The Future of Fintech, Blockchain & Islamic Finance

Introduction

Islamic fintech is set to become a game changer for Islamic banking and finance industry. The potential to disrupt traditional Islamic banking and finance (IBF) industry through Islamic fintech should not be underestimated. Instead, Islamic fintech is seen as an important factor in changing the insights, dynamics, and dissemination of Islamic finance globally.

Fintech (financial technology) is a buzzword that is often heard and used in today’s context. It means new technology and innovation that aims to compete with the traditional financial methods in the delivery of financial services. Examples of fintech include payment using smartphone, peer-to-peer lending (P2P), online trading platform, crowdfunding, blockchain, money transfer, etc. The main point of departure between fintech and Islamic fintech is that Shari’ah guidelines must be observed in the latter. For example, fintech is permitted and accepted in Islam and only becomes impermissible if there is clear evidence that they are against the basic rules of Shari’ah.

Literatures review

Fintech investments had increased manifold from only USD1.8 billion in 2010 to USD19 billion in 2015 (Citi & CB Insights). Although most of the fintech landscape is focusing on the conventional finance industry, the Islamic fintech community has also grown globally. Among the most prominent disruptive ventures in the Islamic finance arena are a few noticeable Islamic fintech start-ups namely EthisCrowd.com, KapitalBoost.com,NusaKapital.com.

The example of EthisCrowd.com and KapitalBoost.com are both based in Singapore, and are widely-recognised pioneers in the field, having won numerous awards and accolades over the past few years. EthisCrowd.com is the world’s first real estate Islamic crowdfunding platform focusing directly on social impact real estate projects in Indonesia. In three years’ time, EthisCrowd.com is expected to build a total of 5,582 affordable houses to help reduce the critical shortage of 11.8 million houses in Indonesia. Moving to KapitalBoost.com, it is Asia’s first Islamic P2P crowdfunding platform for small and medium-sized enterprises (SMEs). Together, the two platforms came to form NusaKapital.com in Malaysia. NusaKapital.com is the world’s first regulated Shariah-compliant P2P crowdfunding platform based in Malaysia. It was awarded one of six licenses for P2P financing by Securities Commission Malaysia (SC).

Apart from Islamic fintech start-ups, other Islamic fintech examples include innovative collaborations between technology and Islamic banks such as the Malaysia-based Investment Account Platform (IAP), which was established in 2016. This is the first Islamic intermediated internet-based platform that combines the expertise of Islamic banks and the efficiency of technology to channel funds from investors to viable economic ventures. More recently, three major Middle-Eastern banks (Al Baraka Banking Group, Kuwait Finance House Bahrain and Bahrain Development Bank) have also come together to launch the world’s first global fintech consortium called “Algo Bahrain”, to accelerate the rollout of Shari’ah-compliant fintech solutions, while spreading across them innovation costs. The consortium is seen as a strategic initiative to position Islamic banks for the forthcoming paradigm shift of the recent fintech innovations in the banking industry. Moving forward, eight more banks are expected to join the consortium in the second phase. It is noteworthy to highlight that innovative collaboration between technology and Islamic banks is key to global fintech growth.

Islamic fintech is also known to promote financial inclusion. This is because according to the World Bank, through fintech, adults who are currently unbanked now have access to financial solutions. For example 700 million people who were unbanked for the last five years now have access to financial solutions (World Bank). One of the main reasons being, fintech start-ups are smaller and more innovative thus they can reach to people in ways that traditional banks cannot. For example, with fintech platforms, SMEs who traditionally might not have the opportunity of getting financing from banks are now able to start their own businesses and earn some income. Collaborations with technology can also lead to Islamic banking products being priced more attractively, thus potentially achieving financial inclusion. IFSB Secretary-General, Mr. Jassem Ahmad, also confirms addressing financial inclusion through fintech. According to him, the IBF industry currently reaches approximately 100 million customers worldwide. However, the potential market is six times that, and this gap can be tapped through Islamic fintech. This is because, through Islamic fintech, the unbanked now has the opportunity of creating a new form of credit history.

A successful nation is built on a system that promotes a sense of shared responsibility in pursuing socioeconomic development. During the ancient Islamic civilisations, the integration of social welfare and economic development became the imperative foundation in driving the efforts towards nation building. Waqf and zakat were the major socioeconomic vehicles, which provided the impetus in the expansion of civilisation by functioning as a just, and comprehensive wealth distribution mechanism. Looking back, the Ottoman Empire rose to the pantheon of world history through the diligent practice of socially responsible Islamic economic and financial system. The comprehensiveness and inclusiveness of the waqf system have increased trade activities, created job opportunities and fuelled the spirit of entrepreneurship within the economic structure of the society. Waqf complexes in the Ottoman Empire such as the complexes of Suleymaniye, Anatolia in Amasya, Murad II and Bayezid II provided facilities such as public markets and kitchens, farmlands, stables and caravansaries, barracks, ports, hospices, schools and universities. The social welfare sector presents windows of opportunities for socioeconomic vehicles to prosper the economy. For example, the waqf system created great economic values and enabled further wealth creation.

Waqf and zakah have been in existence for over a thousand years and remain as important socioeconomic vehicles. However, in recent times and within the existing modern financial landscape, we have seen its greater integration with mainstream finance. The established network and ready expertise of Islamic banks create a strategic position for them to be successful intermediaries in promoting efficient management of Islamic endowments e.g.,waqf and zakat funds. For example, Islamic banks in Malaysia have started to offer integrated waqf solutions to customers, whereby these banks allow their customers to place deposits aswaqf contributions. Similarly, deposit cash waqf is also available in Bangladesh, offered by several Islamic banks in the country. The waqf deposit schemes offered by these institutions are a collection of ‘social savings’ from the local population through waqf certificates as ‘social capital’. The monetary benefits are allocated to individual deposit accounts at the end of a financial year and are made available to be distributed to selected beneficiaries.

Another example is how Islamic capital market, in particular sukuk, has supported the growth of waqf properties. Sukuk can be utilised by awqaf to fund the construction or the addition of new waqf property. These types of securities will appeal to investors pursuing both charitable and profit driven objectives. As an example, the Majlis Ugama Islam Singapura (MUIS) issued Singapore’s inaugural sukuk whose proceeds were meant to be used for the development of two waqf properties, namely the Bencoolen Mosque Project (a service apartment block, a four-storey commercial complex and a mosque) and the 11 Beach Road Project (a six-storey office building). On the other end, Islamic financial institutions that offer typical Islamic asset management services including financial analysis, asset and securities selection, investment planning and on-going monitoring of funds will benefit waqaf institutions through better management of their waqf funds. Effectively, Islamic banks could play their role as intermediaries to match the financial surplus and demand as well as share their financial management and monitoring expertise. These examples are part of the integration that would greatly benefit the effective circulation of wealth in the economy. Whilst we have seen numerous efforts and intellectual discussions on Islamic social finance, this article wishes to expand the potential frontier of Islamic social finance by embracing the rapid technology and digital ecosystem drift that is reshaping how the world of finance is functioning today.

The advance of technology improves efficiency, connects people and challenges the norm. These are some of the inherent values that technology brings to the table. Professor Klaus Schwab termed the era in which we are currently living in as the ‘Fourth Industrial Revolution’. It is an era where physical, digital and biological will seamlessly work together and bring about changes to the landscape in which businesses operate, including those in the financial sector. It will among others, reinvigorate and redefine payments systems, wealth management services and fund raising activities. It may even require regulators to reassess the manner in which the industry is regulated. The traditional role of financial institutions are now being challenged by financial technology firms which are swiftly but surely entering and offering alternative means for customers to procure the products and services which are currently being offered by existing financial institutions. In 2014, investment in financial technology companies reached the USD 12 billion mark, up from USD 4 billion the year before. The Governor of Bank Negara Malaysia Datuk Muhammad bin Ibrahim at the Global Islamic Finance Forum 5.0 (GIFF5.0) said that due to the rise of fintech firms, it is estimated that 10% to 40% overall banking revenue are at risk due to fintech innovations. At the same forum, President of Tencent Online Media Group SY Lau, described the manner in which the fintech firms operate is akin to “the death by thousand cuts”. These fintech firms are more nimble and not constrained by regulations. They are able to move fast and are not only challenging the financial institutions as a whole, but also from product to product and service-to-service basis.

However, forward looking financial institutions that recognise these opportunistic challenges are quick to embrace fintech as part of their growth strategies. The effort by six Malaysian Islamic financial institutions to establish the Investment Account Platform (IAP) is a prime example how financial institutions are leveraging on technology to widen their business coverage. IAP would enable these banks to deliver greater value proposition beyond their existing business model as well as allowing investors to invest in new asset class. A key factor which makes IAP possible is the readiness of regulators particularly Bank Negara Malaysia to embrace change. This is further reinforced with the forthcoming Bank Negara Malaysia’s framework for fintech firms which will allow the firms to test innovations in the financial services operational environment. This will surely pave the way for the next development phase, which is Regulatory Technology or Regtech.

Whilst the regulator and Islamic banking industry players are already embracing fintech, there are still opportunities for institutions undertaking Islamic social finance to fully embrace technology in enhancing deliverables and in bringing greater value to their mandate. Broadly, Islamic social finance sector includes philanthropy based institutions namely zakahsadaqah and awqaf as well as microfinance institutions. In several jurisdictions, electronic collection of zakat and waqf are already being implemented. However, the use of technology in advancing Islamic social finance remains poised. Catalysing on efficiency of digital ecosystem sets promising future for a more globally connected Islamic social finance interlink ages.

Critical review and opinion

Finally, with technology-driven application spreading to almost every segment of the financial sector along with all the positive traits embedded in Islamic fintech as highlighted above, it is only timely for the IBF sector to embrace the fintech revolution to remain pertinent. Moving forward, more collaboration between fintech companies and Islamic banks should be considered for Islamic banks to stay competitive and fintech companies to remain relevant. With proper and effective collaborations, Islamic fintech is set to become the game changer for Islamic banking and finance industry.

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