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Digital Islamic financial services in Muslim-majority countries are experiencing a period of rapid innovation. Primarily catalyzed by the COVID-19 pandemic, the pace of change in Islamic finance, especially within the Malaysia-Indonesia corridor, has sped up tremendously in the past few years. While some countries such as Malaysia have already capitalised on the majority-muslim population with Islamic finance offering, there is still room in countries like Indonesia for expanded and diverse Sharia-compliant services.
Innovation has always been second nature to many countries in the Asia-Pacific region. In particular, Malaysia and Indonesia have consistently ranked amongst the top OIC countries in Islamic finance offerings such as Sukuks and Mudharabah. However, what’s changed in recent years is a new generation of Sharia Fintechs bringing a fresh approach to digital Islamic finance and leveraging technology to bring financial inclusion to millions.
Financial inclusion has been a trending topic for some time. However, while traditional banks have attempted to address financial inclusion in the past, they could not effectively overcome typical challenges such as people’s lack of access to services, improper identity documentation, and low financial literacy.
Recently, the push towards financial inclusion has accelerated, with banks and financial institutions inspired by disruptive fintechs beginning to re-imagine their product roadmaps and strategies through the lens of digital banking and transformation. Most have welcomed these innovations with open arms seeing how quickly financial inclusion has brought them out of poverty, enriched their lives, and provided a lifeline to millions worldwide.
In the Malaysia-Indonesia corridor, a new generation of tech-focused Sharia fintech companies are leading the financial inclusion front.
With financial inclusion at a staggering 95% of the population in Malaysia holding bank accounts, the country is leveraging fintech to meet everyday Islamic financing needs with salary advances, microfinance solutions, and Sharia-compliant loans. microLEAP, Malaysia’s leading Sharia-compliant P2P crowdfunding platform, connects micro-enterprises with Islamic financing options such as Mudharabah.
In addition, explicitly targeting microfinance solutions, Ethis Ventures Malaysia has inaugurated the countries’ leading Equity Crowdfunding (ECF) platform, which collects funds from charity, and disburses them via an interest-free, ‘payback-if-you-can’ model. Ultimately, this landscape shift has ripple effects that are reverberating across the market.
Indonesia on the other hand, home to over 200 million Muslims with a collective spend of over $224 million is still primed to reap the benefits from Sharia fintech as over 80% of the country’s 270+ million Muslims remain unbanked. Sharia Fintechs are working hard to capitalize on the potential in Indonesia. Leading fintech company, LinkAja, launched a first-of-its-kind, Sharia-compliant eWallet in 2021, partnering with over 1200 mosques and waqf across the nation.
Likewise, Google-backed GoPay synergized with the Indonesian Mosque Council to enable and process over $500 million in Zakat funds from over 800,000 mosques. Furthermore, in line with Jakarta’s Sharia Economic Society’s financial inclusion roadmap, Indonesia is leveraging Sharia-compliant lending and ethical debt disbursement to cater to the financing needs of retail customers and SMEs.
Other markets such as Brunei and Pakistan are estimated to reach $3.2 trillion in halal lifestyle spending by 2024 according to the 2019 State of the Global Islamic Economy report from DinarStandard. While a range of Islamic finance products is offered by traditional financial institutions, these markets are still in the early stages of true digital Islamic finance disruption.
Incumbent are responding through partnerships, new acquisitions, and a re-imaging of what traditional Islamic banking can and should be.
As more and more Sharia fintechs pop up in the APAC region, with innovative, nimble, and unique halal offerings, traditional institutions are being forced to adapt and fight tooth and nail to retain market share. Incumbent and legacy banks, experiencing increased competition from Fintechs, have responded by creating partnerships, new acquisitions, and a re-imaging of what traditional Islamic banking can and should be. One of the challenges is that of finding a suitable partner with an equal understanding of technology and the ethical aspects of Islamic finance.
In general, traditional financial institutions have struggled with technology and as such a key trend moving forward, especially in the Islamic Finance space is a partnership. Banks focus on creating unique products and services, while technology partners create the cutting-edge tech required to bring these to life in our fast-paced, digital market.
The recent market shift has held tremendous benefits for both consumers and fintechs. For consumers, the increase in the availability of Sharia-compliant digital solutions has meant broader access to much-needed services that align with people’s needs and lifestyles. However, key markets in the APAC region with unbanked populations are still ripe for Sharia fintechs.
With over 1.7 billion Muslims worldwide, the revolution in Sharia-compliant digital banking is re-shaping market dynamics and this is only the beginning. The emerging dynamic between traditional Islamic institutions and cutting-edge fintechs is disrupting the industry as traditional Islamic banks, fintechs, and start-ups battle to address the region’s still unbanked populations, who demand the last innovations in digital banking that meet their halal lifestyles.
Tagged:
- apac, financial inclusion, Open Banking, shariah
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Samier Khan, Managing Director APAC
A Business Leader with deep expertise in business management strengthened by intellectual curiosity and grounded in real-world technical experience, providing the foundation for next-generation ideas, development, and implementation.
