Leveraging Islamic Fintech to Improve Financial Inclusion

Transcription

1. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized ISLAMIC FINTECH LEVERAGING TO IMPROVE FINANCIAL INCLUSION
3. LEVERAGING ISLAMIC FINTECH TO IMPROVE FINANCIAL INCLUSION
4. © 2020 International Bank for Reconstruction and Development / The World Bank Sasana Kijang, 2 Jalan Dato Onn, Kuala Lumpur 50480, Malaysia Some rights reserved. This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Nothing herein shall constitute or be considered to be a limitation upon or waiver of the privileges and immunities of The World Bank, all of which are specifically reserved. Rights and Permissions This work is available under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) http://creativecommons.org/licenses/by/3.0/igo. Under the Creative Commons Attribution license, you are free to copy, distribute, transmit, and adapt this work, including for commercial purposes, under the following conditions: Attribution: Please cite the work as follows: World Bank (2020) “Leveraging Islamic Fintech to Improve Financial Inclusion”, World Bank, Washington, DC. Translations: If you create a translation of this work, please add the following disclaimer along with the attribution: This translation was not created by The World Bank and should not be considered an official World Bank translation. The World Bank shall not be liable for any content or error in this translation. Adaptations: If you create an adaptation of this work, please add the following disclaimer along with the attribution: This is an adaptation of an original work by The World Bank. Views and opinions expressed in the adaptation are the sole responsibility of the author or authors of the adaptation and are not endorsed by The World Bank. Third-party content: The World Bank does not necessarily own each component of the content contained within the work. The World Bank therefore does not warrant that the use of any third-party-owned individual component or part contained in the work will not infringe on the rights of those third parties. The risk of claims resulting from such infringement rests solely with you. If you wish to re-use a component of the work, it is your responsibility to determine whether permission is needed for that re-use and to obtain permission from the copyright owner. Examples of components can include, but are not limited to, tables, figures, or images. All queries on rights and licenses should be addressed to World Bank Publications, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@ worldbank.org.
5. LEVERAGING ISLAMIC FINTECH TO IMPROVE FINANCIAL INCLUSION October 2020
6. 4 Leveraging Islamic Fintech to Improve Financial Inclusion Acknowledgments This report on “Leveraging Islamic Fintech to Improve Financial Inclusion” was prepared by a World Bank team consisting of Abayomi A. Alawode (task team leader), and Rafi-uddin Shikoh (Consultant), with additional input from Ahmad Hafiz Bin Abdul Aziz, Mohamed Rozani bin Mohamed Osman, Rekha Reddy and Wei Zhang. The team worked under the overall guidance of Hassan Zaman, Cecile Thioro Niang, Irina Astrakhan and Firas Raad. Kane Chong designed the cover and report layout. Please contact Abayomi A. Alawode (aalawode@worldbank.org), if you have any questions or comments with respect to the content of this report.
7. Leveraging Islamic Fintech to Improve Financial Inclusion Table of Contents Acknowledgments 4 List of Figures and Tables 6 Glossary of Terms 7 Executive Summary 8 CHAPTER 1 : Report Purpose and Methodology 10 CHAPTER 2: Islamic Finance and Fintech 12 Global Fintech Market and Trends 13 Islamic Finance and Fintech 20 CHAPTER 3: Developments and Gaps in Islamic Fintech 26 Introduction 27 Islamic Fintech Landscape 27 Gaps to be Addressed 30 Case Studies 31 CHAPTER 4: Islamic Fintech and Financial Inclusion 34 Introduction 35 Fintech’s Role in Global Financial Inclusion 35 Islamic Fintech and Islamic Social Finance 41 Case Studies 44 CHAPTER 5: Roadmap and Considerations 46 Introduction 47 The Potential Opportunities 47 Roadmap per Key Stakeholders 49 Risks of Islamic Fintech and Potential Mitigations 50 Appendices 52 Appendix 1: Interviews 53 Appendix 2: Bibliography 58 5
8. 6 Leveraging Islamic Fintech to Improve Financial Inclusion List of Figures Figure 1 . Global fintech framework 14 Figure 2. Global Islamic finance assets projection and distribution 20 Figure 3. Islamic finance asset share per region 21 Figure 4. Comparing financial inclusion in high income and OIC countries 22 Figure 5. Classification of Islamic fintech by financial services, technology and geography 27 Figure 6. Smartphone penetration in select OIC countries 36 List of Tables Table 1. Summary overview of 9 core fintech technologies 15 Table 2. Select fintech major investments 17 Table 3. Islamic fintech examples per type of financial service 24 Table 4. Islamic social finances 25 Table 5. Select sample of OIC governments or regulators facilitating Islamic fintech 28 Table 6. Financial inclusion through fintech resolved SDG challenges 38 Table 7. Islamic fintech and financial exclusion 41 Table 8. Opportunities to leverage fintech for Islamic finance 43
9. Leveraging Islamic Fintech to Improve Financial Inclusion Glossary of Terms AAOIFI Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is a Bahrain based not-for-profit organization established to maintain and promote Shari’a standards for Islamic financial institutions. AI Artificial Intelligence (AI) refers to the simulation of human intelligence in machines that are programmed to think and behave like humans. AML Anti-Money Laundering API Application Program Interface (API) are a set of routines, protocols, and tools for building software applications. B2B Business-to-Business (B2B) is the marketing, selling, and distribution of products and services by one business to another. CAGR Compound Annual Growth Rate CFT Combating the Financing of Terrorism DIFC Dubai International Financial Centre (DIFC) special economic zone in Dubai that is among the top ten global financial centers, and the leading financial hub in the MEASA region. IMF International Monetary Fund (IMF) is an organization of 189 countries, working to foster global monetary cooperation, facilitate international trade and reduce poverty globally. IoT Internet of Things (IoT) are network of devices connected through sensors, software, and other electronic devices enables collection and exchange of data. ISO International Organization for Standardization (ISO) is an international standard-setting body composed of representatives from various national standards organizations. KYC Know Your Customer (KYC) is a process by which banks verify the identity and monitor the nature of customer activities. MAMA Mobile Alliance for Maternal Action (MAMA) Bangladesh is a public-private collaborative initiative for improving maternal and child health through mobile technology. MEASA Middle East Africa and South Asia region MENA Middle East and North Africa MiFID II Markets in Financial Instruments Directive II (MiFID II), extended scope of MiFID, is a legislative framework introduced by the European Union (EU) to regulate financial markets in the bloc and improve financial security for investors. EU European Union (EU) is a political and economic union of 28 member states located in the Europe. FCA Financial Conduct Authority is a financial regulatory body in the UK that oversees operations of the financial service providers to maintain the integrity of the financial markets. MSME Micro, small, and medium enterprises Fintech Financial Technology (Fintech) is an emerging concept that uses technology to disrupt the financial services, operations, business models, and customer engagement. OECD Organization for Economic Co-operation and Development (OECD) is an intergovernmental economic organization with 36 member countries. GCC Gulf Cooperation Council (GCC) is a regional intergovernmental political and economic union consisting of all Arab states of Persian Gulf (except Iraq). OIC Organization of Islamic Cooperation (OIC) is the second largest inter-governmental organization, after the UN, with 57 member states across four continents. GDP Gross Domestic Product (GDP) is the monetary value of all finished goods and services made within a country during a specific period of time (often annually). P2P Finance Peer-to-peer (P2P) lending/financing enables individuals to obtain loans directly from other individuals, eliminating financial institution (middleman). GDPR The General Data Protection Regulation (GDPR) is a European Union (EU) regulation on data protection and privacy for all citizens of the region, effecting business operations all around the globe. PSD2 EU’s revised Payment Services Directive (PSD2) aims to standardize the regulations for the banks and payment service providers throughout the European Union (EU) and European Economic Area (EEA). HNWI High-net-worth individuals (HNWI) is a term given to persons that acquire liquid assets above a certain figure, where the amount differs from one financial institution to the other. Regtech Regulatory technology (Regtech) a term used for the application of technology in managing regulatory processes within the financial industry. ICO Initial Coin Offering (ICO) is the cryptocurrency industry’s equivalent to an Initial Public Offering (IPO). SDG IFI International Financial Institutions (IFI) are financial organizations established by more than one country, and hence influenced by international law. Sustainable Development Goals (SDG) are 17 interconnected goals of sustainability and prosperity set by the United Nations (UN) to be accomplished by 2030. SME Small and Medium Enterprises UNDP United Nations Development Programme (UNDP) is one of the UN agencies working to eradicate poverty and reduce inequalities across nations. USSD Unstructured Supplementary Service Data (USSD) is a Global System for Mobile (GSM) communication technology that allows sending text messages between a mobile phone and an application program over the network. IFRS IFSB International Financial Reporting Standards (IFRS) are international accounting standards established by the International Accounting Standards Board (IASB). Islamic Financial Services Board (IFSB) is an international standard-setting organization promoting and enhancing stability of Islamic financial services industry. 7
10. Executive Summary
11. Leveraging Islamic Fintech to Improve Financial Inclusion Executive Summary Islamic finance is a fast-booming segment of ICD-Refinitiv , total global Islamic finance assets were global finance. Serving a core population of 1.8 estimated at USD 2.5 trillion in 2018 and forecasted billion Muslims world-wide and a wider global to grow to USD 3.5 trillion in 2024. However, the ethical finance audience, its role is growing in global reach of Islamic finance within its core markets still significance especially as it relates to global social has much room to grow with wider global market financing needs. The global fintech revolution is reference. Account ownership in OIC member having a similar impact for Islamic finance through (mostly Muslim majority) 57 countries in 2018 stood the evolution of a nascent Islamic fintech ecosystem. at 41%, which is significantly lower than high income The purpose of this report is to evaluate the global countries (92%). In addition, reason for not having developments in the area of fintech solutions by an account being “religious” is 5% higher in case of Islamic financial institutions (IFIs) and its impact OIC member countries, indicating a strong role for on financial inclusion within its core markets. The Islamic finance/fintech in addressing this gap. core audience of this Report are financial services institution leadership, and government policymakers, A key driver of Islamic fintech opportunity especially across the core markets of Islamic finance. identified is the young global Muslim population that comprises more than half of the global Within this century, technology and automation population of under 34-year-olds. This young have always been a key part of the global demographic is highly tech savvy with source financial services industry. Bank mainframe markets having high mobile and internet penetration computer networks, ATMs, digital stock exchanges relative to global average. are examples of the earlier financial services technologies. The advent of the recent ‘fintech’ Another key area of opportunity is the role revolution, however, is resulting in a disruptive change of Islamic fintech in galvanizing the multi- of the financial services industry led by a new breed billion-dollar Islamic social finance pool from of technology enablers. This disruption is reshaping Zakat (obligatory charity), Sadaqah (voluntary financial services business models, operational charity), and Waqf (Islamic endowments). Zakat models and customer experiences opening up new can potentially contribute USD 200 billion to USD 1 avenues of serving the world’s evolving financial trillion globally towards poverty alleviation according needs. Islamic fintech opportunity operates within to UNDP in 2018. these developing global fintech trends. This Report identifies three key areas of fintech opportunity that Islamic fintech can address. landscape centered around nine driving fintech Its potential in helping leap-frog Islamic financial technologies, that are delivering key end-customer services reach and impact; in addressing significant financial financial This Report covers services and the overall back-office operational support/efficiencies. inclusion gaps within core markets; delivering Islamic social financing to support global Sustainable Development Goals (SDGs) and needs. Islamic fintech also leverages these technologies However, there are challenges that are identified in addressing core propositions of the global related Islamic finance market comprised of Islamic gateway regulations, amongst other to overcome. banking, Islamic capital markets, Takaful (Islamic insurance), and other IFIs. According to to regulations, investments, payment 9
12. CHAPTER 1 Report Purpose and Methodology
13. Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 1 - Report Purpose and Methodology Report Purpose The purpose of this report is to evaluate the global developments in the area of fintech solutions by IFIs and its impact on financial inclusion within its core markets . The specific objectives of this report are to: • Summarize current trends and developments on the use of latest financial digital technologies in the design and delivery of Islamic financial services • Evaluate the potential of digital technology to make IFIs more competitive • Assess the extent to which these innovations can expand access to Islamic financial services and enhance overall financial inclusion • Identify the potential risks and appropriate mitigation measures • Identify policy, regulatory and institutional challenges that need to be addressed in order to maximize the use of digital technology in Islamic finance The core audience of this report are financial services institution leadership and government policymakers, especially across the core markets of Islamic Finance. Methodology The methodology of producing this report is based on extensive desk research, authors’ market knowhow, and original interviews with 4 Islamic Fintech CEOs (or representatives). The Report also covers select Case Studies. Except for the face-to-face interview with Blossom Finance, all interviews were done through email. List of Islamic Fintechs being interviewed: • • • • Blossom Finance (Indonesia) Wahed Invest (USA) Finocracy (Bahrain) LaunchGood (USA) 11
14. CHAPTER 2 Islamic Finance and Fintech
15. Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 2 - Islamic Finance and Fintech Global Fintech Market and Trends To better scope , we start with a clear definition of fintech and assess its evolution and trajectory. Within this century, technology and automation have always been a key part of the global financial services industry. Bank mainframe computer networks, ATMs, and digital stock exchanges are examples of the earlier financial services technologies. The advent of the recent ‘fintech’ revolution, however, is resulting in a disruptive change of the financial services industry led by a new breed of technology enablers. This disruption is reshaping financial services business models, operational models, and customer experiences opening up new avenues of serving the world’s evolving financial needs. Fintech is defined by DinarStandard, a US based advisory firm, as follows: “4th Industrial Revolution driven technologies exponentially enhancing and/or disrupting 20th century financial services, operations, business models, and customer engagement.”1 The term “Fourth Industrial Revolution” was coined by Klaus Schwab, the founder and executive chairman of the World Economic Forum. “It is characterized by a fusion of technologies that is blurring the lines between the physical, digital, and biological spheres, collectively referred to as cyber-physical systems.”2 A variety of new technologies including robotics, artificial intelligence (AI), nanotechnology, quantum computing, biotechnology, and the Internet of Things (IoT) are shaping this revolution. Fintech’s impact today could be categorized as either having disrupted the current financial services offering or having innovated new services. Disruption examples include offering the same service as existing financial institutions or incumbents, yet with more convenience, lower fees, better pricing, or improved features, while innovations in new services are those solutions that were not offered previously but have been enabled with the improvement in technology. Examples of innovation include Peer-to-Peer (P2P) financing and tokenized assets using Blockchain. Fintech services adoption today has shifted upward from 16% in 2015 into 64% in 2019, with 96% of customers aware of at least one fintech service. 3 A thriving fintech ecosystem is driving this fast-growing adoption. According to EY, “the fintech ecosystem is made up of consumers, financial institutions, fintech startups, investors, regulators and educational institutions.”4 Within the core fintech financial services providers, startups that were challenging many incumbent financial institutions are now also being challenged by the incumbent financial institutions. Incumbents are leveraging their vast existing infrastructure, regulatory experience, and reach to experiment with more resources and get their fintech solutions adapted faster. Players from outside the financial services industry including retail companies, telecommunications, technology and social media, and power and utilities are also becoming competitive participants within this ecosystem. These companies offer innovative financial services to their existing customers, bundling fintech as complementary services. Fintech startup challengers, incumbent financial services providers, and these non-financial services players have enabled a fintech ecosystem that is fast displacing traditional financial institution alliances. 1 2 3 4 DinarStandard. (2018). Islamic Fintech Report 2018 Current Landscape. Global Fintech Framework, pg 9. DinarStandard. Schwab, Klaus. “The Fourth Industrial Revolution: What It Means and How to Respond.” World Economic Forum. January 14, 2016. Accessed March 20, 2018. https://www.weforum.org/agenda/2016/01/the-fourth-industrial-revolution-what-it-means-and-how-to-respond/ EY. (2019). Global FinTech Adoption Index 2019. EY. EY. (2019). Global FinTech Adoption Index 2019. Pg 5 EY 13
16. Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 2 - Islamic Finance and Fintech Global fintech framework Building on the definition presented earlier , the below referenced framework5 illustrates an overall fintech landscape centered around nine driving fintech technologies that are delivering key end-customer financial services and back-office operational support/efficiencies. Figure 1. Global fintech framework FINTECH 4th Industrial Revolution driven technologies exponentially enhancing and/or disrupting 20th century banking sevices, operations, business models, and customer engagement. NINE FINTECH TECHNOLOGIES BY CORE IMPACT THEMES SERVICES Greater automation from insights to activity Disintermediation leading to open access to services Greater decentralization and security CUSTOMERS Deposits Wealth Management Insurance OPERATIONS Back Office Middle Office Front Office Source: Islamic Fintech Report 2018, DinarStandard Copyright 2018. Reproduced with permission. 5 DinarStandard. (2018). Islamic Fintech Report 2018 Current Landscape. Global Fintech Framework, pg 9. DinarStandard. CYBERSECURITY CLOUD ADOPTION BLOCKCHAIN P2P FINANCE MOBILITY OPEN BANKING Treasury QUANTUM COMPUTING Trade Financing Consumers BIG DATA Biz & Consumer Financing (AI) ARTIFICIAL INTELLIGENCE 14 Businesses Financial Institutions
17. Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 2 - Islamic Finance and Fintech Below is a summary overview of the 9 core fintech technologies grouped into three categories , along with examples of service providers. Table 1. Summary overview of 9 core fintech technologies 9 Core Fintech Technologies Description Fintech Challenger Examples Incumbent Examples Greater automation from insights to activity Artificial Intelligence Machine learning is a technology where human users teach robots to help with daily activities, e.g. teaching the robots to detect several activities indicating money laundering or scam accounts. Lemonade, a New Yorkbased insurance startup, has automated the claims process, removing the cumbersome task of filling claim forms, by making a transaction bot takeover all the claim cycles.6 Sun Life created a virtual assistant, Ella, to send reminders to users regarding their insurance or pension plans.7 Big Data Analytics Big data analysis is a process of reading and analyzing data which has been written and stored in the server (internet) consisting of every click for all online transactions. Hexanika is a data management and reporting solution for financial institutions. Their software uses an algorithm that can source and ingest data in multiple formats to normalize datasets. It aims to cut regulatory costs and avoid non-compliance. Standard Chartered has developed its big data analytics, resulting in an enhanced user experience. 8 Quantum Computing Applies principles from quantum theory to develop computers with significantly more processing power. Solves complex problems much more effectively than conventional computers. Deutsche Bank Securities partnered with D-Wave Systems to develop “Quantum for Quants”. QuintessenceLabs has created a set of data technology products and solutions based on quantum computing technology to enable secure data transfer and storage. Disintermediation leading to open access to services Mobile Payment 6 7 8 9 Mobility-enabled payment technology that helps bank account holders (or fintech account holders) to open, access, and transact using their personal account anywhere and anytime as long as they are connected to the server. N26 is a licensed startup bank based in Germany that has gained 2.3 million retail customers in 4 years. Products include Google Pay and connected debit card by Mastercard. 9 BTPN Bank in Indonesia has issued “Jenius” to open accounts and make deposits and payments. Hudson, C. (2018, November 29). Ten Applications of AI to Fintech. Retrieved June 23, 2019, from https://towardsdatascience.com/ten-applications-of-ai-tofintech-22d626c2fdac Sun Life Assurance Company of Canada. (2017, September 12). Sun Life Announcement. Kumar, S. (2019). Banking on innovation: Demystifying Big Data in banking. Retrieved June 23, 2019, from http://www.bbc.com/storyworks/banking-oninnovation/bigdata CBInsights. (2019). Global Fintech Report Q1 2019. NY: CB Insights. 15
18. 16 Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 2 - Islamic Finance and Fintech 9 Core Fintech Technologies Description Fintech Challenger Examples Incumbent Examples Open Banking Technology enables banking data to sync with another third-party app to meet a customer ’s need to monitor their cash flow. Enfuce is developing a connectivity layer that enables third parties to communicate with banks for data as well as payments.10 Customers of Lloyds Bank, Halifax and Bank of Scotland apps have the ability to view their bank accounts from these banks through an app.11 P2P Finance Web-based technology performs the intermediary. ThinCats Australia aims to link investors to debtors throughout the country and offers financing between 2 and 3 years, with no concealed fees or repayment charges. Barclays acquired RainFin in South Africa to tap into P2P financing. Greater decentralization and security Distributed Ledger (Blockchain) Consists of all data, unremovable, about every activity under one platform. The data chain is named “ledger”, and the ledger is distributed to an enormous server globally for cross-verification and decentralization. Symbiont is a blockchain company developing products in smart contracts and distributed ledgers for capital markets. Barclays and Citi work with IBM to create LedgerConnect, a proof of concept for distributed ledger technology. Cloud Adoption Storage system inside a server. User uses tools (website or application) to retrieve and upload data to the cloud system. Stripe, valued at a massive USD 20 billion, enables small businesses to recognize payments online without payment fraud. ICICI Bank in India uses Microsoft Azure to work with some applications without having physical servers on its premises. Cybersecurity Technology build to protect all collected and transacted data and privacy of all users and stakeholders. ComplyAdvantage supports financial institutions to comply with current regulations in AntiMoney Laundering (AML), counter-terrorism financing (CFT), corruption, and bribery. Monetary Authority of Singapore has offered USD 21.88 million in funds to help local financial institutions improve cybersecurity operations. 10 Enfuce. (n.d.). Enfuce Open Banking Platform. Retrieved June 23, 2019, from https://enfuce.com/services/open-banking/ 11 Fintech Futures. (2019, June 18). BankingTech Lloyds first to launch open banking app for credit cards and savings.
19. Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 2 - Islamic Finance and Fintech We identified 9 major fintech trends in 2019 : 1. Fintech growth attracting big investments Fintech investment has soared across regions with the Americas garnering USD 54.5 billion in 2018 (USD 29 billion in 2017), with deals primarily booked by US fintech companies of up to USD 52.5 billion. Europe attracted USD34.2 billion experiencing an almost two-fold increase from USD 12.2 billion in 2017, followed by Asia with USD 22.7 billion in fintech investment.12 In each region, the top 5 fintech companies absorbed more than 50% of total deal value, indicating fairly concentrated investments and a high level of investor confidence in well-established fintech companies. Table 2. Select fintech major investments Investee Investor Investment Challengers Bank Digital Bank N26 Tencent and Allianz USD 160 million Big Tech Players iZettle PayPal USD 2.2 billion Open Banking Data Republic Led by Innov8 and Singapore Airlines USD 22 million Regtech Refinitiv Blackstone partnered with GIC and CPPIB USD 17 billion Blockchain SEBA Crypto Black River Asset Management, Summer Capital, and others USD 103 million Insurtech Oscar Health Insurance  Alphabet, Founders Fund, and others USD 375 million Source: (KPMG, 2019) ‘The Pulse of Fintech 2018’, KPMG, February 2019 2. Consolidation with incumbent to innovate banking tech Financial institutions’ incumbents are fast leading the developments across fintech solutions. In the US, Goldman Sachs has shown that resilient business models and proven marketing strategies can surpass the speed of small but nimble fintech companies. The investment bank has grown its US consumer financing into a USD 1 billion franchise in less than a year, in a business segment that was hitherto alien to them. Concurrently, other investment banks have remained focused on their core businesses and provide roboadvisory services. Together with their well-known brand and loyal customer base, these new ventures have grown at an accelerated pace. The incumbents’ large customer database and robust compliance systems are highly attractive to fintech companies that have reached saturation in their business models. Hence, challengers trying to penetrate business segments beyond their current region and expanding their product suites, require collaboration with incumbents to expedite their growth.13 Big technology companies are also introducing their ecosystem to their customers, which will lead to more consolidation with incumbents.14 A prominent example of this occurred in China where Bank of China partnered with Tencent – a large, internet-based technology company – to build a fintech laboratory. In addition, China Construction Bank has signed an agreement with Alibaba and Ant Financial to enhance the digital experience for their customers. 12 KPMG. (2019). The Pulse of Fintech 2018. KPMG. 13 KPMG. (2019). The Pulse of Fintech 2018. KPMG. 14 McKinsey and Company. (2018). Synergy and disruption: Ten trends shaping fintech. McKinsey and Company. & KPMG. (2019). The Pulse of Fintech 2018. KPMG. 17
20. 18 Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 2 - Islamic Finance and Fintech 3 . Further innovation in services and consolidation in the payments sector The payments sector is now focused towards more effective technology and the centralization of bank account information. Implementation of the Revised Payment Services Directive (also known as PSD2 started in 2018 covering EU countries, with the UK, Belgium, Luxembourg, and Italy expected to adopt the regulation in 2019. The aim is to develop secure communications and a robust customer authentication system. This initiative is being followed in Asia by various countries. Singapore is streamlining its regulatory framework for payments by promulgating the Payment Services Act to expand regulation into fintech companies offering payment services.15 4. Open banking adoption will play an increasing role in financial services Trends in banking focus on customers’ experiences, sharing resources, data importance, and partnerships with fintech or big tech companies. This has led to open banking or open data where standardized Application Programming Interfaces (APIs) enable one banking platform to communicate with another. This trend continues to gain in importance and is becoming pivotal in defining the partnership between incumbent banks and fintech companies. Many initiatives and investments have been made in open banking such as the USD 22 million invested in Data Republic, an Australian fintech company. Open banking which involves data sharing, authentication, and management, is expected to catalyze partnerships between incumbents and challengers and incentivize established challengers to partner with big technology companies.16 Alternatively, in today’s age where a seamless user experience has become the norm, and can no longer provide a competitive advantage17, sole reliance on open banking may not be sufficient. Capgemini proposes a shared marketplace where incumbents and challengers can share data and co-operate to provide an enhanced customer experience which they term ‘Open-X’.18 Rather than having one bank provide a suite of services, a fintech company with one service offering can have partners that provide other financial services, and collectively give their customers access to all services. 5. Increased investment in Distributed Ledger (Blockchain) tech solutions Incumbents and challengers are focusing on addressing technical issues on distributed ledgers or blockchain technology such as scalability, privacy, anonymity, and data segregation. However, companies are simultaneously creating products to benefit from the technology in optimizing financial services19, with noticeable movement globally to utilize blockchain for effective usage.20 6. Insurtech to experience substantial growth Significant and frequent investments have enabled insurtech to become a developed sector. Insurtech providers and insurance companies are collaborating to offer services beyond claims management and bundled insurance services.21 Asia has a competitive advantage in insurtech with growth being facilitated by relatively loose regulation and a large customer base, in comparison with the US and Europe.22 15 16 17 18 19 20 21 22 Linklaters. (2018). Global Fintech Year in Review 2018 Year to Come 2019. London: Linklaters. KPMG. (2019). The Pulse of Fintech 2018. KPMG. McKinsey and Company. (2018). Synergy and disruption: Ten trends shaping fintech. McKinsey and Company. Capgemini and Efma. (2019). World Fintech Report 2019. Capgemini. Ibid 17. Ibid 16. CBInsights. (2019). Global Fintech Report Q1 2019. NY: CB Insights. KPMG. (2019). The Pulse of Fintech 2018. KPMG.
21. Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 2 - Islamic Finance and Fintech 7 . Digital banking and capital markets to replace the current system Conventional banks and corporates will progressively venture into advanced banking, presenting smart, independent computerized banks that work autonomously and without dependency on their current system. 23 Currently, maintaining a system to meet regulations has been one of the big expenses in banking. This has affected the resources available for further innovation and advancement. Digitization of all banking and treasury functions enables significant reduction in expenses for system maintenance and can open new vistas of revenue generation to offset the loss of income from conventional products or services. In order to progress and remain competitive, banks will need to replace their traditional systems, and start adopting data analytics, cloud computing, AI, and blockchain technologies.24 8. More stringent regulations for financial institutions will boost Regtech growth Regtech has become globally significant due to increasing regulation and in 2018 a slew of regulatory requirements such as MiFID II, PSD2, GDPR, new IFRS standards, and EU benchmarks25 substantially increased compliance costs. While audit, risk, and regulatory compliance software is becoming increasingly important, technology-based solutions for CFT that utilize AI and APIs have also attracted investment along with biometric authentication programs to enable identity protection. Funding for such technologies in 2018 totaled USD 686 million, and USD 337 million in Q1 2019, with a slight increase in the number of deals.26 Eventually, Singapore, Hong Kong (SAR), and India are predicted to be the centers for regtech in the Asia region, propelled by substantial digital investments, rapid expansion, and infrastructure that facilitates technological development. 9. Technology regulation increase to prevent financial crime As the impact of increased investment and initiatives in fintech takes root, governments in many countries are putting in place measures to prevent the technology being misused for data theft, money laundering, terrorism, and cybercrime. In Australia and Japan, governments have proposed reforms to tackle open banking and digital currency. Belgium, Italy, and Hong Kong have adopted a cautious approach to crypto assets and ICOs, while China has banned such offerings. The US, France, Germany, Luxembourg, and UAE are actively regulating blockchain and crypto assets, while the UK and Singapore have increased regulation of blockchain, crypto assets, robo-advisory, payments, cybersecurity, and AI. 23 Ibid. 24 gfma and pwc. (2019). Technology and Innovation in Global Capital Markets: Current trends in technology and innovation and their impact on the ‘Investment Bank of the Future’. Global Financial Markets Association. & Clifford Chance. (2019). Fintech in 2019: Five Trends to Watch - Thought Leadership. London: Clifford Chance. 25 Ibid 23. 26 CBInsights. (2019). Global Fintech Report Q1 2019. NY: CB Insights. 19
22. 20 Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 2 - Islamic Finance and Fintech Islamic Finance and Fintech Islamic finance is a USD 2 .5 trillion business Shari’a-compliant finance or Islamic finance comprises Islamic banking, Islamic capital markets, Takaful, and other IFIs. According to ICD-Refinitiv in 2018, 1,447 Shari’a-compliant financial institutions were operating businesses in 72 countries with Islamic finance assets expected to increase from USD 2.5 trillion in 2018 into forecasted number of USD 3.5 trillion in 2024. Islamic banking is still the largest Islamic finance segment with a share of 70% or USD 1.72 trillion in 2017, followed by Sukuk at USD 470 billion (18%), other financial institutions at USD 140 billion (6%), Islamic funds at USD 108 billion (4%), and Takaful at USD 46 billion (2%).27 Figure 2. Global Islamic finance assets projection and distribution Islamic Finance Assets 2015-2018 and Projection (USD billion) Distribution of Global Islamic Finance Assets (USD billion) 4,000 3,472 3,500 3,000 2,500 2,200 2,306 2,458 2,524 2,000 Sukuk, 470 1,500 Other Financial Institutions 1,000 Islamic Funds, 108 140 500 Islamic Banking, 1760 0 2015 2016 2017 2018 Takaful, 46 2024 Geographically the Islamic finance market is concentrated in Asia, the GCC28 , and MENA regions Most Islamic finance assets reside in Asia, the GCC, and MENA regions contributing 95.5% of global Islamic finance assets in 2017 according to IFSB, with Islamic banking making the largest contribution to the aggregate global asset base. 29 However, Islamic banking globally has low market penetration and comprises a minority of total banking assets in most countries within the region. In Asia, the two largest Muslim countries of Pakistan and Indonesia have Islamic banking assets of 15% 30 and 5.8% 31 of total banking assets, respectively. This is despite Muslims in Pakistan and Indonesia comprising 96% and 87% of the total population, respectively. Therefore, significant opportunities exist in gaining more market share, given the right strategy. 27 ICD-Refinitiv. (2019). Islamic Finance Development Report 2019. ICD-Refinitiv. 28 Gulf Cooperation Council (GCC) is a regional intergovernmental political and economic union consisting of all Arab states of the Persian Gulf (except Iraq) which include: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates. 29 IFSB. (2018). Islamic Financial Services Industry Stability Report 2018. Islamic Financial Services Board. 30 As of 1st Quarter 2019 (State Bank of Pakistan, 2019) 31 As of 1st Quarter 2019 (Indonesia Financial Services Authority (OJK), 2019) and (Indonesia Financial Services Authority (OJK), 2019)
23. Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 2 - Islamic Finance and Fintech Figure 3 . Islamic finance asset share per region Islamic Financial Asset Share per Region Africa (ex. North) 1.5% World Muslim Population 2015 Others 3% Indonesia 13% Rest of the World 35% Asia, 24.4% Country Islamic Banking Market Share per Q1 2019 6% India 11% GCC 42% 94% MENA (ex. GCC) 29.1% 15% Algeria 2% Iraq 2% Iran 4% Turkey 4% Pakistan 11% 85% Nigeria 5% Egypt 5% Bangladesh 8% Indonesia Non-Islamic Banking Pakistan Islamic Banking Source: (World Bank, 2017), (Pew Research Center, 2015), (Indonesia Financial Services Authority (OJK), 2019), (State Bank of Pakistan, 2019), World Bank Analysis Funds originating from Muslim countries do not necessarily contribute to Islamic finance assets Funds originating from Muslim countries primarily flow to financial institutions in OECD countries, with estimates of sovereign wealth funds from these countries invested in the OECD amounting to USD 3 trillion. 32 In contrast, the Islamic capital markets comprising outstanding sukuk and wealth management funds have aggregate assets of USD 671 billion. Within Islamic countries, the numbers of unbanked are still high Having access to financial services is a key metric of prosperity and quality of life for people worldwide which covers access to deposit banking, ease of payment, access to credit, savings, and investments. Adults not participating in the financial system or remaining unbanked remain high in many OIC countries. As shown in Figure 4, account ownership in OIC member countries (41%) is significantly lower than high income countries (92%). In addition, the reason for not having an account being “religious” is 5% higher in the case of OIC member countries, indicating a strong role for Islamic finance/fintech in addressing this gap. Bank account ownership in select OIC countries, however, is quite dispersed with Egypt at 23% and the UAE at 88%. Interestingly, adults who voluntarily abstain from banking due to religious reasons, reaches as high as 12% in Iraq for instance. Other reasons for opting out of the banking system include sharing bank accounts among family members and a lack of trust in the financial system.33 32 World Bank. (2017). 33 World Bank. (2017). Mobilizing Islamic Finance for Infrastructure Public-Private Partnerships. Washington DC: International Bank for Reconstruction and Development / The World Bank. 21
24. 22 Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 2 - Islamic Finance and Fintech Figure 4 . Comparing financial inclusion in high income and OIC countries Financial Inclusion: High Income versus OIC Countries (%) 100 92% 90 80 70 60 50 41% 40 30 20 10 6% 1% 0 High Income Account (age 15+) OIC No account because of religious reasons (age 15+) Source: The Global Findex Database 2017: Measuring Financial Inclusion and the Fintech Revolution. World Bank: Washington, DC. Author analysis. OIC countries data of 30 member countries out of 57 as available from source. The main reasons why adults are unable to open bank accounts include34: • Lack of money • Lack of proper documentation • Distance to nearest financial institution Nevertheless, most aspects of financial services, access to deposit banking, ease of payment, access to credit, savings, and investments can all be addressed by fintech solutions offered by IFIs. Muslim population is young, while digitally savvy The global Muslim population is growing and comprises more than half of the global population of under 34-year-olds. 35 A digitally savvy population represents the future customers of financial services, and this is a main change driver in the industry.36 This digitally literate population responds well to all fintech and enables young entrepreneurs to create challengers that provide digital solutions to meet the young population‘s needs.37 Islamic fintech expected to increase Islamic finance market share through 6 financial services Islamic financial assets can be further fragmented into 6 different financial services categories which include funding, trade finance, financing treasury, wealth management, and Takaful. Leveraging disruption and innovation within these service groups is crucial in increasing market share dominated by non-IFIs with extensive customer reach, large customer databases, and robust security compliance. 34 World Bank. (2017). Mobilizing Islamic Finance for Infrastructure Public-Private Partnerships. Washington DC: International Bank for Reconstruction and Development / The World Bank. 35 ThomsonReuters/DinarStandard (2018). State of the Global Islamic Economy Report 2018/19. 36 DinarStandard. (2018). Islamic Fintech Report 2018 Current Landscape. DinarStandard. 37 Red Money. (2018). Islamic Finance News Fintech Huddle Report 2019. IFN.
25. Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 2 - Islamic Finance and Fintech 23
26. 24 Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 2 - Islamic Finance and Fintech Building on the earlier definition of fintech , DinarStandard has defined Islamic fintech as, “fintech technologies exponentially enhancing and disrupting 20th century Islamic financial services, operations, business models, and customer engagement.” The innovation or disruption can be categorized within the six financial services identified with examples showcased in Table 3 below. Table 3. Islamic fintech examples per type of financial service Financial Services Islamic Financial Services Islamic Fintech Examples Funding Includes: • Custody-based deposits (can also be based on Qard) • Investment accounts • Shari’a-compliant payment, collection, and liquidity management • PayHalal (Souqa Fintech Sdn Bhd, Malaysia) • AmalPay (Malaysia) • Investment Accounts Platform (IAP – Malaysia) Trade Finance Includes: • Murabaha working capital • Murabaha/Wakala/Mudaraba/Letter of Credit • Waqfe – Bahrain (Digital banking platform provider) Financing Includes: • Murabahah/Mudaraba/Musharaka/ Salam/Istisn’a/Ijara Financing • Islamic Microfinance • Ethis Crowd – Singapore, Indonesia, Malaysia, Australia • Blossom Finance Capital Market Includes: • Islamic Bank Treasury • Sukuk (Islamic Bonds) • Adab Solution (Crypto exchange) Wealth Management Includes: • Shari’a-compliant wealth management for retail and HNWIs • Wahed – US (Robo-advisory investment platform) • HelloGold (blockchain-based gold investment) Insurance Includes: • Takaful • Re-Takaful • Uplift Mutuals • Insure Halal Large potential also offered by Islamic social finance Islamic principles require every Muslim to help the less fortunate members of society through a variety of charitable means, with the major ones being Zakat (obligatory charity), Sadaqah (voluntary charity), and Waqf (Islamic endowments). Every individual and business is required to share their wealth with the less fortunate through Zakat donations and are encouraged to also contribute voluntarily through Sadaqah. Furthermore, Shari’a Waqf, is defined as an Islamic religious endowment i.e. a voluntary and irrevocable dedication of one’s wealth or a portion of it – in cash or kind (such as a house or a garden), and its disbursement for Shari’a-compliant projects (such as mosques, religious schools, and other social projects38). 38 General Authority of Islamic Affairs and Endowments, UAE 2019. https://www.awqaf.gov.ae/en/definitionofwaqf extracted Dec 1, 2019
27. Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 2 - Islamic Finance and Fintech Table 4 . Islamic social finances Islamic Social Finance Compulsory Voluntary Zakat Waqf Sadaqah How is wealth to be shared with others? Compulsory for Muslims owning excess wealth exceeding certain thresholds and owned over defined periods of time. Voluntary giving to a trust, for communal benefit or anyone specified in the trust deed. Voluntary acts of good deeds to help others. When do the donations occur? Excess wealth is annually defined as per numerical benchmarks. Donations can be made anytime and for any amount. Principal must be maintained for perpetuity. Donations can be made anytime and for any amount. No requirement to maintain principal. Who is the beneficiary? Must be given to anyone defined in 8 categories: needy, poor, slave, debtor, revert (people who embrace Islam), striving for the sake of Allah, traveler in the path of Allah, zakat collectors. Waqf can be made in favor of charitable institutions such as waqf for a mosque. It can also be made in favor of relatives, where the waqf goes to the poor or other charitable purposes when none of them are alive. The beneficiary purpose cannot involve any impermissible activities according to Shari’a. 39 Sadaqah can be given to anyone for charitable purposes as long as it does not involve any impermissible activities according to Shari’a. What is being shared? Cash and in-kind contributions, but the value must follow a certain formula. Assets with perpetual benefit. Anything, as long as it is beneficial to the beneficiary. How large is the social impact? Studies suggest proper collection and distribution of Zakat from domestic sources could eliminate extreme poverty (those who live below USD 1.25 per day) in 20 out of 39 OIC member countries.40 Examples from countries with some of the largest Muslim populations include Indonesia that has potential Waqf assets of USD 60 billion and India where Waqf properties have an estimated market value of USD 24 billion.41 Combination of Zakat and Awqaf (plural of Waqf). Therefore, as Islamic finance adheres to Shari’a, businesses must be concerned with both profitability and making positive social contributions through Zakat, Sadaqah, and Waqf. Zakat can potentially contribute USD 200 billion to USD 1 trillion globally towards poverty alleviation according to UNDP in 201842, and Waqf assets in only Indonesia and India are estimated to have an economic value of USD 84 billion (see table 4). This latent potential of Islamic social finance, if tapped successfully, can help bridge the USD 2.5 trillion annual gap in the UN’s SDGs. 39 40 41 42 GlobalSadaqah.com 2019. https://www.globalsadaqah.com/blog/waqf-4pillars-conditions/ Extracted Dec 1, 2019 World Bank Group and IRTI. (2016). Islamic Finance: A Catalyst for Shared Prosperity? Islamic Development Bank. Ibid. Rehman, A. A., & Pickup, F. (2018, September 7). Zakat for the SDGs. Retrieved Jul 8, 2019, from https://www.undp.org/content/undp/en/home/blog/2018/ zakat-for-the-sdgs.html 25
28. CHAPTER 3 Developments and Gaps in Islamic Fintech
29. Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 3 - Developments and Gaps in Islamic Fintech Introduction Incumbents in Islamic finance are now experiencing difficulties due to many fintech challengers that are disrupting the industry . Embracing new technology has become a necessity to survive rather than a source of competitive advantage. Islamic finance can utilize fintech to tap into new markets, offering new products and services, improved compliance to regulation, enhanced customer accessibility, and significant reductions in cost. Muslim-majority country governments have also started implementing policies to support this development, while simultaneously formulating regulation to prevent any potential fraud or cybercrime. The global Muslim population has an average age of 24 years, with a higher growth rate than any other religion, and is expected to comprise 26.4% of the world’s population by 2030. Pakistan and Indonesia will have the two largest Muslim populations by 2030 with 258 million and 238 million, respectively.43 Islamic fintech can be the solution to reach this immense market and reap its full potential. Islamic Fintech Landscape According to DinarStandard, there are currently 93 Islamic fintech companies predominantly in financing services, followed by wealth management and funding. P2P finance is provided by 65 companies, followed by distributed ledger tech with 14 companies. It is not surprising that P2P platforms are the most common Islamic fintech platforms, given that it captures the essence of Islamic finance as it directly connects the capital provider with the users of capital, using the power of technology. Indonesia is leading with the most companies offering Islamic fintech (31 companies), followed by the US, UAE (driven by the DIFC), UK, and Malaysia 44 with 12 companies or less. Two of the top 5 jurisdictions for Islamic fintech are not major jurisdictions for Islamic finance, implying that proficiency in fintech’s development Figure 5. Classification of Islamic fintech by financial services, technology and geography Classification by Financial Services Classification by Technology Categories Classification by Geography Funding 8% Others 5% Others 14% Wealth Management 15% Distributed Ledger Tech 14% Financing 65% Others 22% P2P Finance 65% Indonesia 31% Malaysia 7% UK 10% UAE 11% USA 12% Source: (DinarStandard, 2018) 43 Pew Research Center. (2011, January 27). The Future of the Global Muslim Population. Retrieved June 24, 2019, from https://www.pewforum.org/2011/01/27/ the-future-of-the-global-muslim-population/ 44 DinarStandard. (2018). Islamic Fintech Report 2018 Current Landscape. DinarStandard. 27
30. 28 Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 3 - Developments and Gaps in Islamic Fintech requires a sound technological base supported by a culture of innovation , rather than dedicated expertise in Islamic finance. Islamic fintech growth is being driven by increasing government and regulatory support, younger, technology-minded customers, innovation attractiveness, and the availability of startup incubators and accelerators that are often state-sponsored. Governments are realizing the potential benefit of Islamic fintech and actively supporting its development. Countries are building centers for startups to interact and collaborate, providing early-stage funds and connecting fintech companies with investors, all within a hospitable regulatory and policy environment. Table 5. Select sample of OIC governments or regulators facilitating Islamic fintech Organization Country Facility provided National Islamic Finance Committee (KNKS) Indonesia A federal government entity, The National Shari’a Finance Committee (KNKS) is an institution that functions as a catalyst for the development of Islamic finance and wider Islamic Economy on a national and international scale. It was setup to drive the execution of the Indonesian Shari’a Economic Master Plan issued in May 2019.45 Bank Negara Malaysia Investments Accounts Platform (IAP) established by Bank Negara is the first Islamic P2P initiative established by a central bank. Malaysia Digital Economy Corporation Malaysia Connecting a network of investors with halal business owners and providing halal certifications. Owned by the Malaysian government.46 Dubai International Financial Center UAE Accelerate the financial technology sector in MEASA through DIFC Fintech Hive programme that supports fintech, regtech, insurtech, and Islamic fintech startups. Provides access to a USD 100 million fund and network of financial institutions. Bahrain Fintech Bay Bahrain Provides opportunities for fintech companies to co-operate and develop their technologies. IFIs operating in Bahrain and throughout the GCC are partners with the Bahrain Fintech Bay.47 Other UK, Turkey, Abu Dhabi UK Islamic Fintech panel to promote Islamic fintech sector. UKTurkey Islamic Fintech Working Group to consider opportunities in Islamic Fintech sector. Abu Dhabi General Market’s New Fintech Ecosystem.48 Challengers are fast embracing the preferences of their young customers with support from accelerators and incubators. The new generation’s preference for innovation and easy accessibility has been embraced by Islamic fintech startups rather than incumbent financial institutions. An important part of the fintech ecosystem has been the incubators for early-stage startups and accelerators that connect startups with investors. Both incubators and accelerators enable startups to develop their technologies and business models while enabling these companies to identify potential equity partners. These international networks are anchored by various organizations such as the Islamic Fintech Alliance in Singapore as part of Asia Pacific, DIFC Fintech Hive in UAE, and AlBaraka Bank in Turkey49 play a leading part in MENA, while in the US, Affinis Labs is a typical example. 45 46 47 48 49 National Islamic Finance Committee (KNKS). (2019). Strengthening the Digital Economy. Retrieved Jul 2019, from KNKS: https://www.knks.go.id/home DinarStandard. (2018). Islamic Fintech Report 2018 Current Landscape. DinarStandard. Ibid. TheCityUK and Borsa Istanbul. (2019). UK-Turkey Islamic Fintech Working Group. London: TheCityUK DinarStandard. (2018). Islamic Fintech Report 2018 Current Landscape. DinarStandard.
31. Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 3 - Developments and Gaps in Islamic Fintech 29
32. 30 Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 3 - Developments and Gaps in Islamic Fintech Gaps to be Addressed Despite rapid growth , support from governments, and a vibrant ecosystem, there are still key areas that require attention for Islamic fintech to maintain its sustainability. Below are key areas of Islamic fintech growth gaps:50 Islamic finance should apply AI and big data analytics in more areas of business Machine-learning capabilities could reduce operating costs in banks by improving productivity in both front and back-office functions and reducing operational errors. Big data analytics could help identify customers eligible for certain services or accelerate the KYC process, considerably reducing customer onboarding times. There are numerous other possibilities for the effective adoption of these technologies which would increase the competitiveness of Islamic banks in comparison to their conventional peers. Distributed ledger tech could boost Islamic trade financing and reduce the incidence of Shari’a non-compliance Islamic trade finance was estimated at USD 186 billion in 2016 and comprises 1.5% of global trade finance which was valued at USD 12.3 trillion. The relatively small representation of Islamic finance in global trade has occurred even though trade between OIC countries amounted to USD 250 billion, and total imports across these countries were USD 1.8 trillion in 2016.51 The inability of Islamic trade finance to capture a larger market share could be attributed to a dearth of Shari’a-compliant trade finance products. Whilst available products have been criticized by Islamic scholars as being too close to usury-based conventional trade finance.52 Blockchain presents one possible alternative by enabling smart contracts to improve existing formats for letters of credit. This would reduce fees for importers and lessen documentation requirements.53 Blockchain can also be used to reduce Shari’a non-compliance through smart contracts. Compliance of contracts through blockchain for Islamic financing, Islamic derivatives, liquidity management, Murabaha, Musharaka, reduction of gharar, tawarruq and custody as example areas. Wealth management can be simplified using AI AI can be utilized to determine optimal investments or portfolios for particular clients based upon their preferences. Robo-advisory eliminates the need for expensive financial advisors, as even novice investors can provide the requisite information, which will enable AI to decide the most suitable allocation of funds. Shari’acompliant criteria can also be made part of the AI’s algorithm to ensure perpetual compliance. These innovations could potentially attract customers previously reluctant to invest due to product complexity or skepticism in relation to Shari’a compliance. 50 DinarStandard. (2018). Islamic Fintech Report 2018 Current Landscape. DinarStandard. 51 Ibid 52 Gundogdu, A. (2016), “Exploring novel Islamic finance methods in support of OIC exports”, Journal of Islamic Accounting and Business Research, Vol. 7 No. 2, pp. 78-92. (Gundogdu, 2016) 53 DinarStandard. (2018). Islamic Fintech Report 2018 Current Landscape. DinarStandard.
33. Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 3 - Developments and Gaps in Islamic Fintech Takaful needs traction and innovation to capture the Muslim insurance market Studies have shown that the unbanked also desire protection on wealth and health , but cannot obtain appropriate products due to increased costs and other reasons that classify them as unbanked in the first place. Furthermore, Muslim populations that could reach nearly 3 billion by 206054, require Shari’acompliant protection against loss of wealth or health. Case Studies Three case studies are presented here as examples of market-leading Islamic fintech companies, covering their founding principles, value proposition, traction to date, and roadmap for the future. Case Study 1 HelloGold – Award-winning wealth management Islamic fintech Founding Principles HelloGold is a gold purchasing platform based on blockchain technology, which was established in 2017. It was the first mobile application that provided its users the opportunity to purchase gold Shari’a-compliantly. HelloGold has received various awards such as ‘Best Islamic Wealth Management Fintech Company’ by World Islamic Fintech Awards 2018 in Bahrain, and ‘Prominent in Wealth, Asset & Investment Management of the Year’ by Malaysia Fintech Awards 2018. Physical quantities of gold back the application and are stored in Dubai or Singapore, while any fractional trading is considered as part of the gold bullion. Value Proposition HelloGold is certified by Amanie Advisors as a Shari’a-compliant asset-backed investment. The target customer base is the 60% of Malaysians that are practicing Muslims 55 , as well as Malaysian households that have at least RM76 savings from disposable income56 (low income). While 98% of Malaysians were using smartphones in 2018 57, the availability of a Shari’a-compliant investment via smartphone, with a minimum investment of RM 1 58 has proved attractive. Traction to Date Since its launch in 2017, HelloGold has over 150,000 downloads and about 80,000 customers, with an estimated RM6.5 million in transaction value. It has also launched in Thailand. Roadmap for the Future Plans to launch the product in Indonesia and Middle East in 2019. A partnership with Baobab in Africa has been finalized which will enable expansion to 9 African countries. The aim is to not be limited to the gold investment business, but to eventually become a virtual bank, regulations permitting. 59 54 55 56 57 Pew Research Center. (2011, January 27). The Future of the Global Muslim Population. HelloGold. (2019). Gold: The Better Way to Save. Retrieved June 27, 2019, from https://www.hellogold.com/about-us/ Khazanah Research Institute. (2018). The State of Households 2018 Different Realities. Kuala Lumpur: Khazanah Research Institute. Malaysian Communications and Multimedia Commission. (2017). Handphone Users Survey 2017: Statistical Brief Number Twenty-Two. Cyberjaya: Malaysian Communications and Multimedia Commission. 58 Ibid 55. 59 Malik, D. (2019, May 10). HelloGold making gold savings accessible to all. Retrieved June 27, 2019, from https://www.hellogold.com/hellogold-making-goldsavings-accessible-to-all/ 31
34. 32 Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 3 - Developments and Gaps in Islamic Fintech Case Study 2 Wahed Invest – The world’s first Shari’a-compliant robo-advisory platform Founding Principles Wahed’s mission is to make halal investing accessible and efficient. The objective was to create an easily accessible product with transparent pricing and no hidden fees. The product also aims to achieve seamless onboarding with no lock-in period and transacted through an intuitive interface. Investor education was another primary focus for Wahed. Educating users on investing was a priority as most of Wahed’s users are first-time investors.60 Value Proposition Although the global Islamic finance industry is maturing, the US is still a developing market. A market study61 examining the financial requirements of American Muslims in 2014-15 detected a growing need for Islamic financial products. This study also discovered that, since Islamic finance facilities are complicated and hard to comprehend, 58% of participants are calling for consistency in ideas and agreements for Islamic finances. Wahed offers Shari’a-compliant investments with reduced transaction charges. Accessibility is enhanced by enabling global access to the investment platform through a fully ‘native’ global mobile experience with licensed activity in multiple jurisdictions.62 Traction to Date Wahed launched their robo-advisory investment services in the US in 2017 and expanded to the UK in 2018. In May 2019, the services are not only available in the UK and US but also to residents in over 130 countries. The company has secured USD 8 million from CueBall Capital and BECO Capital, based on a valuation of USD 100 million as per its second quarter 2018 financial results.63 Roadmap for the Future The product offering is being localized for each key market while more investment tools are being added to increase investment flexibility. It is expected that such additional functionality will further incentivize savings. Wahed is also developing its own investment products and creating vehicles that could operate much more efficiently than traditional mutual funds. The end goal for the company is to become the one-stop shop for Shari’a-compliant wealth management. 60 61 62 63 Information gathered from Interview with Wahed. DinarStandard/AMCC 2014/15. American Muslim. Market Study 2014/15. The Muslim Green. DinarStandard. (2018). Islamic Fintech Report 2018 Current Landscape. DinarStandard. Wahed. (2019, May 9). Wahed Goes Global. Retrieved June 30, 2019, from https://journal.wahedinvest.com/wahed-goes-global/
35. Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 3 - Developments and Gaps in Islamic Fintech Case Study 3 Beehive – MENA’s first regulated P2P lending platform Founding Principles Based in Dubai, Beehive is MENA region’s first regulated P2P lending platform. It states as its purpose to facilitate financing for small and medium sized businesses to fuel their growth. P2P lending is a form of crowdfunding that refers to investors providing finance to businesses without the use of a conventional intermediary, such as a bank. Beehive operates an Islamic Window and is regulated by the Dubai Financial Services Authority. Value Proposition Beehive is a “digitally-native” proposition, i.e. it exclusively leverages its online platform to directly connect creditworthy businesses looking for funding with investors looking to support their growth. For investors, Beehive provides an online platform to find and invest in creditworthy businesses, with as little as AED100, with stated net returns of 10% ARR avg. and monthly payments. Financing for businesses is available from AED 100,000 and is available on repayment terms from 6 to 36 months. All “Beehive Shari’a Compliant” finance requests are processed through UAE’s “DMCC Tradeflow” Commodity Murabaha platform operated by the DMCC. Finance requests that do not comply with the principles of Shari’a are processed as a conventional finance structure and are not accessible to investors who have indicated they would only like to invest in Shari’a-compliant opportunities. Traction to Date Since its launch, Beehive has facilitated funding close to USD 100 million to more than 450 business funding requests and currently has over 10,000 international retail and institutional investors. Beehive has attracted strong investment with a recent round in March 2019 of USD 4 million as part of its Series B round from Riyad Taqnia Fund (RTF). The round took the total investment raised so far by Beehive to USD 15.5 million.64 Roadmap for the Future With its recent investments, the company plans to expand further across GCC and South East Asia. Adel Al-Ateeq, Deputy CEO, Riyad Capital, one of the lead investors in Beehive, has been quoted in media stating, “Beehive has proven itself as a leading fintech pioneer in the region, using innovative digital solutions to improve SME financing accessibility. We’re keen to support their future growth plans which include expansion into Saudi Arabia, bringing new funding options to Saudi businesses.”65 64 MENABytes 2019, Dubai-based P2P SME lending platform Beehive raises $4 million to expand to Bahrain & Saudi, https://www.menabytes.com/beehive-4million/ 65 Ibid. 33
36. CHAPTER 4 Islamic Fintech and Financial Inclusion
37. Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 4 - Islamic Fintech and Financial Inclusion Introduction Financial inclusion is measured by the access to financial services by all sectors of society at an affordable cost .66 Financial services encompass bank accounts, affordable credit, insurance, payments and trade transactions. Research by Kim, Yu, and Hassan has shown that financial inclusion has a direct relationship with economic growth, in which higher financial inclusion will boost economic growth in OIC countries.67 By delivering financial services efficiently to all parts of society, financial inclusion enables people to manage their financial needs, reduces poverty and supports wider growth of economy.68 Financial inclusion is a key pillar of development policy in countries worldwide as an inclusive financial system, and is critical in reducing extreme poverty, boosting shared prosperity, and promoting sustainable inclusive economic growth and development.69 Financial inclusion is at the forefront of the SDGs that were part of the Agenda for Sustainable Development adopted by UN member states in 2015. The SDGs provide a framework to eliminate poverty, achieve zero hunger, provide universal quality education, and other targets within social, economic, and environment areas.70 Fintech’s Role in Global Financial Inclusion Unbanked population dominated by developing countries, especially Muslim populated Out of the world’s population of 7.6 billion, the World Bank estimates that there are 1.7 billion unbanked retail customers and more than 200 million potential micro, small, and medium enterprises (MSME). According to the Global Findex Report, bank account ownership is significantly higher in high-income economies at 94%, in comparison to 37% in developing countries.71 Subsequently, nearly 75% of the world’s unbanked population lives in developing economies, with the highest found in Asia, where India accounts for 20.8%, followed by China at 11.6%72, Indonesia at 5.6%, Pakistan at 5.2%, and Bangladesh at 3.7%. Countries in Africa and Latin Americas trail closely with Nigeria at 2.7%, Mexico at 2.6%, and Brazil at 2.4%73. The unbanked population is dominated by Muslim populated countries that comprise almost 50% of the world’s unbanked population.74 The potential revenue in tapping this unbanked retail and MSME market is estimated to be USD 200 billion.75 66 Buckley, Ross P. and Arner, Douglas W. and Zetzsche, Dirk Andreas, Sustainability, FinTech and Financial Inclusion (May 22, 2019). European Banking Institute Working Paper Series 2019/41. Available at SSRN: https://ssrn.com/abstract=3387359 or http://dx.doi.org/10.2139/ssrn.3387359 67 Dai-Won Kim,Jung-Suk Yu,M. Kabir Hassan, Financial inclusion and economic growth in OIC countries (January 2018). Research in International Business and Finance. Elsevier. 68 Ibid. 69 Alfred Ouma, Shem & Maureen Odongo, Teresa & Were, Maureen. (2017). Mobile financial services and financial inclusion: Is it a boon for savings mobilization?. Review of Development Finance. 70 United Nation Sustainable Development Growth. https://www.un.org/sustainabledevelopment/economic-growth/ 71 World Bank. (2017). Global Findex Report. World Bank. 72 Despite being the second largest economy in the world, its income per capita classifies it as a developing country. 73 Ibid. 74 Pew Research Center. (2011, January 27). The Future of the Global Muslim Population. 75 Ibid. 35
38. 36 Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 4 - Islamic Fintech and Financial Inclusion Fintech and government innovation in policy are enablers to increase financial inclusion Fintech and innovation in government policy is expected to facilitate access to the unbanked population . Each category of fintech should contribute differently in increasing financial inclusion growth, affecting mobile payments to rural areas, employing digital verification to facilitate customer identification, and utilizing crypto assets to reduce transaction costs. In parallel, local governments can develop credit protection programs, introduce requirements to ensure cybersecurity, and invest in digital modes of education. In addition, governments can also create incentives for financial institutions to target the unbanked and support the creation of a financial ecosystem with multiple access points. Finally, in the absence of credit histories, innovative credit assessment methodologies need to be devised to cater to the unbanked.76 In the past few years, most new bank accounts have been opened through fintech According to the World Bank, between 2011-2017, 1.2 billion people opened bank accounts conventionally at the physical location of the financial institution and through fintech. The majority of this progress can be attributed to fintech, with three outstanding examples originating from Kenya, China, and India: 1. Kenya has developed mobile money to enable the unbanked to open savings accounts, utilize mobile payments, and transfer money. 2. China has experienced a substantial reduction in poverty due to digitization of the financial system. 3. India had reached 79% banked population in 2017 by providing a platform for a digitized economy and financial ecosystem.77 Mobile payments have become instrumental in driving financial inclusion In comparison with other types of fintech, mobile payment has made the most significant contribution towards financial inclusion. Fortunately, an estimated two-thirds of the 1.7 billion unbanked own a mobile phone (either an ordinary phone or a smartphone) enabling them to participate Figure 6: Smartphone penetration in select OIC countries Smartphone Penetration in Select OIC Countries 66% Indonesia in mobile payments. 57.5% Malaysia Furthermore, most of the potential Islamic fintech countries are in the top 50 countries of global mobile phone penetration, presenting further opportunity for fintech to access the unbanked. Figure 6 illustrates smartphone penetration for a select sample of OIC countries, with Indonesia exhibiting the highest penetration with 66%, followed 43% Pakistan 37.9% Bangladesh 37% Nigeria 35.1% Iran by Malaysia at 57.5%, and Pakistan at 43% in 2018. Even though the numbers are encouraging, there Egypt 28% remains a large discrepancy with developed countries that average 96% penetration. 76 Ibid. 77 World Bank. (2017). Global Findex Report. World Bank. Source: Newzoo’s Global Mobile Market Report (September 2018), Pew Research Center Global Technology Use 2018-2019 (2018).
39. Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 4 - Islamic Fintech and Financial Inclusion Kenya has proven that having access to mobile financial services leads to increase savings M-PESA is the mobile money transfer and financing service founded in 2007 in Kenya (and some other countries in Africa). M-PESA is accepted nearly everywhere, and transactions can be made with any mobile phone. Other areas of African fintech are also seeing lots of activity – deals to African fintech companies rose from 44% to 63% year-on-year, and disclosed funding was up more than 3 times, from USD 80 million to USD 260 million.78 The empirical results based on Kenya provide evidence regarding the impact of mobile financial services on savings. Users of mobile financial services are more likely to save than those who do not. Besides enhancing the likelihood of saving, the amounts saved are also increased. Both forms of mobile savings are bound to be promoted, i.e. basic  mobile phone  savings stored in the phone, and bank integrated mobile phone savings. Consequently, deepening and expanding the scope of mobile financial savings is essential for promoting and mobilizing savings particularly for the poor and  low-income  earners who have limited access to the formal banking system. The accessibility, convenience, affordability, and safety associated with mobile financial services is a major catalyst in the expansion and growth of mobile financial services.79 Achieving the SDGs will require closing the USD 2.5 trillion annual funding gap According to UNDP, realizing its SDGs requires aggregate investments of USD 5-7 trillion annually until 2030. 80 Developing countries face an annual funding gap of about USD 2.5 trillion in meeting their SDGs.81 As per the IMF, the above-mentioned annual funding gap represents 15% of developing countries’ GDP82 and underlines the additional investment required in health, education, and basic infrastructure (roads, electricity, water pipes, and sanitation services). OECD DAC in 2016 reported that the highest amount raised from official development aid in any one year is USD 142.6 billion, which is less than 10% of the annual spend required to cover the funding gap. Development agenda stated that to achieve the SDGs, governments will have to provide at least 50% of the total funding required in order to successfully achieve the goals.83 Fintech growth could add USD 3.7 trillion to developing countries GDP globally, enough to close the annual funding gap Fintech can help billions of people by increasing growth and adding an estimated USD 3.7 trillion to the GDP of developing countries by 2025, as reported by the McKinsey Global Institute. 84 In order to achieve this, some SDGs can be commercialized, combining profitability with social impact and incentivizing fintech providers to take the lead in increasing financial inclusion. Furthermore, financially inclusive activities can help fulfill several SDGs related to financial independence and close the inequality gap, as suggested by the following fintech utilization case studies. 78 https://app.cbinsights.com/research/africa-fintech-market-map-expert-intelligence 79 Alfred Ouma, Shem & Maureen Odongo, Teresa & Were, Maureen. (2017). Mobile financial services and financial inclusion: Is it a boon for savings mobilization?. Review of Development Finance. 80 UNDP, United Nation Development Program, https://www.undp.org/content/undp/en/home/blog/2017/7/13/What-kind-of-blender-do-we-need-to-financethe-SDGs-/, accessed July 4th 2019. 81 Idem. 82 United Nation, https://www.un.org/press/en/2019/sgsm19546.doc.htm, accessed July 4th 2019. 83 Ibid. 84 McKinsey Global Institute. (2016). How digital finance could boost growth in emerging economies. McKinsey. 37
40. 38 Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 4 - Islamic Fintech and Financial Inclusion Table 6 . Financial inclusion through fintech resolved SDG challenges SDG No Poverty Major Challenges Country Fintech Utilization Case Studies • Illness stops family’s breadwinner from working Brazil Bolsa Familia reduced poverty by 12-18% by distributing benefits through an electronic payment card. 85 • Government’s aid program increases fraud and theft, and benefits the wrong beneficiaries • Absence of a bank account means limited savings and no credit history • Agricultural risks are difficult to manage by farmers Zero Hunger • Cash based payments offer low return for farmers • Government aid for the undernourished does not reach certain locations or communities India India Stack is a technology developed to connect the government, businesses, developers, and startups through open APIs. This enables them to collaborate and work towards creating a paperless and cashless culture. India Stack has facilitated the creation of a unique identification system named ‘Aadhaar’. This creates a unique digital ID for each beneficiary which has allowed the government to deliver accurate payments for unemployment benefits and subsidies. Digital verification using iris, face or fingerprint scans, ensure the benefits reach the right person anywhere within the country. As per July 2019, India Stack has authenticated 2.98 billion Aadhaar, performed 150 million e-KYC, and connected to 339 million bank accounts. 86 Jordan Fintech is used by humanitarian and financial aid donors for Syrian conflict victims by digitally registering the refugees with EyePay, an application released by the company irisguard. EyePay operates using blockchain technology, Ethereum, to support financial inclusion of Syrian refugees in Jordan by processing supermarket and ATM transactions in real-time. The registration uses the refugee’s iris as their digital identity to help them manage their cash. In 2008, irisguard was the first company to install an iris-enabled cash machine in Cairo Amman Bank’s ATM in Jordan. This allows both refugees and other banking customers to use only their iris to access cash without the traditional card and PIN number. Currently, irisguard’s technology has distributed over USD half a billion, integrating individuals and families into the financial system and reducing poverty. 87 More than 2.3 million Syrian refugees in the region are registered in the system so far. 88 Senegal M-Louma enabled farmers to sell directly to wholesalers with better pricing, leading to higher income for farmers. Good Health and Wellbeing 85 86 87 88 • Expensive healthcare access for many households Bangladesh MAMA uses mobile payments to incentivize health agents to register pregnant mothers with mHealth, a digital platform, to receive vital health information. • Limited number of medical facilities and personnel in rural areas Kenya TM Tiba has facilitated health payment, savings, and financing for one million people since 2016. Better than Cash Alliance. (2018). Igniting SDG Progress Through Digital Financial Inclusion. UNSGSA India Stack Official Website, https://indiastack.org/, July 4th 2019. https://www.irisguard.com/node/16 https://reliefweb.int/report/jordan/ifc-irisguard-support-financial-inclusion-and-syrian-refugees-jordan
41. Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 4 - Islamic Fintech and Financial Inclusion SDG Quality Education Gender Equality Major Challenges Country Fintech Utilization Case Studies • Cash payment means teachers must lose teaching time due to collection Kenya M-PESA is the mobile money transferring and financing service founded in 2007 in Kenya (and some other countries in Africa). M-PESA is accepted nearly everywhere, and transactions can be made with any mobile phone. Payment to teachers can be received without expending time for cash payment collection. • Cost of education has excluded low-income households from obtaining quality education Uganda Flexible mobile wallet loans enable households to pay for education. • Women are more likely to be excluded from policymakers and financial institutions’ agenda due to lack of data Dominican Republic A revised credit-scoring model that uses data analytics has changed the status of female low-income earners from rejected to creditworthy. • Water suppliers experiencing difficulties in serving rural areas due to slow and insecure payment collections Ghana SafeWater Network using smart meters for billing and digital payment for collections have enabled more payments to be collected. This has allowed clean water to be provided to a wider area. • 1 out of 4 rural households does not have access to electricity Kenya M-Kopa provides ‘pay-as-you-go’ solar powered electricity to reach rural areas. Payment is made using mobile payment. • Majority of payments made by SMEs are in cash, leading to higher costs Indonesia Go-Jek distributed digital payments to its drivers and partner SMEs, with amounts reaching USD 700 million annually, providing decent incomes to its drivers and SME partners, while also contributing to economic growth. Clean Water and Sanitation Affordable and Clean Energy Decent Work and Economic Growth 39
42. 40 Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 4 - Islamic Fintech and Financial Inclusion SDG Major Challenges Country Fintech Utilization Case Studies • SMEs have limited access to financing due to lack of credit history Africa Kopo has channeled USD 4 million within 3 years to SMEs. Rather than use documents or credit history, Kopo uses transaction history to assess credit scoring. • Almost one-third of developing countries’ urban population lives in inadequate conditions Indonesia Kitabisa.com started in 2013 in Jakarta as a crowd-endowment platform that involves mass funding for social or humanitarian causes. In 2019, Kitabisa.com had over 2.5 million registered accounts named ‘Orang Baik’ (‘good people’ – a term used for those who help others through Kitabisa.com). The platform has distributed more than USD 54 million through nearly 28,000 posted campaigns. Now, kitabisa.com also distributes Islamic endowment funds like Zakat to enable the poor in improving their living conditions. The app is web-based and accessible through mobile phones and desktop computers. Although it helps social connectivity in certain ways, its impact on e-KYC and digital identity requires further study. 89 • Annual economic loss of USD 250 – 300 billion caused by natural disasters due to climate change China Ant Financial provides environmentally friendly data to its users. Greater ‘green’ awareness contributed to a reduction in carbon emissions by 150,000 tonnes. • Cash payment causing high transaction costs to the government, and increasing potential leakages in government expenditure Mexico Government expenditure has decreased by USD 1.27 billion annually by digitizing and adopting central payment. 90 Industry, Innovation, and Infrastructure Sustainable Cities and Communities Climate Action Peace, Justice and Strong Institutions 89 Homepage www.kitabisa.com, accessed July 1st 2019. 90 Better than Cash Alliance. (2018). Igniting SDG Progress Through Digital Financial Inclusion. UNSGSA.
43. Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 4 - Islamic Fintech and Financial Inclusion Islamic Fintech and Islamic Social Finance Islamic fintech caters to both voluntary and involuntary unbanked populations in OIC countries While many challenges of the SDGs could be resolved through fintech and financial inclusion , there remains a significant proportion of people that voluntarily exclude themselves from financial services due to religious and other reasons. People that avoid bank accounts due to religious reasons in OIC countries can be provided usury-free financial transactions based on risk-sharing. The latter concept requires that the transaction risk is borne by both entrepreneurs and IFIs, encouraging a partnership-based approach that develops robust businesses and eventually leads to an increase in the wealth of related individuals and SMEs. Furthermore, as highlighted in Chapter 3, the Islamic principle of charitable contribution through Zakat, Sadaqah, and Waqf distributes income to the unbanked and poor, enabling them to access financial services.91 Financial inclusion as a result of Shari’a-compliant financial services and the inherent Islamic social finance could enable various related SDGs to be achieved. Table 7. Islamic fintech and financial exclusion Reasons for being unbanked Involuntarily unbanked? Islamic fintech potentially able to resolve? Lack of money Lack of proper documentation Distance to nearest financial institution Other family member already has a bank account Lack of trust in the financial system Religious reasons Islamic microfinance is an instrument to effectively alleviate poverty in OIC countries Microfinance involves short-term financing with tenures of less than 12 months. The amount would typically be less than USD 500 and have a relatively high interest rate or required return due to the perceived higher risk. Furthermore, there are minimal document requirements and the targeted customer base is one that is usually ignored by banks, such as individuals who want to start micro businesses, as well as micro entrepreneurs looking for funding to grow into a small business. Unfortunately, in OIC member countries, religious reasons are a potential impediment to the use of microfinance. 91 MIFC. (2014). Global Financial Inclusion Islamic Finance Meets the Challenge. Bank Negara Malaysia. 41
44. 42 Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 4 - Islamic Fintech and Financial Inclusion Islamic microfinance that is Shari ’a-compliant can be utilized to increase financial inclusion. The principal contracts on which this can be used include Qard-ul-Hasan which would be akin to charity; Murabaha which would require buying and selling a commodity at a mark-up or profit; profit and risk sharing models such as Mudaraba or Musharaka where the investor would be exposed to the credit and market risks of the transaction along with the entrepreneur; Salam that would provide funding for the acquisition of a commodity through its forward sale; Istisn’a which would provide funding for manufacturing, or Waqf. Globally, Islamic microfinance has grown from 500,000 customers in 2007 to 1.3 million in 2013.92 Islamic microfinance remains focused in Bangladesh, Afghanistan and Indonesia where 80% of origination has occurred with opportunities for growth in the Levant and North Africa, where 20-40% of potential customers (particularly in Jordan, Syria and Algeria) have cited religious reasons for abstaining from availing microfinance.93 Likewise, Islamic microfinance in Asia is anticipated to grow along with increased demand for Shari’a-compliant financing. Fintech to support Zakat, Sadaqah and Waqf in boosting financial inclusion People falling below the poverty line (i.e. those who live on less than USD 1.9 per day as defined by the UN) will not have enough money to save, which prevents them from opening a bank account. Islamic finance can pull the disadvantaged into a social safety net through Zakat, Sadaqah, and Waqf to ensure that these people are able to fulfil their daily needs. The aim is to lift people from poverty to become self-sustaining where they are able to save and invest, and finally become the contributors of Zakat, Sadaqah, and Waqf. One of the challenges in social funding is the collection and channeling of collected funds as cash is prone to fraud and embezzlement. The best alternative is to direct the payment of charitable donations or government aid through bank accounts or mobile payment which may also be supported by blockchain technology. This will reduce the incidence of fraud, while improving financial inclusion. Fintech can provide integrated solutions to the entire Zakat value chain encompassing the collection, distribution, and intermediation of funds to the improved identification of beneficiaries. Technology can also facilitate bringing more donors to the network. Indonesia provides an effective example where the National Zakat Board (BAZNAS) launched Sobatku to enable collections and payments through a smartphone app. Online marketplace Bukalapak also developed an integrated gateway (‘BukaZakat’) for endowment, philanthropy, and Zakat payment. Additionally, several Zakat related agencies have partnered with fintech specializing in payments to provide channels for collections and payments.94 The adoption of fintech in Islamic social finance potentially increases financial inclusion as it necessitates the opening of bank accounts to access the funds. However, most beneficiaries usually conduct one transaction per period to withdraw the entire funds which are then spent to meet their daily needs. Islamic finance can be utilized to make these beneficiaries of donations self-sustaining, and eventually contribute towards lifting others out of poverty. 92 Karim, N., Tarazi, M., & Reille, X. (2008). Islamic Microfinance: An Emerging Market Niche. CGAP. 93 Ibid. 94 In Indonesia, Dompet Dhuafa has partnered with payment fintech OVO, Baznas with DANA, and Lazismu with GoPay.
45. Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 4 - Islamic Fintech and Financial Inclusion Fintech enabling Islamic finance to increase financial inclusion and contributing to fulfilling SDGs Islamic finance needs to leverage fintech to improve credit scoring , reaching more secluded locations, cutting costs for both financier and borrower, channeling funds to the right segment, and improving compliance regulation. Blossom Finance issuing small-sized, blockchain-based smart sukuk is one example of fintech-based Islamic finance. Other opportunities to leverage fintech for Islamic finance are provided in the table below. Table 8. Opportunities to leverage fintech for Islamic finance Islamic finance technology enablers AI and Data Analytics Islamic finance opportunities to increase financial inclusion Data analytics can be utilized to assess creditworthiness despite very limited credit histories in developing countries. Data points could be collected from different sources such as internet online activities, social media interaction, application usage behavior, call activities, phone camera, and location tagging. AI could then analyze the data using predictive analytic algorithms to decide on creditworthiness, amount of financing, and repayment maturity. Mobile Payment, P2P Finance, and Open Banking Payments using apps in smartphones or USSD in ordinary feature phones are able to reach even the most isolated areas, provided they have phone or internet connectivity. Complemented by P2P financing, everyone in the community could fund viable individual or SME candidates. Open banking supports the end-user experience by enabling customers of mobile payments and P2P financing companies to access data concerning their financial institutions directly without opening banking apps or accessing the bank’s website. Transferring money or making payments can be directly performed through the app without using any bank-based platform. The potential impact in improving the financial system’s accessibility to remotely located populations can be immense. Distributed Ledgers Every financing transaction can be recorded on a blockchain ledger for verification, and security purposes. This also creates a record of all transactions and improves predictive capabilities in relation to repayments. Ultimately this enables risk to be better priced in terms of the financing provided and its related fees. Timely repayments will increase credit scores which in turn will result in lower return requirements and processing fees. Cloud Cloud technology will enable financial institutions or fintech companies offering Islamic finance to run their operations using cloud-based software managed by third parties without the need to have on-site servers. This will enable startups to immediately commence operations without incurring the cost of creating a technology platform. Cybersecurity Fintech advancement requires robust cybersecurity technology to manage the risk of cybercrime such as data breaches, identity theft, fraudulent transactions, and server crashes. Cybersecurity also supports Islamic finance providers to comply with regulations relating to sanctions, AML, CFT, bribery, and corruption. 43
46. 44 Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 4 - Islamic Fintech and Financial Inclusion Case Studies Case Study 1 Blossom Finance – Shari’a-compliant microfinancing business to issue the first blockchain-based sukuk Founding Principles Established in the US, Blossom Finance offers bitcoin-based riba-free microfinance to the US Muslim community. Blossom Finance has moved to Indonesia to be within close proximity to access potentially one of the largest Muslim markets. Value Proposition Obtain funding from global investors and invest in small businesses and expect a profit margin of 6-8%%, with 20:80 profit sharing with the investor. Blossom Finance does not invest in businesses that run margin trading or alcohol, and the investment is based on the profit-sharing concept of “Musharaka”. Microfinance institutions are rigorously evaluated by Blossom Finance, and only high-scoring institutions are eligible to raise funds through Smart Sukuk. The invested funds are invested in a pool of creditworthy small businesses, and no funds are invested directly by Blossom Finance. 95 Traction to Date The company moved to Indonesia in 2015 after considering that 80%of the population aged 15 and above does not have a bank account, while the majority are Muslim. It has issued Smart Sukuk, which is a small-sized, asset-backed Islamic bond to help Islamic microfinance co-operatives in Indonesia (known locally as ‘Baitul Mal Wat Tamwil’ or BMT) channel funding to small businesses or micro entrepreneurs. The transactions utilize Ethereum blockchain technology which eliminates the need for conventional banks to make payment, reducing costs, increasing transparency and enhancing the security of the transaction. 96 Roadmap for the Future Socializing sukuk as a funding vehicle for Indonesian BMT nationwide. Then expand the Smart Sukuk funding mechanism across Asian retail banks, unit-linked equity schemes, multi-finance, and stand-alone development banks globally. Leveraging blockchain technology to “tokenize” real assets and sell the assets on a web-based platform to cross-border retail customers. Target is to become a USD 100 billion company. Case Study 2 LaunchGood – Crowdfunding platform for Muslims Founding Principles Beliefs Muslims value should be shared with the world, and LaunchGood provides an ecosystem for those values to flourish and manifest. Value Proposition Crowfunding platform providing ecosystem and network for Muslims. It raised a small amount of funds from large numbers of individuals or organizations and seeks to improve access to finance for individuals and SMEs which previously have little or no credit history. In addition to providing a crowdfunding platform for Muslims, LaunchGood also administers dedicated coaching, offline donations, and flexibility in changing campaigns. Traction to Date LaunchGood went live in October 2013 and since then has raised more than USD 93 million in crowdfunding for over 8,360 projects across 133 countries by October 2019. Roadmap for the Future Over the next 5 years, LaunchGood aims to expand with more digital platforms – introducing a social media network, hiring platform, etc. – in addition to a global collection of co-working spaces, physical communities and events that bring people together 95 Freischlad, N. (2015, April 29). Blossom offers Islamic micro-financing in Indonesia using Bitcoin. Retrieved June 30, 2019, from https://www.techinasia.com/ blossom-offers-islamic-microfinancing-indonesia-bitcoin 96 Blossom Finance. (2018, May 7). Islamic Finance Upgraded: Smarter Sukuk Using Blockchain. Retrieved June 2019, 30, from https://blossomfinance.com/press/ islamic-finance-upgraded-smarter-sukuk-using-blockchain
47. Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 4 - Islamic Fintech and Financial Inclusion Case Study 3 Tez – Endowment-based fund where donors can select microentrepreneurs of their choice Founding Principles According to the World Bank, more than 50% of Pakistan’s population is unbanked. Many use a range of casual financial instruments, but these can be unreliable, costly, and inefficient. Any small variation in income could affect their capacity to fulfill daily basic needs such as foodstuff and clothing. Tez seeks to incorporate these unbanked masses into mainstream finance by leveraging current smartphone penetration. 97 Value Proposition Offering a smartphone app as a single platform to deliver seamless financial services that include microfinancing, health and life insurance, and investment. Traction to Date Has won the SDG award and received seed funding of USD 1.1 million from Omidyar Network. Currently financing through a partner bank, but preparing to provide financing directly without intermediaries. Case Study 4 Angsur – providing microfinance to students, and supporting social needs Founding Principles More than half the population in Indonesia is unbanked98 creating a target market of more than 100 million Muslims. Most banking services are concentrated in Java and Bali, the most populous regions, while there is little financial infrastructure in other parts of the country. Angsur aims to tap the unbanked population by providing Shari’a-compliant financing to undergraduate students without the requirement of providing collateral. Value Proposition Rather than only analyzing the credit history of a particular student, Angsur gathers social media data and assesses creditworthiness based on digital presence. Their assessment is based on the substantial data available from the digital activity of this demographic group. Murabaha contract is adopted to provide the financing, where Angsur principally buys the intended goods, and sells these to the students at a markup or profit. The sale price can be paid in installments of 1 to 12 months according to the borrower’s preferences, with usually more than 10% advance payment. Education on the Angsur microfinance benefit is performed by other students called Angsur Student Partners. Traction to Date Angsur also contributes socially by donating 2.5% of their sales to the pool in less developed areas. Providing Sadaqah in this manner is popular among Angsur’s beneficiaries. 99 97 Tez Financial Service. (2018, Oct 19). Tez Financial Services Gets $1.1 Million in Seed Funding Led by Omidyar Network. Retrieved Jul 9, 2019, from https://www. tezfinancialservices.pk/press/ 98 Firmansyah, Hafiz Budi and Ramdani, Ahmad Luky, The Role of Islamic Financial Technology (FinTech) Start-Up in Improving Financial Inclusion in Indonesia Case: Angsur (May 27, 2018). 3rd International Conference of Integrated Intellectual Community (ICONIC) 2018. Available at SSRN: https://ssrn.com/abstract=3194546 or http://dx.doi.org/10.2139/ssrn.3194546 99 Ibid. 45
48. CHAPTER 5 Roadmap and Considerations
49. Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 5 - Roadmap and Considerations Introduction Modern Islamic finance started in the 1960s from offering primarily retail banking and has since grown significantly . With the development of fintech companies, key stakeholders in Islamic finance must collaborate to remain competitive and fulfill their social and business responsibilities. Islamic finance and Islamic social finance could serve their respective customers by leveraging technology, and eventually achieving the related SDGs. However, there are challenges related to regulations, investments, and payment gateway regulations amongst others to overcome. The Potential Opportunities The earlier chapters have highlighted the current landscape of Islamic fintech globally and gaps visa-vis global fintech developments. The earlier chapters have also highlighted how Islamic finance, while fastgrowing, is still limited in its coverage within its core audiences having a bigger gap in terms of financial inclusion compared to developed markets. Following is a synthesis of the findings so far that translate to the following three key opportunity areas that Islamic fintech can address: 1. Leap-frog Islamic financial services reach and impact Islamic fintech has the ability to extend the reach of Islamic finance within its core markets and beyond. The following would be the key Islamic fintech solution areas of opportunity: • Catering to the digital-demographic: Expansion for IFIs should focus on building-out digital-only banking and capital markets rather than more ‘brick and mortar’ branches to leverage the young techsavvy and high mobile using Islamic finance user base. Adopting services such as mobile payment and P2P finance while leveraging distributed ledger technology and crypto assets will increase operational efficiency and customer experience. • Leveraging AI/data analytics: Targeting the right customer base using data analytics and improving the user’s experience through AI should further catalyze acceptance of Islamic financial services. This will be particularly valuable in Islamic wealth-management expansion. • P2P lending/trade financing: Islamic P2P and related fintech platforms are poised to further facilitate cross-border trade and financing. Incumbent IFIs should be looking into investing in this opportunity given the scale of resources and regulatory experience needed. • Insure-tech: Takaful-tech can be leveraged to provide coverage with low-cost premia against unforeseen adversities that may arise from the incapacitation of the family’s income earner. 47
50. 48 Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 5 - Roadmap and Considerations • Incumbent/Startup/Tech collaboration: Islamic fintech is ripe for incumbents, startups, and big tech companies to start developing fintech services collaboratively. Moreover, consolidation between challengers and incumbents will expedite innovation and market penetration. Challengers that are collaborative and open to risk-taking will find allies in incumbents with large customer databases and well-established systems. • Open banking architectures: Islamic banks can adopt open banking architectures to enable fintech to directly access banking platforms and offer complementary services. Concurrently, by employing Open-X technology, fintech could provide services from IFIs’ platforms as if they were their own. 2. Address significant financial inclusion gaps within core markets: • SME and unbanked retail solutions: Shari’a-compliant P2P lending, mobile-driven simple banking solutions, insuretech, and other fintech based Shari’a-compliant services will address some of the reasons why people are not using financial services today. This includes the reduction in cost of services. • Payment solution innovations: Shari’a-compliant payment innovation should be one of the main focus areas for both IFIs and challengers looking to improve market expansion and financial inclusion as this is the main fintech technology besides P2P that has incentivized the unbanked to open bank accounts. 3. Deliver Islamic social financing to support global SDGs and needs: • Islamic social fintech to deliver on wider global social needs/SDGs: Islamic fintech is poised to tap the multi-billion-dollar Islamic social financing pool to meet wider global social funding needs as defined by the 17 SDGs of the 2030 Agenda for Sustainable Development. Multi-laterals such as UNHCR, UNDP and others are already taking advantage of this opportunity.
51. Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 5 - Roadmap and Considerations Roadmap per Key Stakeholders Islamic fintech is well-placed to drive the Islamic finance industry to its next phase of evolution and opportunity . Below is a high-level roadmap for the Islamic fintech development for different stakeholders. Governments and regulators balancing customer protection and fintech growth100 Governments have now begun to play an active role in the development of fintech, enabling startups to grow and more mature providers to offer financial services. Governments in Malaysia, Indonesia, UAE, and Bahrain have initiated incubators and accelerators. However, as fintech’s impact grows, governments are taking measures to prevent misuse. A balance must be found between regulation required for consumer protection, and preserving the growth of fintech. Governments need to be one step ahead to promote a healthy fintech ecosystem Governments and regulators play a crucial role in fostering a healthy fintech ecosystem. Proactive regulation is imperative for fintech’s sustained growth with regulators in Bahrain, the UAE, and Saudi Arabia providing good examples of this approach. A hospitable environment for fintech startups has been created in these jurisdictions through initiatives such as regulatory sandboxes that enable new companies to test their technologies in the marketplace while still ensuring sufficient consumer protection. In contrast, requirements like ISO certifications in Indonesia for fintech companies do not offer any significant benefits to customers but are adding to the cost of offering financial services. Restrictions on cryptocurrencies to register with only one exchange also hinders their growth by reducing the liquidity provided by being registered with multiple exchanges. Investors should target Islamic fintech to tap into large Muslim market In 2018, an estimated USD 504 million worth of M&A transactions occurred within Islamic finance with very little Islamic fintech related investments noted. Relative to a fast growing global fintech universe, Islamic fintech has seen only a miniscule amount of investments.101 While this report has not identified Islamic fintech VC/PE investments, it is a fraction of the USD 38.1 billion invested globally in all of 2017. IFIs should be actively looking to acquire developing Islamic fintechs to boost their operations and time-to-market. They would also benefit from separately incubating such acquisitions before full integration within their overall operations. IFIs could have two alternatives in reducing development cost and to expedite technology adoption: merge with or acquire relevant Islamic fintech companies, or form partnerships with them. Acquiring startups can add services that IFIs have not been able to provide, and access previously unbanked customer segments. If IFIs can effectively identify the gap between current products or services and 100 The complete interviews are in the appendix. Except for face-to-face interview with the CEO of Blossom Finance, all responses were gathered through email interviews. 101 DinarStandard 2019, State of the Global Islamic Economy Report 2019/20 49
52. 50 Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 5 - Roadmap and Considerations a potential fintech provider that effectively addresses this deficit , an acquisition can be considered. However, acquisitions of technology companies by financial institutions have often floundered on an inability to integrate different business cultures. The IFI may also acquire an equity stake in a fintech company, where board representation should enable strategic direction to be provided and ensure that all interests are aligned. Risks of Islamic Fintech and Potential Mitigations Risks: Convenience in borrowing could lead to being trapped in debt Mobile, Shari’a-compliant P2P financing enables financial inclusion by accessing unbanked populations regardless of the reasons that had caused the customers’ absence. However, the relatively easy-to-obtain financing can potentially encourage people to borrow more than required and accumulate excess debt. Instead of financing micro or small businesses, the end result can just be increased consumerism fueled by debt. New methods of scams and fraud could emerge P2P finance offers convenience where credit approvals can be granted within minutes based upon personal data and telephone numbers. However, the fees charged are significantly higher in comparison with IFI financing. Moreover, in the case of default, financiers may resort to aggressive measures to coerce repayment. Unsuspecting donors may contribute towards fake ventures through crowdfunding. Once collected, the funds may be used for unrelated causes. Faster funds collection means faster scamming. Lack of financial infrastructure could result in unbanked populations In the US, prospective customers are able to open bank or investment accounts simply by entering specific personal information which is automatically checked against government records. If all the details are accurate and valid, the customer’s account is opened almost instantaneously. The lack of such financial infrastructure in many developing countries may make account opening quite cumbersome and act as a deterrent to many people. AI could lead customers to acquire products or services they do not need due to a lack of understanding Emergence of AI in the financial services industry where, for example, robo-advisory may be employed in wealth management, could potentially advise the wrong products or services as a result of the algorithm’s limitations.
53. Leveraging Islamic Fintech to Improve Financial Inclusion Chapter 5 - Roadmap and Considerations Stringent fintech regulations to stifle growth IFIs must embrace the fact that many governments are now starting to regulate fintech due to its growing size and significance along with the potential threats from cybercrime , terrorism, and money laundering. Compliance with additional regulation can be expensive and time consuming for IFIs who might not possess the requisite knowledge on these issues. Consequently, IFIs could partner with regtech companies or support a regtech startup to assist in complying with regulatory requirements. There are several other potential risks: • Data analytics could potentially advise IFIs to only provide services to the most profitable customers, excluding all others. • IFIs’ risk management could be obsolete and need upgrading to avoid mis-selling and customer exploitation. • Shortage of Islamic scholars that can issue pronouncements (fatawa) on complex products due to a knowledge gap in relation to technology. Potential mitigations: • Hiring the right talent is critical to ensure Shari’a compliance. It is imperative that the company’s CEO attaches the same weight to ensuring Shari’a compliance as he/she does to product development and innovation.102 • Islamic fintech should adhere to the spirit of Shari’a-compliant finance by eschewing products that simply accumulate debt by providing easy credit. Islamic microfinance co-operatives (BMT) in Indonesia, for example, will only provide financing to genuine micro and small businesses. • The spirit of Shari’a should be embedded in the products and services and should not just be cosmetic in nature. Providing financing using Qard-ul-Hasan should not be accompanied by relatively high processing fees that increase transaction costs for the customer.103 • Having robust risk management policies and procedures is critical, especially for fintech startups given their wide reach. Technology is the key that allows companies to access sizable segments of underserved consumers, and it should be used effectively to create holistic KYC, AML, and risk management frameworks and controls.104 This includes creating digital identities for unbanked populations. • Key stakeholders of Islamic fintech including regulators, incumbents, and challengers must work with Shari’a scholars to align their vision and knowledge. 102 Information gathered from Interview with Blossom Finance. 103 Ibid. 104 Information gathered from Interview with Wahed Invest. 51
54. Appendices
55. Leveraging Islamic Fintech to Improve Financial Inclusion Appendix 1 - Interviews APPENDIX 1 Interviews Interview with Blossom Finance Note : Below responses are the summary of a face-to-face interview. The responses are not reproduced verbatim but concluded from the interview. Q: What challenges did you face early on, in particular when launching Blossom Finance? A: Lack of awareness in the Muslim community in the US leads to avoidance of financial services. Q: Which technological trend or development would Islamic fintech entrepreneurs need to look out for in the next 3-5 years? A: We will see increasing retail participation and cross border transactions, especially leveraging Q: Could you explain briefly what is being offered by Blossom Finance? A: Blossom Finance is not a P2P platform, we only blockchain. Tokenization will be the future trend. Every asset has the potential to be tokenized and traded at a fraction of total value. provide funding for institutions, with the amount of USD 100 thousand to 3 million. Additionally, banks and other Islamic finance players will go digital, future expansion will be for branchless Baitul Mal Wat Tamweel (BMT, Islamic cooperatives banking and branchless finance. While ‘brick and in Indonesia) could raise funds from overly liquid mortar’ banks will still be around, expansion will no institutions without paying the high “listing” cost. longer build fully physical new branches as it is today. The BMT association will rigorously filter and test creditworthiness of BMTs eligible to receive funds. Only BMTs with high scores are eligible to be financed and only the top rating qualifies for eligibility. Q: What is your plan with the current company for the next 5 years, in terms of product suite and/or expansion? A: Sukuk as a funding vehicle for BMTs. Creating a Q: In your view, what has been done successfully by governments and/or regulators in supporting Islamic fintech? What else should they do in the future? A: The US has supported fintech by allowing platforms to raise funds. While the Indonesian government has a regulation pan-Asian retail bank, unit-linked equity schemes, for BMT or microfinance to operate, the central unit finance, and a stand-alone development bank. bank also has a special program for SMEs, which Blockchain is central, tokenizing assets that are sold supports Blossom in providing financing. Recently on a web-based platform. Target is to become USD the Indonesian Financial Services Authority (OJK) 100 billion valued company. passed legislation on cryptocurrencies and at the 53
56. 54 Leveraging Islamic Fintech to Improve Financial Inclusion Appendix 1 - Interviews end of 2018 formed a body named National Islamic Financial Committee (KNKS) to harmonize Islamic finance initiatives nationwide. Q: In your view, what are the risks of financial inclusion through Islamic fintech and how would you mitigate such risks? A: Riba and debt is either haram or strongly Q: What can the government do additionally? A: Requirements such as ISO certifications are not discouraged in Shari’a. Islamic finance should offering benefits to consumers or safer transactions, Islamic fintech should avoid becoming another loan can be eschewed as they increase startup costs for shark or induce people to accumulate unnecessary fintech. debt. Islamic microfinance (BMT) in Indonesia, for emphasize equity-based transactions over debt. example, will only provide financing to genuine It is easier to open a bank rather than to start a micro and small business, and may even advise cryptocurrency. The law requires that cryptocurrencies customers how to lower the operating costs of micro can only sign up at one exchange, due to arbitrage. businesses. This law should be removed as it restricts liquidity in these currencies. Hiring the right talent that is eager to follow Shari’a law could enable its spirit to be infused not only in Q: What challenges need to be addressed by IFIs if they want to remain competitive? A: Muslims should obtain their financial services the product and services, but pervade the culture through IFIs if they are able to provide the same user be charged to raise costs for the customer. of the fintech. For instance, if financing is provided using Qard-ul-Hasan, relatively high fees should not experience and pricing as the conventional financial institutions. CEOs should attach the same importance to Shari’a compliance as they do to launching new products. To offer the same user experience, bigger IFIs should This responsibility should not just be delegated form partnerships with Islamic fintech companies, to the Shari’a Board or compliance team and then and leverage their technology and expertise. This ignored. is a better alternative than acquiring a fintech company. Acquiring fintech companies could take a considerable amount of time, effort, and cost, while having a high probability of failure. If IFIs are still adamant to acquire, the fintech company should be allowed to operate as a startup and innovate independently. A better alternative may be to acquire an equity stake in an Islamic fintech and provide direction through board representation. Q: Why do you consider investors should invest more in Islamic fintech? A: Muslims comprise 1 out of every 4 people in the world. If 60% of them represent a new market, the potential size is significant. Investors should not forego the potential revenue from this huge market while the underserved and unbanked Muslims should also be tapped.
57. Leveraging Islamic Fintech to Improve Financial Inclusion Appendix 1 - Interviews Interview with Wahed Invest Q : What challenges did you face early on, in particular when launching Wahed Invest? A: Wahed’s mission is to make halal investing accessible and efficient. These two words implicate Q: Which technological trend or development would Islamic fintech entrepreneurs need to look out for in the next 3-5 years? A: Inclusivity, accessibility, and efficiency are three a wide range of topics in the world of investment key items that are needed for this space to take management – a product that is available to everyone, off, whether that’s Islamic investing, insurance, pricing that is simple, clear and competitive, no or any other sector. A recent survey we ran in hidden fees, seamless onboarding, no lock-in period, the UK showed that over half of British Muslims an intuitive interface, etc. Launching a product that feel excluded by mainstream financial services. encompasses all the above was not an easy task. People love to throw around buzzwords like AI, There were a lot of moving pieces that we had to machine earning, IoT, among others, as they have juggle and we’re really proud to have built what has been without a doubt a key pillar in boosting the become a global robo-advisor. All departments had fintech space into the spotlight. But to be able to to be in sync to ensure that execution is flawless, so leverage these technologies properly, companies clear communication between teams and overall first need to ensure that they are user-centric and project management was crucial. product-focused. There is a lot of opportunity in different sectors but following and understanding One other aspect that we really focus on is education. that We made sure that we provided and continue to needed to allow for more advanced technological provide our users with the right educational material developments. philosophy behind building products is not just about Wahed, but about investing in general. A lot of our users are first-time investors, so raising awareness about the benefits of investing is of utmost importance. Q: What is your plan with the current company for the next 5 years, especially in terms of product suite and/or expansion? A: The halal and ethical investing industry have Q: What future opportunities do you see in the Islamic fintech industry as a whole? In which areas do you see the most promising growth opportunities? A: We firmly believe in our mission to bring awareness to personal finance and investing. More than 80% of our users are either new to investing or not very familiar with investing. This alludes to the been expanding rapidly and we’re excited to play a current landscape’s ripe ecosystem. We’re seeing an major role in this advancement. We are working on increasing focus on retirement and family planning localizing our product offerings in our key markets based on several surveys we’ve previously run. In while also adding more tools that will allow clients the US and UK, it is more or less the norm to have to invest with more flexibility. This added depth your own retirement account which you contribute to will make saving easier, and planning and reaching regularly, and this trend is now moving east. goals a little more fun. At the same time, we’ve been space! The end goal for the company though, is Q: In your view, what are some of the challenges for Islamic fintech to increase financial inclusion? A: There are numerous factors that impact financial to become the one-stop shop for overall Shari’a- inclusion, aside from a company’s product features. compliant money management. I’ll share an example from our experience in the US working on creating our own investment products and vehicles that could be a lot more efficient than traditional mutual funds, keep an eye out for this 55
58. 56 Leveraging Islamic Fintech to Improve Financial Inclusion Appendix 1 - Interviews and UK , which explains how governments play a vital examples stem from a cluster of issues that need to role in this journey of financial inclusion. In the US, be fundamentally reviewed by incumbents, which users are able to open bank accounts or investment usually takes some time. accounts simply by entering specific personal Not all countries have this infrastructure set-up so Q: In your view, what are the risks of financial inclusion through Islamic fintech and how would you mitigate these risks? A: Having solid risk management systems and naturally, account opening is not always as seamless. policies is more important now than ever, especially Individuals in rural areas in developing countries may for also not even have the right supporting documents, Technology is the key that allows companies to which partially explains the high percentage of access sizable segments of underserved consumers, unbanked users typically found in these areas. and it can and should be used the same way to information which is automatically checked against government records. If all the details are accurate and valid, the user’s account is opened almost instantly. fintech startups given their wide reach. create holistic KYC, AML, and risk management Q: In markets or countries where Wahed Invest has a footprint, in your view, what has been done successfully by the government and/or regulators in supporting Islamic fintech? What else should they do in the future? A: Governments and regulators play a crucial frameworks and controls. role in fostering a healthy fintech ecosystem as a journey will not only help users feel more secure but whole. We view them as partners, and this mindset will also ensure that only the right users are signing allows us to be nimble. Since most fintech players up without ruining the experience for others, which are introducing brand new solutions to the market, is the ultimate goal. naturally the regulators need to not only keep the same pace but also be one step ahead to be able to advise the companies efficiently. Being lean and agile, startups move fast, and regulators who behave similarly will benefit from developing a healthy and leading ecosystem. The formula that they seem to follow is having the right amount of red tape to protect the user and balancing it with clear policies and processes to allow startups to go to market effectively. The number of high-growth fintech startups in the West is a testament to that. Q: What challenges need to be addressed by IFIs if they want to remain competitive? A: They need to be efficient. Users expect similar services, experience, and pricing from incumbents now. For example, if you need to update your email some banks in the MENA region still force you to go to a branch or ATM machine, and even then, the change will take a few business days to get implemented. On the contrary, you can open an account with Wahed literally in minutes. These small Translating these policies into core product features (whether consumer facing or internal tooling) as opposed to viewing it as an afterthought is critical to be able to handle new users at scale. Ensuring that these features smoothly fit into the user onboarding
59. Leveraging Islamic Fintech to Improve Financial Inclusion Appendix 1 - Interviews Interview with LaunchGood Q : What challenges did you face early on, in particular prior to launching LaunchGood in 2013? A: It was a real struggle to just build the website. payments platform. There’s a lot of discrimination against Muslims in the banking industry, and it affects countless charities and companies – including LaunchGood! Not being a coder, I was dependent on contracting out developers to do the work – but we had little cash and less experience managing such a process. We ended up going with some guys in Pakistan who initially gave us a 3-month timeline – but it ended up taking 18 months! You have to be really stubborn to wait that long to see your idea come to life. Q: In your view, what has been done successfully by the government and/or regulators (globally or in a specific country) in supporting Islamic fintech? What else should they do in the future? A: There’s a growing interest along with money for Islamic fintechs. That’s awesome to see – for example Q: Could you explain briefly on what is LaunchGood’s value proposition? A: At LaunchGood, we believe Muslims have Abu Dhabi Islamic Bank’s EFICA competition with a incredible values to share with the world, and we’re That gives me a lot of hope, but definitely there providing an ecosystem for those values to flourish needs to be more done still. I prefer it comes from and manifest as a real, global impact. the private sector rather than governments though, USD 100,000 top prize! There have been a number of incubators I’ve heard of (but no direct experience). to make it less vulnerable to changing political tides. Q: What is your plan with the current company for the next 5 years, in terms of product suite and/or expansion? A: LaunchGood is more than just a fundraising Q: What challenges need to be addressed by IFIs if they want to remain competitive? A: Design matters. It’s easy to think about the website – it’s an ecosystem and network for Muslims technology, but the user experience is just as important to be and do their best. We operate primarily as a – and given how amazing mainstream fintech products crowdfunding platform now, but over the next 5 years look, the interface is important too, because it conveys we have ambitious goals to expand with more digital quality and trustworthiness. The bar’s a lot higher now platforms – social media network, hiring platform, than when we started 7 years ago. etc. – as well as a global collection of co-working spaces and physical communities and events that bring people together in real life. Q: Which technological trend or development would Islamic fintech entrepreneurs need to look out for in the next 3-5 years? A: Blockchain and cryptocurrency seem like the Q: Why do you consider Investors should invest more in Islamic fintech? A: There are nearly 2 billion Muslims globally who are becoming increasingly wealthier and savvy, yet want to remain true to their values. Whoever can conveniently make that happen stands to make a lot of money. obvious answers, as they should be. Q: What future opportunities do you see in the Islamic fintech industry as a whole? In which areas do you see the most promising growth opportunities? A: A super ambitious project would be to create an easy-to-digest cryptocurrency embraced widely. But something more realistic with a big demand: our own Q: In your view, what are the risks of financial inclusion through Islamic fintech and how would you mitigate these risks? A: The risk is the watering down of values, similar to what we saw with the sukuk model of halal-bonds when they started taking off in the 2000’s and became a bit out of control. 57
60. 58 Leveraging Islamic Fintech to Improve Financial Inclusion Appendix 2 - Bibliography APPENDIX 2 Bibliography Alliance for Financial Inclusions . (2018). Fintech for Financial Inclusion: A Framework for Digital Financial Transformation. 2018: AFI. Bacha, O. I. (2019, Feb 18). Serious gaps in Islamic banking and finance. Retrieved Jul 8, 2019, from https://www. inceif.org/2019/02/19/serious-gaps-in-islamic-banking-and-finance/ Bary, E. (2018, Oct 29). How artificial intelligence could replace credit scores and reshape how we get loans. Retrieved 8 July, 2019, from https://www.marketwatch.com/story/ai-based-credit-scores-will-soon-giveone-billion-people-access-to-banking-services-2018-10-09 Better than Cash Alliance. (2018). Igniting SDG Progress Through Digital Financial Inclusion. UNSGSA. Blossom Finance. (2018, May 7). Islamic Finance Upgraded: Smarter Sukuk Using Blockchain. Retrieved June 2019, 30, from https://blossomfinance.com/press/islamic-finance-upgraded-smarter-sukuk-using-blockchain Boston Consulting Group. (2019). Creating a More Digital, Resilient Bank. BCG. Bovill. (2019). The outlook for retail banks and lending firms in 2019/20. Bovill. Capgemini and Efma. (2019). World Fintech Report 2019. Capgemini. CBInsights. (2019). Global Fintech Report Q1 2019. NY: CB Insights. Clifford Chance. (2019). Fintech in 2019: Five Trends to Watch - Thought Leadership. London: Clifford Chance. Davies, A. (2012, March 29). Global Islamic finance assets hit $1.3 trillion - study. Retrieved July 22, 2019, from https://www.reuters.com/article/islamic-finance-growth-idUSL6E8ET3KE20120329 DinarStandard. (2018). Islamic Fintech Report 2018 Current Landscape. DinarStandard. Enfuce. (n.d.). Enfuce Open Banking Platform. Retrieved June 23, 2019, from https://enfuce.com/services/openbanking/ EY. (2017). Innovation in Financial Inclusion: Revenue Growth through Innovative Inclusion. EY. EY. (2019). Global FinTech Adoption Index 2019. EY. Financial Stability Board. (2019). FinTech and market structure in financial services: Market developments and potential financial stability implications. FSB. Fintech Futures. (2019, June 18). BankingTech Lloyds first to launch open banking app for credit cards and savings. Retrieved June 23, 2019, from https://www.bankingtech.com/2019/06/lloyds-first-to-launchopen-banking-app-for-credit-cards-and-savings/ Freischlad, N. (2015, April 29). Blossom offers Islamic micro-financing in Indonesia using Bitcoin. Retrieved June 30, 2019, from https://www.techinasia.com/blossom-offers-islamic-microfinancing-indonesia-bitcoin GFMA and PWC. (2019). Technology and Innovation in Global Capital Markets: Current trends in technology and innovation and their impact on the ‘Investment Bank of the Future’. Global Financial Markets Association. Gundogdu, A. (2016). Exploring novel Islamic finance methods in support of OIC exports. Journal of Islamic Accounting and Business Research, 78-92. Heffernan, M. (2012, April 24). Why mergers fail. Retrieved July 2019, 22, from https://www.cbsnews.com/news/ why-mergers-fail/
61. Leveraging Islamic Fintech to Improve Financial Inclusion Appendix 2 - Bibliography HelloGold . (2019). Gold: The Better Way to Save. Retrieved June 27, 2019, from https://www.hellogold.com/ about-us/ Hudson, C. (2018, November 29). Ten Applications of AI to Fintech. Retrieved June 23, 2019, from https:// towardsdatascience.com/ten-applications-of-ai-to-fintech-22d626c2fdac IFSB. (2018). Islamic Financial Services Industry Stability Report 2018. Islamic Financial Services Board. Indonesia Financial Services Authority (OJK). (2019). Indonesia Banking Statistics May. Jakarta: OJK. Indonesia Financial Services Authority (OJK). (2019). Sharia Banking Statistics. Jakarta: OJK. International Monetary Fund. (2015). Islamic Finance: Opportunities, Challenges, and Policy Options. IMF. Islamic Bankers. (2019, January 15). E-Wallets: Did You Forget Us Again? Retrieved June 18, 2019, from https:// islamicbankers.me/tag/islamic-fintech/ Islamic Financial Services Board. (2010). Islamic Finance and Global Financial Stability. Islamic Development Bank. Islamic Financial Services Board. (2018). Islamic Financial Stability Report 2018. IFSB. Karim, N., Tarazi, M., & Reille, X. (2008). Islamic Microfinance: An Emerging Market Niche. CGAP. Khazanah Research Institute. (2018). The State of Households 2018 Different Realities. Kuala Lumpur: Khazanah Research Institute. KPMG. (2019). The Pulse of Fintech 2018. KPMG. Kumar, S. (2019). Banking on innovation: Demystifying Big Data in banking. Retrieved June 23, 2019, from http:// www.bbc.com/storyworks/banking-on-innovation/bigdata Linklaters. (2018). Global Fintech Year in Review 2018 Year to Come 2019. London: Linklaters. Linklaters. (2018, July). Get involved or get left behind: how established companies can access the technology revolution. Retrieved June 23, 2019, from https://www.linklaters.com/en/insights/blogs/fintechlinks/2018/ july/get-involved-or-get-left-behind-how-established-companies-can-access-the-technology-revolution London Stock Exchange Group. (2019). Fintech Comes of Age. London Stock Exchange Group. Loughran, M. (2018, Jun 16). The Power of Blockchain for Microfinance. Retrieved Jul 8, 2019, from https:// medium.com/uulala/the-power-of-blockchain-for-microfinance-139c4e7029af Malaysian Communications and Multimedia Commission. (2017). Handphone Users Survey 2017: Statistical Brief Number Twenty-Two. Cyberjaya: Malaysian Communications and Multimedia Commission. Malik, D. (2019, May 10). HelloGold making gold savings accessible to all. Retrieved June 27, 2019, from https:// www.hellogold.com/hellogold-making-gold-savings-accessible-to-all/ McKinsey and Company. (2018). Synergy and disruption: Ten trends shaping fintech. McKinsey and Company. McKinsey Global Institute. (2016). How digital finance could boost growth in emerging economies. McKinsey. Md. Hashim, P., & M. Hasan, S. (n.d.). Prospects and Outlook of Islamic Wealth Management: Post Global Financial Crisis. MEMRI The Middle East Media Research Institute. (2014, March 7). Pakistani Media Reports Examine Growth Of Islamic Banking In Pakistan; Government Official Appointed ‘To Ensure That The Conventional Banking System Is Replaced By The Islamic Banking System, As Per The Teachings Of Islam’. Retrieved Jul 17, 2019, from https://www.memri.org/reports/pakistani-media-reports-examine-growth-islamic-bankingpakistan-government-official MIFC. (2014). Global Financial Inclusion Islamic Finance Meets the Challenge. Bank Negara Malaysia. Narwi. (2019). About Narwi. Retrieved Jul 12, 2019, from http://narwi.org/about-us 59
62. 60 Leveraging Islamic Fintech to Improve Financial Inclusion Appendix 2 - Bibliography National Islamic Finance Committee (KNKS). (2019). Strengthening the Digital Economy. Retrieved Jul 2019, from KNKS: https://www.knks.go.id/home OIC: The statistical, Economic, and Social Research and Training Centres for Islamic Countries. (2017). OIC Economic Outlook 2017: Industrial Development for Structural Transformation. Ankara: SESRIC. Olyver Wyman. (2009). The Next Chapter in Islamic Finance: Higher Rewards but Higher Risks. Olyver Wyman. Pew Research Center. (2011, January 27). The Future of the Global Muslim Population. Retrieved June 24, 2019, from https://www.pewforum.org/2011/01/27/the-future-of-the-global-muslim-population/ Pew Research Center. (2015, April 2). Muslims. Retrieved July 3, 2019 Pew Research Center. (2019). Smartphone Ownership is Growing Rapidly Around the World but Not Always Equally. Pew Research Center. Red Money. (2018). Islamic Finance News Fintech Huddle Report 2019. IFN. Rehman, A. A., & Pickup, F. (2018, September 7). Zakat for the SDGs. Retrieved Jul 8, 2019, from https://www. undp.org/content/undp/en/home/blog/2018/zakat-for-the-sdgs.html Reuters. (2018, October 5). Fintech, a global boost for Islamic Finance? Retrieved June 24, 2019, from https:// www.reuters.com/sponsored/article/Fintech-a-global-boost-for-Islamic-Finance State Bank of Pakistan. (2019). Islamic Banking Bulletin March 2019. Islamic Banking Department: State Bank of Pakistan. Sun Life Assurance Company of Canada. (2017, September 12). Sun Life Announcement. Retrieved June 23, 2019, from https://www.sunlife.ca/ca/About+us/Newsroom/News+releases/Announcement/ Sun+Life+introduces+Ella+an+interactive+digital+coach+to+help+Clients+navigate+and+maximize+ their+benefits+and+pension+plans? vgnLocale=en_CA&id=123117 Tez Financial Service. (2018, Oct 19). Tez Financial Services Gets $1.1 Million in Seed Funding Led by Omidyar Network. Retrieved Jul 9, 2019, from https://www.tezfinancialservices.pk/press/ TheCityUK and Borsa Istanbul. (2019). UK-Turkey Islamic Fintech Working Group. London: TheCityUK. Thomson Reuters. (2018). Islamic Finance Development Report 2018. Thomson Reuters. UNDP. (2017, December 11). Waqf for financing the Sustainable Development Goals (SDGs). Retrieved July 8, 2019, from http://www.id.undp.org/content/indonesia/en/home/presscenter/articles/2017/12/11/untappedgreat-potential-of-waqf-for-sustainable-development-in-indonesia-.html Wahed. (2019, May 9). Wahed Goes Global. Retrieved June 30, 2019, from https://journal.wahedinvest.com/ wahed-goes-global/ World Bank. (2017). Global Findex Report. World Bank. World Bank. (2017). Mobilizing Islamic Finance for Infrastructure Public-Private Partnerships. Washington DC: International Bank for Reconstruction and Development / The World Bank. World Bank Group and IRTI. (2016). Islamic Finance: A Catalyst for Shared Prosperity? Islamic Development Bank.