Islamic Digital Economy – Islamic Fintech – Malaysia’s New Frontier

Islamic Digital Economy – Islamic Fintech
Malaysia’s New Frontier

Yuzaidi Yusoff
January 5, 2021

Changing Economic Landscape
The World Bank reported that top 15 economies in the world represent 75% of the overall global GDP in 2018, which totalled USD86tn. United States captures 24% of the world total, or USD26tn, followed by China, Japan and Germany.

It is interesting to note from a projection by Standard Chartered, that the next decade will see some significant changes in the global economic ladder. In 2030, China will be the largest economy in the world with USD64tn in GDP, followed by India at USD46.3tn. United States will drop to 3rd in the ranking at USD31tn as its projected GDP in 2030.

What is more interesting is the rise of the developing countries. Indonesia, Turkey, Brazil and Egypt will jump to no. 4, 5, 6 and 7 in the world respectively, overtaking the likes of Japan and Germany as the leading world economies. The developed economies will still grow, but not at an exponential rate as the countries mentioned above.

Malaysia Economic Monitor (MEM) 2020 report by World Bank says Malaysia is not expected to recover fully from the pandemic shock within the next few years, creating a challenge to the medium term fiscal outlook. Malaysia has used up much of its fiscal space. By the time it is out of its crisis, it will be saddled with more debt and contingent liabilities.

It went to suggest that Malaysia should refocus its fiscal policy on sustaining public financing for long-term growth, seizing new growth opportunities and bold structural reforms.

Opportunities for Malaysia
It is said that Malaysia needs to enhance its industrialisation economy and not rely solely on her commodity revenue. Fortunately, there are opportunities out there. 2.3bn of them. That is the number of Muslims in the world by 2030, forecasted by Dinar Standard as reported in the State of the Global Islamic Economy Report (GIER) 2019/20. It said that Muslims are expected to spend USD3.2tn by 2024 from USD2.2tn in 2018.

Islamic finance (assets) is forecasted to contribute USD3.5tn with a CAGR of 5.5% in 2024 from 2018 as reported in the same Report. In 2018, the Islamic finance (assets) stood at USD2.5tn with a 3.5% growth y-o-y. Malaysia is ranked third with USD521bn.

In fact, Malaysia is ranked #1 in the Global Islamic Economy Indicator (GIEI) ranking, followed by UAE, Bahrain, Arab Saudi and Indonesia.

In 2018/19, investment in Islamic economy companies is only USD1bn, a fraction of the global investment in consumer and financial services of USD596bn. The same report also reveals that 66% of consumers are willing to pay more for ethical products.

Thomson Reuters projected the sharia-compliant assets worldwide to reach USD3.8tn by 2022.

The recently signed Regional Comprehensive Economic Partnership (RCEP) Agreement on 15th November 2020 resulting in the establishment of the world’s largest trading bloc, will give Malaysia the opportunity to capture 30% of the world population. World Bank estimates that Malaysia is expected to see a net gain of around 1% of the GDP from RCEP. There is a huge opportunity to capture.

Among the hot sectors for growth that Malaysia can and should be focussing on is in Islamic finance, especially in Islamic Fintech, particularly in peer-to-peer (P2P) finance and insure tech/Takaful. Islamic social finance, i.e. zakat, waqaf, microfinance; and Islamic trade finance are the other sub-sectors to watch out for growth. Malaysian Islamic Fintech can and should increase adoption and in addressing UN Sustainable Development Growth (SDG) objectives. An ethical purpose and approach easily understood by the non-Muslims.

Bullish and Aggressive
According to the Department of Statistics of Malaysia’s (DOSM) report, Malaysia’s GDP per capita for 2018 shows that they are uneven across the states. Kelantan has the lowest GDP per capita at RM13,700 or 69% below the national average of RM44,700. Kedah, Perlis and Sabah are the other poor states in the country with RM21,400, RM24,400 and 25,900 respectively.

The Khazanah Research Institute (KRI) paper, “Improving Income Inequality: Fact or Fiction?” stated that the income gap on absolute term in the country has widened. In 1970, the Top 20 households (T20) earned RM3,300 more than the Bottom 40 households (B40). In 2016, the T20s earned RM13,200 more than the B40s.

Islamic social finance can and should play a bigger role in reducing poverty, inequality and addressing environmental challenges. Bank Negara Malaysia’s (BNM) recently launched policy document on Licensing Framework for Digital Banks inviting applicants to offer banking products and services primarily to underserved and unserved market through digital means helps to address this gap.

The Shared Prosperity Value 2030 (SPV30) is a commitment by the Government of Malaysia to make Malaysia a nation that achieves sustainable growth along with fair and equitable distribution, across income groups, ethnicities, regions and supply chains. Its primary aim is to provide a decent standard of living to all Malaysians by 2030. The SPV30 preaches the concept of inclusivity, leaving no one behind. Islamic Fintech can be that engine, that driver, for financial inclusion for all Malaysians at all levels.

Two of the Key Economic Growth Activities (KEGA) outlined in the SPV30 is Islamic Finance Hub 2.0 and the Digital Economy. Malaysia strongly believes the potential growth of these activities as it aspires to achieve high value economic development.

The SPV30 is very focus to position Malaysia as an Islamic Finance Hub 2.0.

Malaysia was a leader in “Wave 1” of Islamic banking back in the 1990s. Malaysia is ready to lead the “Wave 2” of Islamic finance, adapting to the digital Fintech world. Malaysia is strategically placed in ASEAN to serve as the gateway for Islamic Fintech, particularly to Indonesia.

Malaysia has the right ingredient and ecosystem to build a Global Islamic Fintech Hub in the region as it:
• has a matured Islamic finance environment;

• is conducive and has a cost-effective business environment;

• is blessed with academicians, Islamic finance experts and shariah scholars;

• has sought after local and international talents in Fintech and Islamic finance;

• has established proven Islamic finance framework and structure; and

• progressive regulatory bodies.

Malaysia should be in the driver seat in leading the Islamic digital economy for the region. For the last fifty years Malaysia has been successful in the electrical and electronics (E&E) sector. It has the experience, the ingredients, and the know-how for a similar transformation of the Islamic digital economy. It needs to create an ecosystem for its Islamic digital economy that incorporates reforms to its infrastructure, policies, talents, production, innovation, intellectual property (IP), research and financial support.

Malaysia is located in an ideal location for the regional hub not only with a sizeable market, but also offers the opportunity to scale-up into the region, especially capturing the more than 280m Muslims in the region.

Take The Bull by The Horns
To maximize the opportunities at hand, Malaysia needs to fill the gaps and overcome its shortfalls. Funding availability has always been the issue for the Malaysian startups, small and medium enterprises (SMEs) and entrepreneurs. Many feel Singapore is friendlier and offers more funding opportunities for them. Malaysia also needs to find ways to attract more venture capitalists (VCs), investors, fund managers to support Malaysian unicorns-to-be. Government agencies should play a bigger role in providing ease and support for setting up operations and business in Malaysia. There needs to be more active engagements by regulators and offer more welcoming regulatory environment.

Malaysia can take the cue from Bahrain Fintech Bay (BFB) that has the support from the Islamic banking community, boasting eight (8) of the largest Islamic banks in the Kingdom as partners. The Association of Islamic Banking and Financial Institutions in Malaysia (AIBIM) can play a bigger role in supporting the Islamic Fintech ecosystem in Malaysia.

In UAE, the DIFC Fintech Hive, located in the Dubai International Financial Center (DIFC), a global hub for Islamic Fintech, is driven directly by Dubai Islamic Economy Development Corporation. It is attracting local and foreign Islamic Fintech start-ups including Malaysian own shariah compliant gold digital savings platform, HelloGold.

Malaysia should learn its bitter lesson from the Malaysia-born, Singapore-based unicorn, Grab.

Indonesia just launched the Indonesia Islamic Economic Masterplan 2019-2024 (IIEM 2019-24). This is a country with the largest consumer of halal products in the world.

With a population that takes up more than 3.5% of the world’s total population, Indonesia spends more than USD215bn in all Islamic economic sectors. Indonesia is poised to be the developing country to be reckoned with. It is not surprising that the projections from Standard Chartered, placed Indonesia as the 4th biggest economy in the world by 2030, behind China, India and the United States. Indonesia has
identified strengthening Islamic finance and digital economy as two of its four main
strategies in the IIEM 2019-24.

Nevertheless, Indonesia has its own challenges to overcome in the Islamic banking.

They include skilled resources, regulations improvements, research & development (R&D) to ascertain opportunities, and education & socialisation on Islamic banking.

Malaysia has a lead-start on some of these areas. It cannot rest on its laurels and must act fast, as the window of opportunities (some say survival), is closing in fast.

The Covid-19 pandemic has given Malaysia the opportunity not only to revitalize the economy but also to REFORM the economy.

“Countries become good at certain industries only because they decide as much, and not because they are destined to do so.”
– Prof. Ha-Joon Chang, University Cambrige

Immediate actions could include the following:
1. Establish an Islamic Fintech sub-committee within a special committee of Islamic Finance under the Ministry of Finance.

i. Formulate a national Islamic Fintech strategy linking to Islamic and ethical economies;

ii. Work closely with key stakeholders across the ecosystem to drive the strategy roadmap;

iii. Design an Islamic Fintech framework;

iv. Execute and monitor the Islamic Fintech strategic plan;

v. Act as the point of reference on anything related to Islamic Fintech in Malaysia;

vi. Define and design the Islamic Fintech industry parameters – providing clarity

in roles of incumbents and new entrants;

vii. Rationalize standards, working closely with other countries, making Islamic finance standards as the leading benchmark for ethical finance practices, to reach beyond Muslim-owned businesses and to drive economic growth.

2. Enhance the existing MDEC’s Orbit and as an Islamic Fintech cluster.

i. Provide Islamic Fintech companies an access to multinational companies (MNCs), Islamic financial institutions (IFIs) and regulators;

ii. Serve as an advisory service centre including on shariah compliant financial matters;

iii. Act as an accelerator and an incubator, provide access to international market especially to Organisation of Islamic Cooperation (OIC), Gulf Cooperation Council (GCC), and RCEP countries; iv. Act as a soft landing for foreign Islamic Fintech players in making Malaysia as its hub or base in this region; v. It can emulate the Bahrain’s BFB structure with a Public Private Partnership (PPP) between the Ministry of Multimedia and Communication (KKMM), MDEC, AIBIM, and Malaysia IFIs.

3. Redefine Islamic social finance for an inclusive Islamic Fintech
Malaysia needs to revive institutions that encourage mutual help and generosities to people in need. One of them is waqaf. The basic concept is not too different from endowments. In fact waqafs are the precursors to modern day endowments or foundations, where properties or other assets are donated to be used for the benefit of society.

Development of waqaf is one of the significant social instrument for social development, greater public good and wealth distribution. During the Abbasid period of Islamic history when waqaf dominated the economy, medical services were provided free of charge by waqaf-funded hospitals. They competed with each other to provide the best free services, as the ones with better reputations would attract more donors.

i. Collaborate with UNHCR Zakat Fund;

ii. Establish synergistic collaboration with zakat collection centres, institutions and regulatory bodies across the respective states in Malaysia;

iii. Increase adoption of sustainability in Islamic social finance products, maximising social impact and addressing SDGs;

iv. Establish structured and well governed philanthropic-based institutions that include:
a) Zakat;
b) Infaq;
c) Sadaqah;
d) Waqaf.

i. Establish cooperation-based institutions that include:
a) Qard (loan-based cooperation);
b) Contemporary Islamic microfinance institutions.

i. Securities Commission recently launched Waqf-Featured Fund Framework to facilitate the offering of Islamic funds with wakaf features is a step in the right direction;

ii. Taking advantage of Fintech to be put in place like zakat information system, waqaf information systems, and enhancing the collection and management of the zakat collection and distribution;

iii. Encourage the use of big data and Artificial Intelligence (AI) to spur growth of innovation and improve the quality of service delivery;

iv. We need more shariah-compliant Exchange Traded Funds (ETFs) in the market to encourage start-ups in providing investors with a globally diversified Islamic ETF portfolios;

v. Proper branding and awareness to the Muslims on zakat, waqaf, etc and that environmental, social and governance (ESG) criteria goes beyond corporate social responsibility (CSR);

vi. Build a Fintech culture within the Islamic finance fraternity, in particular the Islamic social finance space.