With the publication of the Kalifa Review in July 2020, the nascent fintech sector has once again moved to the forefront of the minds of business leaders and policymakers. LEENA PAYYAPPILLY sets out some of the key points that were discussed at the virtual roundtable discussion — chaired by Imam Qazi, a partner at Foot Anstey — focusing on investment into the UK’s Islamic fintech industry.
The Kalifa Review
The Kalifa Review (commissioned by the chancellor and undertaken by Ron Kalifa) sets out the objectives for supporting the growth and widespread adoption of UK fintech. Along with strengthening regulation and developing human capital, investment is one of the five key areas that need a real focus. The review identified the need to:
(a) Expand research and development tax credits, the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS) and venture capital trusts, and
(b) Unlock institutional capital to create a GBP1 billion (US$1.41 billion) ‘FinTech Growth Fund’ of sufficient scale to act as a catalyst in developing a world-leading ecosystem.
The review highlighted the Islamic fintech sector as a growth area for investment with potential to cross-collaborate with international partners.
What investment schemes are available in the UK and are they sufficient?
Faizal Karbani, the founder and CEO of Simply Ethical, commented on how financial service businesses are generally excluded from the EIS and SEIS and he commented that it would be “a real game changer in terms of raising investment if rules around these schemes are clarified and if such schemes are opened up more widely to financial service businesses including fintechs”.
Youness Abidou, the founder of Nester, explained how Nester was able to secure the EIS but that it was a challenging process whereby HM Revenue & Customs had to essentially allocate Nester into certain prescribed categories to ensure Nester was able to benefit from the relief.
Ibrahim Khan, a co-founder of IslamicFinanceGuru, further added that such schemes help to cap the downside, but it does not necessarily guarantee an upside which is of course a key element in angel investments.
The participants also discussed how other means of investing, such as investing in portfolio funds, are a prudent way to diversify and spread an investor’s risk.
International investment in the UK fintech sector
Awaiz Patni, group CFO at Saudi Bugshan Holding Company, commented on how the UK’s mature regulatory and tax environment, when compared with other jurisdictions such as certain parts of the Middle East, can appear prohibitive for angel investors venturing into the investment landscape for the first time.
Dr Aida Othman, the managing director of ZICO Sharia Advisory Services located in Malaysia, believes that with the right guidance, discussions and incentives, the current focus of many countries on domestic investments will likely diversify geographically to the UK.
How fintechs have structured their products to channel investment
Salman Hasan, the chief legal officer of Primary Finance, commented how a unique fintech-based business can garner significant support from investors and customers for an ethical, affordable and debt-free financing model.
Youness explored how a peer-to-peer business model operated via a user-centric fintech platform acts as a great tool to connect investors with customers seeking finance for real estate projects.
However, for such business models, investment from the public or peers needs to be pooled and obtaining the necessary regulatory authorizations in order to hold funds can be a complex process.
Nabila Kazi, the sales director at Shieldplay, explained how an established business holding the relevant Financial Conduct Authority authorizations can support start-ups in such situations where they can also leverage the platform to maintain real-time visibility and transparency over a transaction and the status of funds.
Unlocking capital and creating a broader appeal
There are three areas in particular that would help facilitate the development of fintech in the UK:
1. While the UK boasts several investment schemes, investor awareness of such schemes needs to significantly improve.
2. The traditionally conservative investment mindset of many Muslim investors in the UK is ripe for change.
3. Thirdly, the Islamic fintech market in the UK should do more to appeal to a broader pool of investors.
Zahir Nayani, a partner in the Islamic finance team at Foot Anstey, commented on how one could broadly categorize Muslim investors in the UK as (a) those who only want to invest in Shariah compliant products, (b) those who are market-agnostic and are satisfied with conventional investment platforms and (c) those who would prefer Shariah compliant products with all things being equal.
The Kalifa Review importantly highlights the lack of adequate funding into the UK fintech market. However, the more stakeholder discussions we are able to have, the more we will be able to understand why there is a scarceness of funding and what measures we can implement to unlock it.