The disruptive impact of Islamic fintech


Financial technology or fintech is fast gaining traction in the financial services and products industry, as both start-ups and traditional finance companies such as banks or insurance companies proactively incorporate methods to stay in the lead.

According to ‘Fintech and Financial Services: Initial Considerations’, a report prepared by the International Monetary Fund (IMF) staff team, fintech leverages the explosion of big data on individuals and firms, advances in artificial intelligence (AI), computing power, cryptography, and the reach of the internet.

“The strong complementarities among these technologies are giving rise to an impressive array of new applications touching on services from payments to financing, asset management, insurance, and advice.

“The possibility now looms that entities driven by fintech may emerge as competitive alternatives to traditional financial intermediaries, markets, and infrastructures,” it read.

The same can be said for the Islamic finance industry. In fact, Bank Negara Malaysia itself supports the role of fintech in Malaysia’s overall finance industry.

In his opening remarks at the Islamic Fintech Dialogue 2017, Bank Negara Malaysia assistant governor Marzunisham Omar revealed that while Islamic finance has made significant progress domestically and globally, the next growth phase requires the industry to ride the fintech wave.

“At present, Islamic finance fintech is still in its infancy and growing. Encouragingly, we are seeing increasing number of fintech start-ups, innovation labs and incubators that are based on the values and principles of Islamic finance.

“However, they are not as visible and omnipresent as their conventional peers,” Marzunisham said.

He went on to highlight that the case is compelling for Islamic finance to take on a more prominent role in the fintech ecosystem.

“The technology is ripe, with higher penetration of mobile and internet across markets. Consumers are also becoming more and more tech-savvy. Digital-banking consumers stand at an estimated 670 million in Asia alone and are expected to reach 1.7 billion by 2020.

“In Malaysia, within a population of 31 million, there is high mobile and internet penetration rate at about 141 per cent and 81 per cent respectively. With a diverse population and a growing middle class, Malaysia is an ideal test bed for developing and commercialising fintech solutions.”

Bank Negara Malaysia assistant governor Datuk Ahmad Hizzad Baharuddin also highlighted in a keynote address at ASAS Shariah Fintech Forum 2017 that Islamic finance, being a relatively young industry, stands to gain significantly by leveraging on technology.

“We view technology as a great equaliser. With a sizeable market share of more than 28 per cent of the total financial assets which commensurates with the size of the Islamic financial institutions, it is now time for the Islamic finance industry to compete alongside its conventional counterparts.

“For those who embrace technology for instance, it opens up opportunities that allow them to compete more effectively – with wider range of innovative products and better pricing to fulfil the needs of customers. The time is right for the industry to capture the window of opportunities brought about by fintech to remain relevant and competitive, given the more challenging journey ahead.”

Other experts in this field were also fully supportive of the role of fintech in Islamic finance, as revealed at the recent World Islamic Economic Forum 2017 (WIEF 2017) held here in Kuching.


Adopting fintech the fastest way to reach people

On this note, AmInvestment Bank chief executive officer (CEO) Raja Teh Maimunah Raja Abdul Aziz was quick to point out during the panel discussion that it is clear that with the adoption of fintech, entities will be able to reach out to as many people beyond borders, compared to when utilising traditional banking methods.

“The adoption of fintech by Islamic financial institutions and Islamic finance in general is extremely compelling,” Raja Teh Maimunah said.

“If you were to start a new bank today and you want to set up a whole brick-and-mortar distribution netwok, it’s going to take you 100 years and by the time you’re done, people don’t go to branches anymore. The reality is the fastest way to reach out to as many people beyond borders is the adoption of financial technology.”

Raja Teh Maimunah went on to remark that the adoption of technology to further Islamic finance is “what we ought to be focusing on”.

She also noted there will come a day when everyone carries a mobile phone and that fintech is going to be the strongest distribuition network for Islamic finance.

“Banks – and Islamic finance banks in particular – do not have an option not to adopt. The only way that Islamic banks or Islamic funds or Islamic crowdfunding can reach out is to adopt mobile technology.”

International Centre for Education in Islamic Finance (INCEIF) president and CEO Dato’ Dr Mohd Azmi Omar also agreed on that note, saying that utilising fintech in Islamic finance will be one way where “we can increase the function inclusion, bring muslims into the financial sector, using fintech as one of the tools”.

In a number of studies made including the work Mohd Azmi has done when he was with Islamic Development Bank (IDB) in Saudi Arabia, it has been found that there is a large segment of Muslims who refuse to participate in the banking sector.

One of the reasons was due to religious issues.

“They do not want to receive as well as pay interest because they believe that interest is ‘reba’ therefore Muslims are not allowed to be involved in that as customers or as borrowers of the commercial banking system,” he explained, adding that this is done across many countries.

“Even if we establish Islamic bank in one particular country, the market maybe small. Recently, before I came back to Malaysia, we were working with Suriname, a country in South America. It has a population of less than a million and a Muslim population of slightly close to 300,000 and there’s a plan to establish an Islamic bank (there).

“Having an Islamic bank with a small population, the question will be the issue of viability of that plan. However, if we utilise fintech, that will be one way where we can increase the function inclusion. Bring Muslims into the financial sector, using fintech as one of the tools.”

Mohd Azmi highlighted that his work before and currently, involves looking at how they can use fintech to support the Islamic financial institution, to bring more people into the financial sector.

“Apart from the banking sector, we also did look at the issue of charities and so on. We have not been able to utilise the other Islamic financial components in the form of zakat, wakaf and sadaqah.

“These are economic pillars that we can use to support the development of Islamic economy in general. Hence, utilising fintech is one of the tools.”


‘Time to embrace digital disruption’

Traditional banks, while the biggest users of technology, cannot seem to grasp the importance of moving forward in this fintech ecosystem.

Raja Teh Maimunah observed that globally, a lot of banks essentially look at digital disruptions in banking a little bit like taxi drivers at Uber: they are upset and then they continue to live in denial.

“I think for a lot of banks, it’s because of the heavy investment in legacy systems and this is really ironic. Banks are actually the first, they are the biggest users of technology.

“We spend a lot of money on technology. But because of the money we had spent, we seem to be unable to migrate and we are not as agile and I think this is where the challenge lies, largely with banks.”

From experience, she noticed that the decision to change the approach from credit to risk is very difficult from the mindsets of traditional bankers.

This is unlike the fintech companies, who are not bankers, that have looked at financial services as purely just another business.

“They’ve approached it from a customer experience perspective, as opposed to how we approach it, from largely a regulatory perspective,” she added.

Atom Bank, an app-based bank in the UK, is an example of an entity which fully embraces digital banking.

As per the bank’s website, Atom Bank does not have any branches, is transparent, innovative, low-cost and puts customers at the heart of everything it does.

Additionally, the bank uses biometric security, ie face and voice recognition to log-in to its app.

“If you have the opportunity to open an account with Atom Bank… I actually calculated that it took me six minutes and I didn’t have to talk to anybody. And it literally asked me three fields.

“In Malaysia, you have 16 fields and several forms and the requirement to see face-to-face know your customer (KYC).

“We are still caught between regulatory confines as well as our inability to say that you can do it differently and you can still ensure that KYC is done.”

That said, Raja Teh Maimunah noted that Malaysian banks and most banks around the world are attempting to digitise bits of their business.

However, these banks are only digitising exisitng processes but not quite taking one step back and crafting a digital experience, she said.

“We are unable to provide like what Atom Bank has been able to do in terms of account opening and onboarding of customers.”


DLT another gamechanger

Distributed ledger technology (DLT) has in particular, been lauded as a gamechanging tool in the industry as the adoption of it allows for secure and efficient offering of financial services.

According to the World Economic Forum-Deloitte’s ‘The future of financial infrastructure’ report, DLT, more commonly called ‘blockchain’, has captured the imaginations and wallets of the financial services ecosystem.

Raja Teh Maimunah noted that to facilitate trade in a highly connected world, very complex with the issues of KYC and the issues of anti-money laundering (AML), the use of DLT will actually allow banks to protect all of these.

“One is to cut down manual processes of course, and number two, you actually will know the origin and destination of money,” she said.

In terms of fraud, she pointed out that especially with invoice financing, there are people around who can use the same invoice and get financing three times.

“But, if you use it and put it on the ledger, it is not possible because it’s a decentralised ledger. That’s the beauty about DLT.

“It is not a central repository, it is a decentralised book and you cannot actually alter it retroactively.”

Raja Teh Maimunah stressed that the use of DLT is crucial for them to move forward in terms of trade finance.

“The very essence of Islamic finance is trade, in whichever form, whichever contract, the underlying contract that you use. But can we facilitate it by the use of DLT?”

Raja Teh Maimunah also revealed that AmInvestment Bank is currently experimenting with its clients to use DLT for the issuances of bank guarantee.

“It is not financing upfront, but for those of you who are in the banking industry, you will know how manually intensive it is to issue a bank guarantee and how many people are involved and how many times these documents are being pushed to and forth.”

Moving forward, she predicted that with the event of fintech, or technology finance (techfin), what will be seen is perhaps breaking up of some of these products into vertical pillars.

This is because the fintechs are not interested in the whole suite of what the banks have got to offer, she said.

“They’re not interested in the least profitable side of the business, we can keep that. What they want is the most profitable, least capital-intensive business like remittance, collections and payments. That ‘s what fintech are keen on and that is the bits that will be chipped off from the main banks.

“My suspicion is eventually there will be break ups perhaps of these huge, large financial institutions into vertical pillars. Once that happens, you will then see the push towards technology by distributed ledger because you need to talk amongst yourselves even more so and you don’t have a centralised risk or credit unit anymore.”


Is the Malaysian market ready for Islamic fintech?

On whether the Malaysian market is ready for Islamic fintech, Mohd Azmi shared in a separate session with the media that education and awareness among consumers is important in this case.

“You see the thing is, you must educate people about fintech. Education and awareness. A lot of people do not know of the availability of this fintech,” he observed.

“The point is, these fintech applications has a lot of potential to bring people into the financial sector in Malaysia. To be able to even send money to your friends, send money to relatives, receive money, make payments, but in a syariah-compliant manner.”

The distance of individuals from physical branches will also likely play a role in the higher adoption of Islamic fintech in the Malaysian market.

Mohd Azmi noted that in Malaysia, people still have problems of accessing banks, especially for those who reside far from the city or town.

“If you are far away from the city or from town, it’s difficult for you to access banks because you have to think of the transporation (needed) to go to the bank. It’s not convenient because banks only open certain hours,” he said.

He also pointed out that another factor is the millenials, people between the ages of 15 to 30, and who are mobile phone or smartphone savvy.

“Having this gadget or facility enables people to go into banking. Just imagine, you can learn about Islamic finance through phone rather than attending a class.

“There are a lot of advantages. I see the role of fintech, or Islamic fintech, will be to expand the accessibility of Islamic finance in Malaysia.”

However, Mohd Azmi acknowledged that for banks, the challenge they are facing now is that their businesses are getting smaller.

“Why do you want to put money in a bank where if you can put in a fintech nowadays and get a better return? Because fintech links you with a project or an investment.

“So, this opportunity allows people to put money directly into investment and you know that this investment is investment in the real economy. You are really manufacturing things to help the country to grow.

“Thus, by putting this, fintech helps you to develop the real economy.”

In addition, from a regulator’s point of view, Mohd Azmi pointed out that it makes our financial system more stable.

“Because people are able to create jobs and then you channel the money to the right resources,” he said.

As such, he opined that in future, the banks’ role, in certain sectors, will eventually be smaller, especially with payment, deposit and financing. At which point, banks will then have to venture into other areas.


Preparing future bankers for disruption

For INCEIF’s part, Mohd Azmi revealed that the university is changing its curriculum to keep pace with the current developments.

“We see that apart from Islamic finance, the halal economy is a big segment of the world economy now.

“What we’re doing now is that we are also now changing the curriculum, the content, keeping pace with the development, so that our graduates will be able to not only understand, but also to contribute to this new development,” he said.

“I would say that in order to prepare our graduates for the global halal economy, is to focus on what we call ethical finance. Sustainable finance.

“At the end of the day, there is a lot of commonalities between sustainable development goals (SDGs), the Equator Principles and the United Nations’ Principles for Responsible Investment.

He added that all of these are important components that considers environment, society and community.

Mohd Azmi also stressed that the important thing is that Islamic finance cuts across the ethical responsible finance.

“It is very much concerned about how the next generation will live, how the planet will survive if we continue under the current situation.

“Hence, even in the context of producing graduates in universities, we are incorporating all these elements, so that our graduates will be ethical, keeping abreast with the recent developments and also take into account the latest technology in the financial sector.”