Professor Nafis Alam (Sunway University)
Lokesh Gupta (Consultant, RM Applications)
FinTech is the buzz word in today’s financial industry landscape. In simple terms it is a combination of the words finance and technology to provide a better and Innovative financial technology infrastructure for offering financial products and services. It is common to associate FinTech with mobile app related solutions but it is beyond that i.e. digitalization of financial services with innovation. It has revolutionized the offering of financial products and services by making it affordable, easier and need-based in comparison to traditional offerings.
It provides an amazing platform and opportunity for banks to promote financial inclusion by serving underbanked and unbanked communities. FinTech is also associated with disrupting traditional models by creating services with or without intervention of financial intermediaries. In order to remain competitive, financial sectors and especially banks should be proactive in adopting FinTech. A recent Boston Consulting Group study showed that over the next five years, corporate banks that remain digital laggards could see profits drop by as much as 15-30 per cent relative to their digitally fast-moving competitors.
Islamic Finance, which is relatively new in comparison to conventional banking also emphasizes on financial inclusion and social welfare. Islamic finance is showing double digit growth and offers financial services in compliance with Shariah to achieve social and financial objectives. Islamic Finance aspires for growth without compromising on Islamic principles and this opens up an opportunity to join hands with FinTech to drive adoption of Islamic Finance products and services. In recent times, Islamic finance has been catching on with technological advancement across its service domains. A robo adviser called Wahed, the world’s first automated Islamic investment platform was launched by New York-based Wahed Invest Incorporation. Wahed is designed to analyse thousands of Halal securities worldwide to create portfolio allocations with the highest growth potential for its clients. Abu Dhabi Islamic Bank, one of the largest Islamic banks in the GCC partnered with Fidor Bank, an Internet-only direct bank licensed in Germany, to launch GCC’s first “community based digital bank.
A World of Possibilities
The rise of FinTech has opened up a world of possibilities for IFIs. It is a win-win for both parties whereby IFIs can leverage on their ATM Network, Branch Infrastructure and integrate with FinTech’s platform to increase their offerings and services. IFIs will have to be at the forefront of the latest development in FinTech financial business models and collaborate with them to grow the products and services offerings. There is also potential for IFIs to have their own venture capital funding initiatives under equity financing (Musharakah or Mudharabah) to potential FinTechs and make them part of their internal innovation team. On the other hand, FinTech can also leverage on ethical banking offered by IFIs to scale up their offerings using collaboration approach and can tap wider markets including Muslims and Non-Muslims.
FinTechs are leveraging on mobile connectivity and digitally connecting Peer to Peer (P2P) with technology has opened up seamless business possibilities in the area of Remittance, Payments, Crowd Funding etc. FinTech’s presence in Islamic Finance is still at a very early stage, it means possibilities of many opportunities. Some segments of Islamic finance where FinTech can come in handy are discussed below:
P2P Crowd Funding
Crowdfunding allows easy access to funding online where borrower and lender can be from different geographical boundaries and would have never met. It is based on Peer to Peer (P2P) model embedded with Islamic finance principles such as Murabaha (Mark Up) for buying an asset and Musharakah or Mudharabah based equity Financing model which can provide easier financial access to Individuals and SMEs and for venture capital.
Islamic Financial Institutions (IFIs) can collaborate with FinTech and play the role of Financier Intermediary or can own the debt created through financing. IFIs can leverage on FinTech penetration using social media and can have cost saving on customer acquisition cost while same can be translated into cheaper financing products. IFIs can target niche segments like Asset Financing. White goods financing can be based on Murabaha Mark up Financing for Shariah compliant assets.
P2P Financing is based on risk sharing concept which is in line with Islamic principles. This will make the model appealing for both Muslims and Non-Muslims looking for alternative financing options. There have been similar initiatives by IFIs in Malaysia by launching collaborative Investment Account Platform (IAP), where lenders, banks and enterprises seeking funds are all connected together using a common platform. Investors will have easy access to a series of investment opportunities, and for IFIs it will be a new channel to attract funding.
Domestic and International remittance using P2P model is gearing up and FinTech is providing a creative way of remittance without moving the money cross border. It works by rerouting money domestically by connecting the senders from cross border wanting to send money to their respective beneficiary. This provides a much cheaper option and saving on remittance charges, which matters a lot in case of migrant payment to their respective beneficiaries. Islamic Banks can connect with FinTech’s remittance platform with their ATM Network allowing them to withdraw funds based on the remittance amount and entering secured PIN and no mandatory bank account is required. IFIs can encourage beneficiary to open bank account with minimum documentation based on financial inclusion policies.
The latest trend in Mobile money is offering of mobile wallets to mobile phone users who may not have regular bank accounts. These are now heavily used for micro payment ranging from Mobile Top up, Utility Payment and other day to day payments. This is also playing a major role in Domestic and Cross border payments through instant messages without going through the hassle of filling forms.
Malaysia is leading the FinTech development for Islamic finance compared to other Islamic finance focused economies. For example, the Middle East’s banking sector has been relatively slow in adopting deep and transformative digitisation compared to its global peers, according to a recent survey of corporate banking customers worldwide by the Boston Consulting Group (BCG). In Malaysia, the Government is also creating a start-up friendly business environment, whereby $47.8 million (MYR200 million) is being allocated for start-ups under Working Capital Guarantee Scheme (WCGS) Fund. In addition, the Malaysian central bank and financial regulator Bank Negara Malaysia came out with regulatory sandbox framework to boost the FinTech sector in the country. “Regulatory sandbox” is a concept where businesses can test innovative products, services, business models and delivery mechanisms in a live environment without immediately incurring all the normal regulatory consequences of engaging in the related activities.
The sandbox framework is applicable to all licensed financial institutions and all FinTech companies intending to carry out businesses to raise the P2P lending within the country, Securities Commission Malaysia has awarded 6 P2P licenses, one of which is the world’s first license for Shariah-compliant P2P. This license was awarded to EthisKapital.com, which will be focused on funding small businesses and real estate development projects. All this shows that the Government and Regulatory bodies are FinTech friendly. This should serve as a catalyst for FinTech to have an innovative Islamic Finance ecosystem offering ethical banking services to gain traction among the masses. Thus, the Islamic finance industry is well positioned to seize opportunities by embracing new technological developments and pave the way for more FinTech growth.