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Malaysia is the undisputed leader in the Islamic finance industry, with a 48% market share of global sukuk issuance in 2019, more than double that of its biggest competitor Saudi Arabia. Recently, the country also emerged as one of the world’s leading Islamic financial technology (fintech) hubs that houses various Islamic fintech start-ups.
Based on Malaysia Digital Economy Corporation’s (MDEC) Islamic Fintech Report, published in February this year, a total of 26 Islamic fintech providers were operating in Malaysia in 2019, higher than the UK (19), United Arab Emirates (16), Indonesia (12) and US (10).
These fintech start-ups include HelloGold, the world’s first Shariah-compliant gold digital application, and microLEAP, the first peer-to-peer (P2P) financing platform in Malaysia that offers both Islamic and conventional investment notes. Ethis Ventures, an Islamic fintech start-up from Singapore, moved its headquarters to Malaysia last year and became the first licensed Islamic equity crowdfunding platform locally.
Even conventional fintech start-ups have recently ventured into the Islamic space in Malaysia. For instance, StashAway, the country’s first and largest robo-advisory firm in terms of asset under management, launched StashAway Simple this year, a Shariah-compliant cash management solution that invests its clients’ money in an Islamic money market fund.
Why has Malaysia become a magnet for Islamic and conventional fintech start-ups? A key factor is that the country has a set of comprehensive regulatory guidelines that clearly list the requirements for fintech players to operate their businesses. Without ambiguity, fintech start-ups can make investment decisions quickly and decisively, says Wong Wai Ken, country manager for StashAway Malaysia.
For instance, the Digital Investment Management (DIM) framework, introduced by the Securities Commission Malaysia (SC), has laid out the requirements for StashAway to participate in the robo-advisory industry and tap into the Muslim and non-Muslim markets. There are also clear regulatory guidelines for fintech players who have applied, or want to apply, for a licence to operate an equity crowdfunding, or P2P financing, platform.
A mature Islamic finance ecosystem is another crucial factor that draws Islamic fintech players to Malaysia. There are various Shariah advisory firms that can ensure the products and services offered by fintech start-ups are Shariah-compliant. Several Islamic banks can also provide them with comprehensive Islamic banking and finance services.
Wong says: “The local Shariah adviser network is robust. There are huge players in this field that can advise you on all kinds of matters. You can also perform various financial tasks with Islamic banks, which are entirely segregated from the conventional ones. The infrastructure [for Islamic finance] is there.
“I cannot say that Singapore has the same [capability] as Malaysia. And Malaysia is the pioneer in Islamic finance based on worldwide standards.”
Malaysia houses numerous International Islamic finance bodies that strive to further improve the Islamic finance ecosystem locally and globally. They include the Islamic Financial Services Board (IFSB), a standard-setting organisation that promotes and enhances the stability of the Islamic financial services industry; and International Islamic Liquidity Management Corporation (IILM), an institution that offers and facilitates effective cross-border Shariah-compliant liquidity management solutions.
Bank Negara has set up the International Centre for Education in Islamic Finance (INCEIF) to develop human capital for the global Islamic finance industry; as well as the International Shariah Research Academy for Islamic Finance (ISRA), an Islamic finance and Shariah-related research institution.
Robin Lee, co-founder and CEO of HelloGold, says Malaysia is a perfect market for Islamic fintech players because of its mature Islamic finance ecosystem and infrastructure. It is also a “goldilocks” country with the right market size and a multiracial and multireligion population for Islamic fintech start-ups to do business in.
Lee says: “Singapore, a city state, has a population of five million without a mass retail market [to test our business model]. On the other end of the spectrum, Indonesia is just too big. Malaysia has a population of about 30 million, and it is just nice for us to have a feel of what things will be like.
“In terms of demographics, Singapore’s population is largely Chinese. Malaysia has a large Muslim population with a mix of Chinese and Indians. If our products work in Malaysia, it should be able to work in countries like Indonesia and India too,” he says.
Then, there is pent-up demand in the Malaysian retail market for new Islamic investment products and services, which makes the country attractive to Islamic fintech players, says Tunku Danny Nasaifuddin Mudzaffar, founder and CEO of microLEAP PLT, the first local P2P financing platform to offer Shariah P2P investment notes.
Danny says the platform was launched in October last year and offered only conventional P2P investment notes in the following six months. The reaction from investors had not been great because of various factors.
“However, we started offering investors Shariah-compliant investment notes beginning April this year, and they were taken up by investors very fast. The growth was fantastic. We had only six investment notes funded at the beginning of April. By October, we had fully funded 38 [Shariah-compliant investment] notes. We found that Malaysians are hungry for Islamic assets,” he says.
Still, Islamic fintech start-ups in Malaysia have their own set of challenges in offering a more comprehensive range of products, gaining local market share and expanding their businesses regionally.
For instance, StashAway’s Wong says a lack of Shariah-compliant exchange-traded funds (ETFs) in the market has hindered the start-up from providing investors with a globally diversified Islamic ETF portfolio.
As at Nov 25, there were only six Shariah-compliant ETFs listed on the local bourse: MyETF Dow Jones US Titans 50; MyETF Dow Jones Islamic Market Malaysia Titan 25; MyETF MSCI Malaysia Islamic Dividend; MyETF MSCI South East Asia Islamic Dividend; MyETF Thomson Reuters Asia Pacific ex-Japan Islamic Agribusiness; and Trade Plus Shariah Gold Tracker.
Wong notes that existing products also lack the innovation needed to add value to investors.
“The existing Islamic ETFs track the performance of various Islamic indices that are more or less replications of existing conventional indices, instead of tracking innovative Shariah-compliant indices,” he says.
For instance, MyETF Dow Jones US Titans 50 benchmarks its performance against the Dow Jones Islamic Market US Titan 50 Index, which is a subset of the Dow Jones Industrial Average.
Then, the MyETF Dow Jones Islamic Market Malaysia Titan 25, which tracks the Dow Jones Islamic Market Malaysia Titans 25 Index’s performance, invests in various large-cap companies that are component stocks of the KLCI, which offers investors little diversification value.
“It is crucial to have more innovative Shariah-compliant ETFs available to fund managers,” says Wong.
Meanwhile, microLEAP’s Danny says awareness surrounding Islamic fintech start-ups is still relatively low, especially in the small and medium enterprise (SME) industry.
He says many smaller businesses eligible to raise funds from the public via P2P platforms are unaware of the Shariah-compliant option. Then, some perceive the Shariah-compliant way of raising funds as more costly than the conventional one.
While this point is true in general, it does not apply across the board, says Danny. “For us, the cost for SMEs to raise funds through the issuance of Shariah-compliant investment notes is exactly the same as conventional notes.
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