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sia strives to expand coverage of digitalisation of MSMEs ”, Antara News , Sept 16 , 2022 ).
The lack of digital adoption in MSMEs can significantly hold back the economic potential of both countries . Digitalisation and digital tools help businesses reduce costs , standardise and automate business processes and reduce the reliance on human resources .
WIDESPREAD DIGITAL ADOPTION
Digitalisation is also a prerequisite to remaining competitive in a world that ’ s constantly transformed by technology – from the way one can now enjoy their entire shopping ( e . g ., retail automation ) or dining experience ( i . e ., robotic restaurants ) without a single human employee , to the way one can now instantaneously communicate with another despite the distance ( including topographical barriers ) in between .
Digitalisation enables businesses to innovate solutions and achieve efficiency .
One of the biggest hurdles standing in the way of widespread digital adoption amongst business owners in Malaysia is the financing costs associated with all the hardware and software .
With most of the population also being unbanked or under-banked , essential financial services providing credit access are largely inaccessible to those who need it most .
Thus , digitalisation for economic empowerment is also a problem of financial inclusion .
Islamic fintech can drive solutions for SMEs and unbanked retail users , reduce the cost of services , and innovate payment solutions to improve market expansion (“ Leveraging Islamic Fintech to Improve Financial Inclusion ”, World Bank , Nov 18 , 2020 ).
The untapped potential of Islamic fintech is also in part reflected in the projected 21 per cent CAGR ( compound annual growth rate ) by 2025 ( compared to only 15 per cent for conventional fintech ), the exponential growth of the Muslim birthrate , and also the increased global demand for socially responsible investing ( SRI ) and business practices , or ESG , which co-aligns nicely with Islamic finance principles (“ Islamic FinTechs Rise in Southeast Asia ”, FinTech News Malaysia , Oct 18 , 2022 ).
Islamic fintech is based on the four main principles of Islamic finance – which are :
• profit-and-loss sharing ( musharakah / mudarabah );
• all wealth must be asset-backed and have a real economic purpose ;
• investments should also have a social and ethical benefit beyond mere monetary returns ; and
• harmful ( haram ) activities and industries should be avoided . It ’ s also characterised by the prohibition of interest ( riba ), excessive uncertainty ( gharar ), and gambling ( maysir ). The principle of profit-and-loss sharing protects the borrower from disproportionately bearing the brunt of the risk in a business venture , and the principle of wealth being asset-backed has led to Islamic investments being historically less volatile .
Zakat , sadaqah , waqf , Islamic microfinance , and micro takaful models also reduce the number of unbanked by providing them with financial access , thereby contributing to financial inclusion ( please refer to the Glossary at the bottom of the article for definitions on zakat , sadaqah , waqf , and takaful ).
LAGGING IN THE SHARE OF EQUITY-BASED FINANCING PRODUCTS
Examples of Islamic fintech in Malaysia include HelloGold – an award-winning and Malaysian-grown Islamic fintech app that enables individuals to protect their savings via gold in a Sharia-compliant way . Other notable examples include MicroLEAP , Malaysia ’ s
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first Shariah-compliant P2P ( peer-to-peer ) financing platform for MSMEs , and PayHalal , the world ’ s first Shariah-compliant payment gateway / digital payments solution .
Indonesian success stories include PayTren , a payment gateway service that facilitates everyday monetary transactions alongside ALAMI , an award-winning and world ’ s first Sharia challenger bank , and Kapital Boost , an Islamic-based P2P platform that offers short-term , ethical investment opportunities to global investors .
However , as it is , the Islamic fintech industry in both Malaysia and Indonesia is still nascent .
We ’ re still lagging in the share of equitybased financing products , i . e ., based on the contractual principles of Musharakah ( profit-and-loss sharing ) and Mudarabah ( profit sharing ) and also the lack of a distinct and specialised institutional structure to adjudicate on Islamic-based financial disputes – which still have to rely on the civil courts (“ A Comparison Between Malaysia And Indonesia In Islamic Banking Industry ”, Research Journal of Business and Management , Atikullah A ., Vol . 4 , Issue 3 , 2017 ).
Meanwhile , a global news platform report shows that Indonesia has the fifth largest share ( US $ 2.9 billion ) of the Islamic fintech market in the world . Reports also noted that millennials dominate the borrower category . The first in line is Saudi Arabia with US $ 17.9 billion followed by Iran with US $ 9.2 billion , United Arab Emirates ( UAE ) US $ 3.7 billion , and Malaysia US $ 3 billion ” (“ Indonesian Shariah Fintech Market 5th Largest in the World ”, OpenGov , May 11 , 2021 ).
According to a journal article published in F1000Research (“ Business Trends & Challenges in Islamic FinTech : A Systematic Literature Review ”, Vol . 11 , Issue 329 , 2022 ), current issues holding back Islamic fintech developments further in Malaysia are as follows :
• lack of specialist talents ( in both Islamic finance and fintech );
• lack of regulatory guidance ; and
• lack of a standardised Shariah benchmark for Islamic fintech However , bilateral cooperation between
Malaysia and Indonesia could address these shortcomings via strategic synergies .
Beyond the cultural and religious commonalities ( ties of kith and kinship ) and geographical proximity ( which enables economies of scale and market integration , among others ), Malaysia and Indonesia also share a common vision to utilise Islamic fintech to achieve greater financial inclusion and economic empowerment .
GLOBAL LEADER IN ISLAMIC FINANCE
In 2020 , the Securities Commission ( SC ) of Malaysia and Indonesia ’ s OJK ( Financial Services Authority ) entered into a fintech cooperation agreement to facilitate information sharing and referrals for businesses seeking to operate in the other ’ s jurisdictions (“ SC Inks Fintech Cooperation Agreement With OJK , Expanding Collaboration Between Malaysia - Indonesia ”, Securities Commission Malaysia , Aug 24 , 2020 ).
This is no surprise , as these two countries bring distinct and complementary strengths and contributions to the table .
Malaysia has been ranked first among 81 countries for nine consecutive years as the global leader in Islamic finance (“ Islamic FinTechs Rise in Southeast Asia ”, FinTech News Malaysia , Oct 18 , 2022 ). Indonesia is among the fastest-growing SEA countries with the world ’ s largest Muslim population (“ Economy of Indonesia ”, Indonesia Investments , 2022 ).
To fully unlock the wealth of opportunities in Islamic fintech , EMIR Research would like to propose the following policies :
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Beyond the cultural and religious commonalities ( ties of kith and kinship ) and geographical proximity ( which enables economies of scale and market integration , among others ), Malaysia and Indonesia also share a common vision to utilise Islamic fintech to achieve greater financial inclusion and economic empowerment .” |
Zakat
Annual payment for certain kinds of property for charitable purposes – a duty for Muslims who meet the wealth requirements .
Sadaqah Voluntary charity contributions .
Waqf
Takaful
Endowment by an owner of property for public benefit or wellbeing .
A co-operative system of reimbursement or repayment in case of loss .
Musharakah A joint partnership where two or more persons combine either their capital or labour , forming a business in which all partners share the profit according to a specific ratio , while the loss is shared according to the ratio of the contribution .
Mudarabah A partnership in profit whereby one party provides capital , and the other party provides skill and labour .
Haram Forbidden by Islamic law .
Halal Permissible by Islamic law .
Riba Charged interest .
Gharar Excessive risk and uncertainty .
Maysir
Glossary of words Gambling , where simple transfers of wealth takes place from losers to winners without real economic value being created .
1 . SC and OJK to implement a framework to provide bilateral accreditation for
Islamic fintech courses
This would take the existing cooperation agreement a step further by encouraging and paving the way for convergence and an emerging solid consensus on Islamic fintech standards , at least in the wider Southeast Asian region .
Such a convergence and consensus could then serve as a model and template – to be replicated and duplicated – in other parts of the world with significant Muslim populace ( e . g ., in South Asia ).
2 . SC and OJK to implement a framework to co-develop Islamic fintech consumer protection guidelines and regulations
At the same time , both countries can also step up with the existing cooperation agreement through maximum co-integrations of Islamic fintech principles and practices by co-developing consumer protection guidelines and regulations .
Together , Malaysia and Indonesia could be the leading players in the global Islamic fintech industry – incubating creative and start-of-the-art solutions with social and ethical benefits at the core of an Islamic financial ecosystem ( 4.0 and beyond ).
Jason Loh and Jennifer Ley Ho Ying are part of the research team at EMIR Research , an independent think tank focused on strategic policy recommendations based on rigorous research .
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