The financial landscape has dramatically changed in 2021 as the world grapples with the unprecedented impact of the global coronavirus pandemic which has unleashed a raft of tectonic shifts to the way we do business, live, bank and socialize. But in every difficulty lies an opportunity: the onset of the pandemic did create a rather perfect storm for the Islamic fintech sector to thrive, even as harsh operating conditions weed out weaker players. This translated into a very exciting 2021 as we see a proliferation of new players, a raft of new regulations and initiatives as well as more money poured into this promising sector.
If 2020 was a period of accelerated germination for Islamic fintech start-ups, 2021 is the period the industry is seeing the fruits of its labor.
Setting a new bar
As we explored last year, the pandemic essentially forced governments and Islamic financial institutions to lay down, at an accelerated pace, regulatory and technical infrastructures required to facilitate remote banking. This momentum did not only carry through into 2021 but picked up as Islamic fintech players mushroomed — we see this at both global and national levels.
At an international level, global standard-setting body the Accounting and Auditing Organization for Islamic Financial Institutions, or more commonly known as AAOIFI, approved in principle the governance standard on Islamic crowdfunding, the first of several planned fintech-related frameworks, underscoring the vital role fintech will play in the Islamic finance industry.
Zooming into specific countries, Indonesia in particular spent the last 12 months fortifying its financial system with new digital finance-related measures to not only bolster the sector, but to eliminate the bad apples. The Republic’s authorities, including Bank Indonesia (BI), the Financial Services Authority (OJK), the national police force, the Ministry of Communication and Information Technology as well as the Ministry of Cooperatives and SMEs, signed an MoU in August to jointly combat illegal online financing activities. This is in response to the phenomenal growth of peer-to-peer (P2P) finance platforms, which also unfortunately, ushered in various illegal online loans: from 2018 to August 2021, almost 4,000 fintech contents which violated local laws were cut off.
In the same month, the OJK issued three new regulations to protect consumers while fostering digital innovation among financial institutions, as well as dedicated rules for securities crowdfunding.
These developments follow a series of earlier measures including BI overhauling its fintech regulatory sandbox and the OJK introducing its new five-year financial masterplan which focused on speeding up digital transformation. It is perhaps unsurprising to see such strong regulatory support from Indonesia: the government, through various channels including the regulators and the National Committee for Islamic Economy and Finance, has made Islamic digital transformation a key focal point of their nation-building mandate. As a result, Indonesia houses one of the largest concentrations of Islamic fintech start-ups globally, 39 as at the 20th September 2021, according to the IFN Islamic Fintech Landscape.
We see a similar push in neighboring Malaysia, which is home to 30 Islamic fintech service providers. Apart from new rules such as the one on e-money and digital wallets by Bank Negara Malaysia (BNM), the Securities Commission Malaysia also launched an Islamic fintech accelerator program, FIKRA, in partnership with the UN Capital Development Fund, the first program of its kind to focus specifically on the Malaysian Islamic capital market.
Pakistan has been exceptionally busy: not only did the regulators issue several rules including for insurtech, mutual fund digital platforms and digital banks — all accommodating Islamic instruments — but the State Bank of Pakistan has also been enhancing its groundbreaking Roshan Digital Account. Launched last year, the Roshan Digital Account enables the Pakistani diaspora to open banking accounts remotely as well as invest in Islamic and conventional instruments. This year, the service has been expanded to include the facilitation of Zakat payment and the procurement of car financing. The central bank also confirmed it will soon allow overseas Pakistanis to secure property financing through the Roshan Digital Account.
In the Middle East: Oman joined its peers by releasing crowdfunding regulations and expects to begin licensing platforms before the end of 2021; Iran approved new digital instruments including Islamic micro e-payments and crypto payments; the Central Bank of Bahrain instructed banks to implement the second phase of its open banking framework; and the Saudi Central Bank also finalized its debt crowdfunding regulations and implemented an open banking policy.
Major Islamic financial markets are putting their money where their mouths are and are proactively engaging stakeholders to offer regulatory support to create an enabling holistic Islamic fintech ecosystem, pushed by the belief that digital is the future, and the future is now.
Challenging banking conventions
Various Islamic digital finance trends have emerged over the last 12 months, but two stood out in particular: the explosion of buy-now-pay-later (BNPL) service providers, and the rapid increase of Islamic challenger banks and stand-alone digital banking services by established financial institutions.
BNPL, or point-of-sale loans, is taking the world by storm. As the pandemic rages on, e-commerce has boomed as bricks-and-mortar retailers have either been forced to shut temporarily or been driven out of business permanently. Global online shopping transactions grew 19% to US$4.6 trillion last year, according to payment processing firm Worldpay, and BNPL accounted for 2.1% of that sum, approximately US$97 billion.
With BNPL start-ups like Klarna achieving a US$46 billion valuation and Paidy as well as Afterpay being acquired by big guns like PayPal and Square respectively, BNPL is big money and it is no surprise that fintechpreneurs are entering the space with Shariah compliant versions. Over the last year, we have seen the likes of Tamara and Tabby — both from Saudi — securing Fatwas, and Malaysia’s Split getting a Shariah stamp of approval for its point-of-sale services.
Another force to be reckoned with is the rise of Islamic challenger banks across traditional and non-traditional Muslim markets.
In the US, at least two are bidding to appeal to North American Muslims, long sidelined by the domestic banking system. Texas-based Fair and Californian start-up Fardows are piggybacking on existing bank charters such as that of Washington’s Coastal Community Bank to offer interest-free financing, Shariah investments and Islamic banking services to meet the demands of the world’s fastest-growing religious group.
Two digital banks have been approved by the Saudi government, with one — Saudi Digital Bank — confirmed to operate within the confines of Shariah. In the UAE, at least three digital banks are to make their debut. Zurich Capital launched REZQ–Baraka and also confirmed it has applied for regulatory licenses in several African markets including Congo, Ghana, Nigeria and Gambia to offer Shariah digital financial services in collaboration with local partners. The UAE regulator gave its approval to Al Maryah Community Bank to launch as a specialized digital bank, while Zand revealed it is to launch “soon”, subject to final regulatory approvals, and will be chaired by Emaar Properties Founder Mohamed Alabbar.
In Malaysia, it seems that everybody wants to get into the digital bank game — from banks and non-financial conglomerates to tech companies and digital wallets. BNM closed its digital bank license applications at the end of June, and with only five available for grabs, the race is tight. More than 10 entities have formed at least five consortiums to apply for an Islamic digital banking license. The contenders include the likes of telco giant Axiata Group, RHB Bank, insurance broker Boustead, National Co-operative Movement of Malaysia’s MyAngkasa Digital Services, communication device firm Green Packet, factoring company M24 Tawreeq and chemicals company Hextar Global, among others.
As BNM processes these applications, Labuan Financial Services Authority, the financial regulator of offshore center Labuan, has begun licensing digital banks, with a couple focusing exclusively on Shariah products: Asia Digital Bank and Baxian Private & Investment Bank, both of which are Chinese-owned.
But challenger banking start-ups are not the only one grabbing headlines; established players, as expected, are also flexing their muscles by establishing stand-alone digital brands, carving out a niche for themselves while leveraging on their existing network, resources and expertise. In the UK, Kuwaiti-owned Bank of London and The Middle East introduced Nomo, its mobile-first Islamic digital banking arm. In the UAE, Abu Dhabi Islamic Bank rolled out Amwali, a mobile app developed specifically for children and the youth — those between the ages of eight and 18 years old.
Tajikistan’s Alif Bank is growing its reach through its gamut of digital platforms ranging from its digital wallet to BNPL platform as well as online marketplace. Having already expanded into Uzbekistan, with an eye on entering other Central Asian jurisdictions, Alif is also setting up roots in the UK.
This encouraging trend of Islamic virtual banks is in line with the rise of challenger banks entering the market with niche propositions such as catering to minority communities, unbanked populations and high-net worth individuals.
Attracting the money
2021 can be characterized by the surge in investments into Islamic fintech. Although access to capital remains the biggest obstacle Shariah fintech start-ups face, as confirmed by IFN Fintech’s seminal CEO and founder survey, a greater number of investors — including conventional and first-time Islamic fintech investors — are pouring money into more Shariah fintech start-ups. This suggests that Islamic fintech is entering mainstream consciousness: while its ethical and niche proposition is important, but more significantly, it signifies the readiness and capability of Shariah fintech start-ups to compete with conventional players.
The year was off to a great start: Indonesia’s Shariah P2P platform ALAMI secured a US$20 million Series A round in January and raised another US$17.5 million in August. BNPL platform Tamara closed MENA’s largest Series A funding this year, raising US$110 million in April, after securing US$6 million in seed funding at the start of the year. Other notable Islamic fintech deals this year include those of: FlexxPay, CapBay, Forus and IslamicFinanceGuru.
Mergers and acquisitions
Another 2021 theme is inorganic growth. After a slow start, a handful of Islamic fintech players have finally matured to a stage to act as a buyer to expand their offerings, while a couple have successfully exited.
Indonesia’s ALAMI, for example, acquired a local Islamic rural bank, BPRS Cempaka Al-Amin, which it relaunched as Bank Hijra, signaling the P2P financier’s foray into banking services beyond P2P financing. New York-headquartered Wahed Invest at the end of last year announced it would be acquiring UK-based Islamic digital banking start-up Niyah to support the Islamic robo-advisor’s ambition of becoming a “one-stop shop for Shariah compliant financial products and services”.
Also worth highlighting is the purchase of Islamic tech giant Path Solutions by Singapore’s Azentio Software. Still subject to the necessary approvals, the acquisition is part of Azentio’s expansion strategy into Muslim-majority markets with Path Solutions’s suite of Islamic banking software products.
Reaching new heights
These trends we have highlighted do seem to paint a bright picture for Islamic fintech. The discussion has demonstrated how Islamic fintech start-ups have endured and emerged stronger during a global health crisis, with the pandemic being the most effective driver for digitalization in the financial space. The tough operating conditions, which demanded digital solutions as social distancing rules make in-person financial services seem almost obsolete, have created pockets of growth for certain verticals. Not only are regulators paying more attention to this sector, but investors as well — and this speaks volumes.
As investments into fintech hit new records thanks to COVID-19 (KPMG noted global fintech investment rose to US$98 billion in the first half of 2021 from US$87 billion in the second half of 2020), and with Muslim jurisdictions such as the Middle East and Indonesia grabbing more attention (and funds), it is likely that Islamic fintech start-ups would also benefit.
Islamic fintech trends observed this year are likely to keep their momentum as the regulatory environment becomes friendlier and the market becomes more familiar with Islamic and digital finance. Activities within the alternative finance space are likely to continue and digital banks or digital banking initiatives are likely to be more common. Crypto finance and decentralized finance (DeFi) are also ones to watch out for as there is a rising movement among central banks to explore and utilize cryptocurrencies, and more DeFi players are making the case for Islamic finance.
As far as the pandemic is concerned, we are not out of the woods yet. However, vaccination is sweeping across the world, and more countries are learning how to live with COVID-19. Economic recovery would be staggered depending on vaccination rates and infection levels, but there is cause for cautious optimism, and it will be exciting to see what is in store for Islamic fintech.