Islamic Fintech

Fintech (financial technology) is the application of disruptive technology to traditional financial services, to achieve savings by minimising cost, and optimising time and system efficiency. Fintech concepts such as digital investment management (e.g. robo-advisory), equity crowdfunding (ECF), peer-to-peer (P2P) financing and digital asset exchanges (e.g. cryptocurrency exchanges) are creating opportunities to meet the needs of increasingly more sophisticated corporate clients and investors in the capital markets.

In recent years, Islamic fintech – which focuses on the use of technology to deliver Shariah-compliant financial solutions, products, services and investments – has been gradually gaining prominence. Islamic fintech is based on Shariah principles, which advocate the well-being of humankind while integrating ethics and justice with fintech solutions. The domestic Islamic ECF and P2P financing markets offer micro, small and medium enterprises (MSMEs) a viable alternative for Shariah-compliant financing. In 2023, this channel raised RM524.8 million in financing (2022: RM140.8 million).

Islamic Fintech Sphere

The combination of Malaysia’s robust Islamic finance regulatory environment, digital affinity of Malaysians, strong Islamic finance community, and the Government’s pledge to champion the Islamic economy, has opened doors for the nation to be a global Islamic fintech hub. Furthermore, the Government has identified Islamic finance and the digital economy as Key Economic Growth Activities under the Shared Prosperity Vision 2030 (or SPV 2030) initiative, especially as a platform to drive financial inclusion in Malaysia.

Based on data from the Global Islamic Fintech Report 2023, Malaysia has become a prominent Islamic fintech market in recent years. Amongst the factors contributing to its prominence is the doubling in the number of Islamic fintech providers, with 57 local providers out of the global total of 417 as at end-December 2023 (2021: 161 Islamic fintech providers worldwide). Islamic fintech has promising growth prospects in the Malaysian capital markets, underscored by the potential for halal businesses to raise Shariah-compliant funds and the potential investment opportunities for both Muslim and non-Muslim investors.

Malaysia retained its top position in the Global Islamic Fintech (GIFT) Index, a global index comprising 64 countries that are perceived to have the most conducive environments to promote the growth of Islamic fintech. The index applies a total of 19 indicators across five categories, namely Islamic fintech market and ecosystem, talent, regulation, infrastructure, and capital to determine compliance and ranking. Malaysia is followed by Saudi Arabia, Indonesia, the United Arab Emirates and the United Kingdom.

Market Development

In August 2021, the SC launched the Shariah Screening Assessment Toolkit for the Unlisted Micro, Small and Medium Enterprises as a guide for ECF and P2P financing platform operators and Shariah Advisers to determining the Shariah-compliance status of unlisted MSMEs for the platforms. Likewise, this screening toolkit will also enable MSMEs to gain better access to Shariah-compliant financing via the ECF and P2P financing platforms. In addition, the toolkit will also benefit investors who seek to diversify their Shariah-compliant investment portfolios across various asset classes and economic sectors. In July 2020, the Shariah Advisory Council (SAC) of the Securities Commission Malaysia (SC) issued a resolution that permits the trading and use of digital assets. Although the SC has yet to issue the complete guidelines, this is perceived as a landmark development for the launch of Shariah-compliant crypto-trading facilities. The SAC of Bank Negara Malaysia has issued a ruling that e-money is a permissible payment instrument under Shariah, effective 19 May 2020.

The SC and the United Nations Capital Development Fund (UNCDF), through its Centre for Financial Health programme – have launched an innovation programme to develop a vibrant Islamic fintech innovation ecosystem in Malaysia’s Islamic capital market (ICM). FIKRA, i.e. the first regulator-led Islamic accelerator programme, which translates to ‘ideas’, is dedicated to fintech solutions in Malaysia’s ICM. FIKRA aims to identify and scale relevant and innovative fintech solutions that can help address three main challenge areas – namely the diversity of Islamic Capital Market (ICM) offerings, accessibility and social finance integration – to support the growth of innovative start-ups.

As part of the SC’s continuous efforts to develop a vibrant ecosystem in Malaysia, FIKRA ACE was introduced in June 2023 as an enhanced, 3-year fintech initiative with three components.

FIKRA ACE Accelerator – An Islamic-focused accelerator programme
FIKRA ACE Circle – A networking platform to connect relevant stakeholders across ICM & Fintech
FIKRA ACE Excel – A platform for collaborations with higher learning institutions for capacity building