The global Islamic fintech industry is worth an estimated RM372.56 billion ($79 billion) and is growing rapidly. Southeast Asia is one of the most promising markets for Islamic fintech, with a sizeable Muslim population and a growing middle class.
There are several opportunities for Islamic fintech companies in Southeast Asia, including providing Shariah-compliant solutions for payments, lending, and investments.
The Islamic fintech industry has a higher growth projection at 21% CAGR by 2025 than conventional fintechs at 15% CAGR. The market is projected to reach RM603.65 billion (US$128 billion) by 2025.
According to the ‘Global Islamic Fintech Report’ (produced by DinarStandard and Elipses), the top six Organisation of Islamic Cooperation (OIC) fintech markets by transaction volume for Islamic fintech are Saudi Arabia, Iran, Malaysia, UAE, Turkey, and Indonesia.
Growth of the Islamic fintech industry
This growth is driven by several factors, including the increasing demand for Shariah-compliant financial products and services, the proliferation of mobile phones and mobile banking services, and the growing awareness of Islamic fintech products and services.
Islamic fintech companies are providing a much-needed alternative to traditional banking products and services that are not compliant with Shariah law.
In addition, they are also tapping into the region’s growing demand for digital banking and financial services.
During the recent Islamic Fintech Leaders Summit 2022 held in Kuala Lumpur, the chairman of the Shariah Advisory Council for Malaysia’s central bank and the Securities Commission, Dr. Mohd Daud Bakar, mentioned in his keynote address that things are looking up for the industry as Islamic finance players are catching up with their conventional peers.
Southeast Asia as a rising powerhouse in Islamic finance
While the global Islamic finance industry is still in its relative infancy, multiple factors point to Southeast Asia as a rising powerhouse in this space.
Indonesia, Malaysia, and Singapore, in particular, are well-positioned to become significant players in the industry, thanks to a combination of strong economic growth, large Muslim populations, and supportive government policies.
The region is already home to many successful Islamic fintech startups, such as Indonesian Ethis and Alami, which use technology to develop innovative solutions that comply with Islamic law.
These include peer-to-peer lending, Islamic crowdfunding, and Shariah-compliant online payment providers.
These startups are vital in promoting financial inclusion and providing Muslim consumers access to Shariah-compliant financial products and services.
The industry is still in its early stages of development, and there is considerable potential for further growth. This is especially true in Southeast Asia, where the Muslim population is large and growing.
With the right policies and regulations in place, the Islamic fintech industry could significantly promote financial inclusion and economic development in the region.
Indonesia’s booming fintech industry
The Indonesian fintech industry is one of Southeast Asia’s fastest-growing and most exciting.
In just a few years, it has given birth to four unicorns and one decacorn, as evidenced by the emergence of Gojek, Tokopedia, Xendit, Traveloka, and Bukalapak.
As of July 21, 2022, Indonesia’s fintech startups had a combined enterprise valuation of RM69.80 billion (US$14.8 billion), and the country is now home to more than 150 fintech startups.
Indonesia has the highest number of recognised Islamic fintech companies. One of which is Alami, which has disbursed RM848.21 million (US$179.8 million) sharia financing to the country’s regional SMEs, with a majority from the telecommunication sector at 18.2%, halal food at 14.6%, and energy at 13.2%.
However, the industry is still nascent and lags behind conventional fintech, which has seen a 130 percent growth in financing volume from 2021 to 2022.
Islamic fintech firms provide services, including peer-to-peer (P2P) lending, payments, and Islamic banking products. The sector is still in its early stages of development, but the regulator is optimistic about its prospects.
Through its National Agenda, the Indonesian government supports the development of a Sharia-compliant economy. The Indonesian Sharia Fintech Association also advocates for Sharia fintech startups in expressing aspirations to regulators to support the development of the Sharia fintech business.
Despite the challenges, Indonesia’s Islamic fintech industry is growing and is expected to continue to grow in the coming years.
This is good news for the many Muslims in Indonesia looking for financial services compatible with their religious beliefs. It is also good news for the Indonesian economy as a whole, as fintech firms are helping to boost financial inclusion in the country.
Malaysia could lead the way in the Islamic Fintech industry
Malaysia, in particular, has the potential to become the global hub for Islamic fintech due to its solid Islamic finance industry, supportive government policies, and developed infrastructure.
However, out of the over 233 fintechs currently operating in the country, only 4% of these are Islamic fintechs. This is a surprising statistic considering that Malaysia is a predominantly Muslim country.
The development of the Islamic fintech industry in Malaysia is crucial to the country’s goal of becoming a global leader in the field. The sector has the potential to boost the economy and create jobs while also providing a much-needed service to the Muslim community.
The introduction of Shariah-compliant products and services in the digital domain is still in its infancy. Nevertheless, the Malaysian Islamic Finance Sector has taken great strides in the last decade in introducing innovative products and services that cater to the needs of the global Muslim population.
According to the Global Islamic Economy Indicator, Malaysia is the global leader in Islamic finance and ranked first among 81 countries for the ninth year.
There are several reasons why Malaysia is well-positioned to lead the way in Islamic fintech. The country has a strong Islamic finance industry, a supportive regulatory environment, and a sizeable Muslim population. Additionally, Malaysia also has a thriving startup ecosystem.
Malaysia is leading in high development and conduciveness
Moreover, Malaysia also leads the Fintech Hubs Maturity Matrix, a measure of fintech growth based on market size against ecosystem conduciveness. This means Malaysia is the leading country regarding high development and conduciveness for Islamic fintechs.
Malaysia continues to dominate the global Sukuk market, with nearly 30% of all sukuk issuances globally and almost 40% of the world’s outstanding sukuk in June 2022.
According to RAM, Malaysia’s sukuk market continues to dominate, with a market share of 39.2%, followed by Saudi Arabia (20.4%) and Indonesia (17.5%). Collectively, these markets contributed 77.1% of total global sukuk issuance.
Malaysia’s status as a top sukuk market is underpinned by several factors, including a favourable regulatory environment, a large pool of Islamic investors, and a deep liquidity pool.
The Malaysian government has also been supportive of the sukuk market, with many initiatives aimed at promoting the use of sukuk.
Positioning Malaysia as a regional Islamic Financial Hub
The government’s commitment to position the country as a regional Islamic finance hub is evident in the initiatives that have been undertaken in recent years.
They have identified Islamic finance and Islamic digital economy as Key Economic Growth Activities (KEGA) and aim to position the country as an Islamic Finance Hub 2.0 through the Shared Prosperity Vision 2030 (SPV 2030).
The recent Bank Negara Malaysia’s Financial Sector Blueprint 2022 to 2026 was also developed with the aim of making Malaysia the global hub for Islamic finance. One of the strategies is to sharpen Malaysia’s proposition and refine measures towards strengthening Malaysia’s international competitiveness as an Islamic finance gateway.
In addition, the Securities Commission of Malaysia (SC) partnered with the United Nations Capital Development Fund (UNCDF) to launch FIKRA, an Islamic fintech accelerator program to identify and scale relevant fintech solutions in Malaysia.
The initiative aims to address the talent shortage in the industry by increasing awareness about Islamic financial technology and providing training and development opportunities for Malaysians interested in a career in fintech.
The country is also the headquarters for leading financial entities such as Bank Islam Malaysia and the Islamic branches of the RHB Group and Maybank.
Malaysia has recently granted two Islamic digital bank licenses, one of which has been awarded to a consortium of AEON Financial Service Co., Ltd., AEON Credit Service (M) Berhad and MoneyLion Inc.; and a consortium led by KAF Investment Bank Sdn. Bhd.
Al Rajhi Bank, one of the largest Islamic banks in the world, has also set up a new digital bank in Malaysia. This is in line with the bank’s goal to be a leading digital Islamic bank globally. The new bank will offer a suite of digital products and services that are designed to meet the needs of the modern customer.
The contribution of Islamic finance to the Malaysian economy is expected to grow in the coming years. This is due to the increasing demand for Shariah-compliant products and services globally, as well as the continued efforts of the government to promote the growth of the Islamic finance sector.
With the proper support, the Islamic fintech industry in Malaysia has the potential to thrive. If the country can develop a world-class Islamic fintech industry, it will be well-positioned to become a global leader in the field.