaysia and the potential benefits and challenges faced in mobilising Islamic Fintech to achieve SDG goals.

Islamic Fintech in Malaysia - a Panacea for Financial Inclusion?

Financial inclusion is key to achieving the United Nations’ 17 SDGs, in particular, helping to reduce poverty (SDG1); enabling investment and cost-effective services in the core sectors of agriculture, health, education, and energy (SDG2, SDG3, SDG4 & SDG7); diminishing gender inequality (SDG5); and spurring broader economic growth (SDG8 & SDG9).

Yet, many people globally remain unbanked and underbanked. One reason lies in religious and ethical concerns, such as the Islamic faith’s injunction against usury and interest. According to the 2020 World Bank report on Leveraging Islamic Fintech to Improve Financial Inclusion, up to 50% of the world’s unbanked 1.7 billion people and more than 200 million potential micro, small, and medium enterprises (MSMEs) are concentrated in Muslim-populated developing countries.

The answer to this could be Islamic Fintech, which merges syariah-compliant finance and technology to support financial inclusion. Islamic Fintech services simplify and facilitate access to financial services—such as takaful, or Islamic insurance, payment systems, and banking—for hard-to-reach populations at more affordable costs.

Furthermore, championing Islamic Fintech would fuel aspirations of financial inclusion and global sustainability. Islamic finance as a form of ethical finance is already synergistic with environmental, social and governance (ESG) frameworks given their shared emphasis on positive and sustainable development. Islamic finance services that are imbued with the principles of maqasid al-Shariah (i.e. Shariah’s intended outcomes) and delivered through digital channels could potentially be a panacea for financial inclusion. 

Malaysia Well-Placed to Lead in Islamic Fintech

While several countries are competing for global leadership in the Islamic Fintech space, Malaysia has several strengths, notably in the context of infrastructure and regulation:

  1. Malaysia has ranked first in the Global Islamic Fintech (GIFT) Index since the index was first launched in 2021, surpassing 64 other countries in talent, regulation, infrastructure, Islamic Fintech market and ecosystem, and capital.
  2. Almost 40% of respondents polled in the 2021 IFN Fintech CEO & Founder Survey recognised Malaysia as having the most conducive Islamic Fintech ecosystem in the world. Key to this is hands-on stakeholder engagement from the Malaysia Digital Economy Corporation (MDEC), the principal government agency overseeing the country’s digital economic transformation.
  3. The regulatory infrastructure overseen by Bank Negara Malaysia (BNM) and the Securities Commission Malaysia (SC) is consistently upgraded, in line with the 2022-2026 Financial Sector Blueprint which articulates Malaysia’s vision for Islamic fintech. Recent initiatives by BNM include releasing a discussion paper on licensing digital Takaful operators and plans to amend its Innovation Green Lane this year to facilitate Fintechs. Currently, the Innovation Green Lane only fast-tracks market validation trials and financial solution approvals for Islamic Financial Institutions (IFIs) but not Islamic Fintechs unless partnered with IFIs.
  4. Malaysia’s Islamic Fintech governance is underpinned by the concept of value-based intermediation, which was pioneered by BNM and guides the overarching regulation of Islamic finance in the country to achieve social finance, holistic development and inclusion goals.

Malaysia’s Islamic Fintech Landscape

This facilitative ecosystem has seen the emergence of 48 halal Fintechs in various business sectors and at different stages of maturity. According to MDEC’s 2022 Islamic Fintech Dialogue Report, these include:

  • TakaTech (Islamic insurance) (6)
  • Personal Finance Management (2)
  • Blockchain and Cryptocurrencies (3)
  • Islamic Enablers (2)
  • Crowdfunding (4)
  • Payment, Remittance and Foreign Exchange (10)
  • Robo Advisers (2)
  • Trading and Investment (7)
  • Alternative Finance (6)
  • P2P Finance (6)

Halal Fintechs which are already up and running include:

  • Finterra, a developer of blockchain solutions for Islamic social finance such as charity (sadaqah), endowment (waqf), and alms (zakat);
  • microLEAP, a P2P microfinancing platform partnering with SME Corp to disburse RM10 million in Shariah-compliant financing to SMEs;
  • PayHalal, which offers Shariah-compliant Buy Now Pay Later (BNPL) in partnership with Atome;
  • CapBay, a provider of Shariah-compliant supply chain financing solutions; and
  • Ethis, an ethical investment and social finance platform which is collaborating with venture capital firm Gobi Partners to establish a USD20 million seed fund for investing into Shariah-compliant start-ups globally.

Attesting to the buoyant prospects of Islamic Fintech in Malaysia, 33% of Islamic Fintech companies globally are headquartered in Kuala Lumpur as of 2022 (according to Tan Sri Dr Mohd Daud Bakar, Chairman of the BNM and SC Shariah Advisory Council in his opening remarks at the Islamic Fintech Leaders Summit 2022) and BNM approved two Islamic digital banking licenses in 2022.

Impediments to Growth

While the numbers appear laudable at first glance, the Islamic fintech sector still pales in comparison to its conventional counterpart.

According to Fintech News Malaysia, Islamic Fintech only accounted for a 5% share (or 16 out of 294 companies) of Malaysia’s overall Fintech space in 2022. Even if there were 48 Islamic Fintechs as per MDEC’s 2022 Islamic Fintech Dialogue Report, this means that Islamic Fintechs only comprise roughly 16% of Malaysia’s total Fintech market.

What is impeding Islamic Fintech and digital banks from breaking out and scaling up, in spite of the enviable regulatory support? Talent scarcity and access to finance are among the main challenges cited by respondents in various market surveys and research reports on Islamic Fintech.

Talent scarcity does not just affect operations but also Shariah compliance for Fintechs, compared to traditional IFIs, because of their ‘plug-and-play’ models [Mufti Faraz Adam, Global Islamic Fintech Report 2021]. With core parts of their infrastructure outsourced to third-party vendors, Fintechs must ensure external as well as internal Shariah compliance across their business models. However, there is an acute shortage of professionals who are competent in the governance and assurance of both Shariah and technology.

Unsurprisingly, lack of financing has emerged as a key barrier to growth: 33% of respondents from the 2021 IFN Fintech CEO & Founder Survey named access to capital as the biggest hurdle to scaling up, followed by poor Islamic finance literacy and unsupportive regulations.

One reason for the lack of financing is that many angel investors, private equity firms, and venture capitalists are based in non-Muslim countries, where Islamic finance’s minute footprint is off their radar. This lack of awareness is compounded by low literacy in Islamic finance. A limited understanding of Islamic finance’s differences with conventional finance— and even prejudice against Islam— translates into investor hesitance when it comes to backing Islamic Fintech, even though there are clear synergies between sustainable development and Shariah-compliant Islamic finance.

While there is capital available in Muslim countries, with Malaysia holding an estimated $619.7 billion in Islamic finance assets for 2021 according to the 2022 State of the Islamic Global Economy Report, smaller Islamic Fintech companies face challenges in securing investment funding or strategic partnerships. In the Malaysian Digital Economic Corporation (MDEC) 2022 Islamic Fintech Dialogue Report, industry insiders revealed that Islamic banks and funds in Malaysia are uninterested in acquiring or funding these start-ups.

Worse still, stiff competition from financial incumbents with their own digital offerings and mobile platforms are crowding out start-ups. IFIs’ reluctance to collaborate also stifles broader Fintech innovation, as start-ups are unable to experiment with new product offerings by tapping on the infrastructure, expertise and other resources of larger IFIs. 

This reluctance poses a setback for financial inclusion and SDG goals. Most Islamic Fintech products globally focus on the alternative finance, payments, fundraising, and deposits & lending market segments that serve the underbanked and unbanked. Here in Southeast Asia with a regional Muslim population of more than 240 million, there are only six Islamic Fintechs geared towards insurance and social finance respectively, according to the 2022 Global Islamic Fintech Report.

The Way Forward

Creditably, Malaysia has put in place key initiatives to help resolve the bottlenecks pinpointed by Islamic Fintechs. With regards to talent, the Fintech Booster capacity-building program introduced by BNM and MDEC enables Islamic Fintech companies to learn legal and compliance matters from Shariah advisory firms and consultants. The FIKRA Islamic Fintech Accelerator Programme, a joint initiative helmed by the SC and United Nations Capital Development Fund intends to: one, help SDG-aligned, innovative and sustainable Islamic Fintechs scale up and two, strengthen the talent pipeline by increasing awareness on career opportunities within the Islamic Fintech space.

With regards to financing, the establishment of Penjana Kapital which is a Government fund-matching scheme is key towards strengthening the funding ecosystem in Malaysia [MDEC CEO, Mahadhir Aziz, as quoted in the Malaysian Reserve’s February 2023 article “Funding, talent poser in the making of unicorns”. Other initiatives that could benefit Islamic Fintechs include the recent launch of the Employees Provident Fund’s $600 Islamic Private Equity Fund and the RM60 million Shariah-compliant FICUS SEA Fund by Malaysia Venture Capital Management and Ficus Capital, which focuses on financing early-stage technology companies.

Nonetheless, these remain largely top-down government-driven initiatives. While government support is important to drive growth, it is equally crucial for the private sector to advocate for Islamic Fintech. For instance, boosting rates of Islamic Finance literacy among consumers and investors to improve adoption and usage of Fintech services, and encouraging collaboration versus competition between IFIs and Fintechs.

Critically, Islamic Fintechs also must do their part by strengthening their business models and value propositions to capture investor interest, attract strategic collaboration and broaden the appeal of their offerings.

By virtue of their tremendous potentials and backed by supportive government policies and infrastructure, Islamic Fintechs in Malaysia should be poised to be at the forefront of the social finance scene and also in the vanguard of the global movement for financial inclusion. Certainly, this is a space to watch.

Zulfa Abdul Rahman

Team Lead of the Islamic Finance Unit in the Professional Practices and Technical Division of the Malaysian Institute of Accountants (MIA)

Zulfa Abdul Rahman is a Team Lead in the Professional Practices and Technical Division of the Malaysian Institute of Accountants (MIA), where she leads the Islamic Finance Unit. Previously, Zulfa was attached to a commercial bank where she worked in the Trade Finance Division for eight years. She is also the secretariat to the Islamic Finance Committee of MIA, which aims to promote Islamic finance through various initiatives such as collaboration with relevant stakeholders and accountancy bodies. Some of her notable involvement include projects such as the World Congress of Accountants (WCOA) 2010 where Islamic finance topics were first introduced at its platform, organising the National Zakat Symposium, conducting the Islamic Finance Pupillage Programme, publication of the Accounting for Islamic Finance textbook, stakeholders’ engagements through roundtable discussions and more recently working on a collaboration with a local university to publish shariah audit reference materials. Zulfa is a Chartered Accountant of MIA (C.A.) and a Chartered Global Management Accountant (CGMA).