Originally developed in accordance with Sharia’a principles to provide Muslims with financial assistance, Islamic Finance has aroused non-Muslims’ interest because of its socially responsible investing structure.
Considering, firstly, the post-crisis shock in financial institutions’ trustworthiness, the wave of rigorous risk and transparency regulations and the growing demand for ethical investments; and, secondly, the outlook declaring that the number of Muslims is expected to grow to 2.76 billion or 29.7% of world’s population by 2050, it is not surprising that Islamic Finance is one everyone’s lips these days.
Islamic finance provides evidence that an ethical finance is not an oxymoron.
Inspired by the Qur’an, the paternalistic framework underpinning Islamic Finance blocks irrational and inconsiderate conducts that are not beneficial to a wide group of stakeholders in society.
Given this trait of carefulness underpinning Islamic Finance, its appeal also to non-Muslims results palpable.
The most popular Islamic financial instruments have been Sukuk: “Certificates of equal value representing after closing subscription, receipt of the value of the certificates and putting it to use as planned, common title to shares and rights in tangible assets, usufructs and services, or equity of a given project or equity of a special investment activity”. Frequently referred to as an ‘Islamic bond’, the essence of Sukuk is to provide Sharia-compliant instruments for investment which do not involve interest (riba) and excessive uncertainty (gharar).
The construction of Sukuk generally involves the packaging or structuring of pools of Sharia-compliant assets and a review and approval by Sharia-adviser to ensure compliance with Sharia instruments such as Istisna, Salam, Ijiara, Murabaha, etc. Multinational corporations, sovereign bodies, state corporations and financial institutions have drawn upon Sukuk, with a global issuance worth USD767 billions in 15 years, often as an alternative to syndicated financing.
Malaysia has been the dominant player, commanding almost 79% of the total domestic Sukuk market since inception with a total of 4,647 issues worth USD486.5 billion in 15 years. With regards to international Sukuk, Malaysia issuance is worth USD30 billion, second only to UAE with USD53.8 billion in 15 years.
To understand the role of Malaysia in fostering Islamic finance, it is necessary to identify some relevant hindrances in the development of Sukuk market.
When structuring Sukuk, the incorporation of a Special Purpose Vehicle (SPV) is generally required to act as Sukuk-certificates issuer and intermediary. Moreover, the assets underlying the Sukuk are transferred from the originator, seeking to raise finance, to the SPV. These transactions generate additional costs and taxes that limit the competitiveness of Sukuk in comparison to conventional bonds.
Malaysia’s response to such obstacle for competitiveness has been to lay down tax laws that take account of this element and create a level playing field with conventional bonds (stamp duty and income tax exemptions). As a proof of the international commitment to address this issue, the UK has extended the alternative finance regime to Sukuk so that amounts paid by issuers to Sukuk-holders are tax-deductible by the issuer and taxable in the hands of the holder as interest. Similarly, the Finance Act 2009 exempt Sukuk from stamp duty land tax (SDLT). Similar engagements have been taken in Japan and Singapore in order to eliminate asymmetries in tax treatments.
Another issue is the standardization of Sharia’a boards’ ruling. The sources of Sharia’a include Fiqh: the interpretation of the Qur’an and Sunna by Islamic jurist and scholars. Following different school of thoughts, the jurisprudence is not homogeneous. As a consequence, the nature of the assets underpinning Sukuk and the tradability of Sukuk-certificates in the secondary market are regulated differently in each jurisdiction; leading to uncertainty and improper practises which increase the costs of Sukuk issuance.
More questions arise, in particular, considering the difference with conventional bonds: under Islamic law, the transfer of debt obligations is prohibited, and therefore the buying and selling of debt certificates is generally prohibited (Bay’ Al-Dayn). Nonetheless, Malaysia offers a compromise, as Malaysian jurists allow a more liberal interpretation of Sharia’a and forms of debt trading. Sukuk-al-Murabaha are, thus, popular in Malaysia since it allows Bay’ Al-Dayn. In particular, when intangible assets are part of a broader portfolio, which includes also a sensible pool of tangible assets, the tradability of Sukuk in the secondary market is comfortably permitted.
Moreover, Malaysia introduced the Sharia’a Advisory Council of the Securities Commission (NSAC of Bank Negara Malaysia), a centralised authority which guarantees the homogeneity of standards and interpretations, thereby, the reliability of the financial instruments as Sharia’a-compliant. The NSAC has the power to issue fatwa-resolutions that bind all financial institutions in the country; thus, it addresses the harmonisation of standards and practices, boosting investor confidence and trust.
Fintech and Malaysia
Prodomal efforts made in Malaysia to create transparency and to introduce technology as FAST, RENTAS and ETP, permitted negotiations on computerized networks and facilitated transactions.
The role of information technology seems to be further dominant as the fintech wave has finally hit the market. With fintech companies commercialising their services, the initial expectations from incumbents have shifted from threat to collaboration. The most relevant aspect is that fintech companies are starting to serve the unserved. They provide an opportunity to reconnect with those customers who lost trust in the industry after the global crisis and to connect with those people who do not currently have access to financial services.
With an unbanked global population of 2 billion adults, 55% of which resident in Asia & Pacific region, fintech can tackle the most common self-reported barriers to account ownership such as lack of trust, affordability and distance from financial institutions.
The adoption of new technologies to facilitate the delivery of regulatory requirements (regtech) will assist manging documentation requirements which is hindering 18% of the unbanked from opening an account and, in a period of growing regulation pressure, including AML-CFT policies, regtech is “all about identifying and mitigating compliance risks to help businesses ease regulatory costs”.
In June 2016, Bank Negara established the Financial Technology Enabler Group (FTEG) with the task to supervise and support technology development with a focal point on the subsequent queries related to regulation. Similarly, under the ‘afFINity@SC’ initiative, the Malaysian Security Commission has been active in preparing regulation that will allow fintech solutions to operate more faultlessly. Since regulations for P2P and crowdfunding already exist, Malaysia well-poised to benefit from the fintech wave.
OpenBanking implies initiatives to provide access to customer accounts through open APIs. OCBC in Singapore was the first bank in the region to launch an Open-API initiative, but, in Malaysia, Sedania Corp. introduced AsSidq in 2009, a truly halal banking and fully automated online FinTech platform, which received the approval of BNM and AAOIFI to provide liquidity to their clients on a deferred payment basis.
The disruptive (r)evolution is taking place because the Internet is now accessible from devices that we carry in our pockets which allow us to experience the digital world. Where 70% of the population is expected to use smartphones by 2020, mobile banking solutions will have an opportunity to reach out customers targeting the unbanked.
Following the continuous innovation trend, Malaysia launched an Investment Account Platform (IAP) which is predicted to become a cross-border multicurrency channel linking into regional and global economies. Similar to FinTech platforms such as crowdfunding and P2P lending platforms, IAP facilitates direct investment by investors in viable ventures of their choices. IAP is backed by six Malaysian Islamic banks and it aims to provide opportunities to radically transform operational models by adopting digitalisation strategies.
Bursa Malaysia recently launched Bursa Malaysia-i: the world’s first end-to-end Sharia-investing platform. It permits Sharia-compliant exchange-related services including listing, trading, clearing and depository services; boosting Malaysia’s leadership as the global marketplace for Islamic Finance, enhancing competitiveness of the Islamic capital market industry, the platform’s expectation is to expand the already inclusive marketplace to ensure “there is something for everyone on Bursa Malaysia”.
Islamic fintech is not ring-fenced in Asian and MENA region: Canadian fintech company “Goldmoney Inc” certified its gold-based financial products as Sharia-compliant. Again, in Malaysia, HelloGold launched a sharia-compliant platform that uses blockchain.
The kind of costs efficiency and security offered by blockchain’s distributed trait are said to be more Islamically-inclined and, therefore, intrinsically more compatible with Islamic Finance than conventional finance. Blockchain is a perfect channel to incorporate and operationalise Islamic values of justice, equality, trust, and fairness into finance which embodies the spirit of the Sharia.
As experts believe that the digital solution is the only way for Islamic banks to grow, it appears that fintech is the element that will close the loop in Islamic Finance. Especially in Malaysia, where the soil is fertile because of enhanced competitiveness of the Sukuk-market and the harmonisation of standards. In this context, fintech will act as a catalyst enabling transcendence beyond borders and keeping Malaysia at the vanguard of the development curve.