Malaysia’s Approach Towards Nurturing Innovation-Driven Islamic Fintech Ecosystem

Malaysia’s Approach Towards Nurturing Innovation-Driven Islamic Fintech Ecosystem

by July 21, 2023

Entrepreneurs eager to craft groundbreaking applications within Malaysia’s Islamic fintech sphere are likely to welcome the opportunities introduced by the FIKRA Islamic Fintech Accelerator Programme, initiated by the Securities Commission Malaysia (SC) alongside the United Nations Capital Development Fund (UNCDF).

This year, the SC has unveiled FIKRA ACE, an ambitious fintech venture that sets out to bolster the Islamic capital market (ICM) ecosystem in Malaysia and internationally, streamlining the growth of Islamic fintech via a methodical approach.

In an announcement, the SC revealed that the enhanced three-year initiative FIKRA ACE builds upon the launch of their pioneer Islamic fintech accelerator scheme, FIKRA, first launched in May 2021.

The scheme aims to identify and foster fintech firms, helping them expand and integrate into the ICM ecosystem across diverse sectors. It also seeks to fortify the Islamic fintech space by fostering capacity and a talent pipeline for the industry.

Nurturing Companies and Building Capacity in Islamic Fintech

Founded in 2021, FIKRA sought to tackle hurdles to establishing and scaling innovative Islamic fintech startups in three key areas. Firstly, it aimed to concoct new products within the burgeoning ICM ecosystem. Malaysia’s progressive-minded SC is an ardent advocate for improving the Shariah governance structure for the Islamic capital market.

Towards the end of 2022, the SC issued fresh guidelines on Islamic Capital Market Products and Services (ICMPS Guidelines), set to become the primary reference source for all diverse ICMPS offerings targeted at sophisticated and retail investors.

According to the SC chairman, Datuk Seri Dr Awang Adek Hussin, these guidelines effective from 28 November last year, offer stakeholders a comprehensive central document on Shariah principles and requirements pertinent to ICM products and services, including the introduction of a new chapter on waqf.

Malaysia's Approach Towards Nurturing Innovation-Driven Islamic Fintech Ecosystem

Source: Securities Commission Malaysia, United Nations Capital Development Fund (UNCDF)

Datuk Seri Dr. Awang further commented that the SC’s endeavours to widen and enrich the ICM, indicates waqf as a key enabler in harnessing the value proposition of Islamic social finance for Sustainable and Responsible Investment (SRI) initiatives.

He stated that the expanded Waqf-Featured Fund Framework (WQ-FF Framework) would now incorporate listed funds, such as Islamic Real Estate Investment Trusts (REITs) and Islamic ETFs. Speaking at the Waqf and Islamic Capital Market Conference in July 2023, Datuk Seri Dr. Awang estimated waqf assets to be worth more than RM1.3 trillion in Malaysia, but only about 13% of waqf land in the country is currently developed, highlighting a lot on untapped waqf potential in the country.

The second aim was to enhance accessibility by addressing the lack of financial literacy, and investors’ ability to make sustainable investments. SC Malaysia’s former executive chairman, Syed Zaid Albar, added that the ultimate goal is to boost financial inclusion and address significant social concerns, such as old age, poverty, and inadequate retirement funds.

The third objective was to bolster touchpoints of Islamic social finance instruments, like Qardhul Hassan (interest-free loans), or those linked to Islamic structures, such as zakat and waqf. With global Islamic finance assets expected to reach almost US$4 trillion by 2024, the idea is that there will be abundant opportunities for ambitious startups.

The Shariah concepts of inclusion and sustainability also align with the UN’s Sustainable Development Goals (SDG), rendering it a natural fit with the broader UNCDF aims of sustainable and responsible investments, promoting financial inclusion, and making Islamic capital markets more accessible to otherwise marginalised sectors.

Dato’ Seri Dr. Awang Adek Hussin

Dato’ Seri Dr. Awang Adek Hussin

“We are pleased with the development to date. It shows the WQ-FF Framework has been able to promote greater collaborations between Islamic Fund Management Companies (IFMCs) and State Islamic Religious Councils,” SC chairman Datuk Seri Dr Awang noted at the Waqf and ICM Conference. “There has been an increase in efforts by all parties in exploring and identifying the potential of waqf assets development.”

“Since the launch of WQ-FF in 2020, six waqf featured funds have been issued,” he added. “The aggregate funds raised amounted to RM46.7 million – as at December 2022. This amount may be small, but it is certainly moving in the right direction.”

Past FIKRA Innovators

The inaugural FIKRA accelerator scheme ran for three months in 2021, providing 10 applicants with opportunities to collaborate with program partners like Bank Islam Malaysia, Gobi Partners, Kenanga Investment Bank, and Permodalan Nasional Bhd.

Among the participants was Kestrl, a UK-based Islamic fintech offering personal finance solutions to Muslims. With FIKRA’s support, ‘The Muslim Money App’ developed and implemented personal financial management features that haress machine learning and behavioural science for Bank Islam’s newly launched digital bank ‘Be U’.

Another participant was Crea8 Capital, a “socially responsible robo-advisor” licensed by the SC, providing personalised, sustainable, and responsible investing (SRI) in line with personal values while assisting users with short-term and long-term goals like home ownership and planning for higher education.

Additional participants in 2021 included Shoraka Suyula Platform, a secure digital marketplace for funding Ar-Rahnu (Islamic pawnbroking) operators, and MADCash, a microlending platform that not only tracks loan repayments but also monitors the sales and growth performance of beneficiaries, generating credit scores for the unbanked and underbanked.

Nurturing an Innovation-Driven Islamic Fintech Ecosystem in Malaysia

Source: Securities Commission Malaysia, United Nations Capital Development Fund (UNCDF)

The 2023 Fikra ACE Cohort

In 2021, Islamic fintech transactions in Organisation of Islamic Cooperation (OIC) countries amounted to US$79bil (RM368bil). Although this represented just 0.8% of global fintech transaction volume, this segment is projected to grow to US$179bil (RM835bil) by 2026, with a 17.9% compounded annual growth rate.

For the 2023 batch, FIKRA ACE will focus on Islamic social finance, syariah-compliant SRI, and Islamic fund and wealth management.

SC chairman Datuk Seri Dr Awang Adek Hussin opined that Malaysia has the capacity to maintain a flourishing Islamic fintech ecosystem, capitalising on its global leadership in the Islamic capital market.

FIKRA ACE is coordinated in cooperation with the Malaysia Digital Economy Corporation (MDEC) as the ecosystem and strategic partner. The accelerator programme for the 2023 cohort is anticipated to begin in August.

Innovative fintech companies domes and international, are encouraged to submit applications, open until 4 August 2023.