Fintech has immense potential to be the next game changer in Islamic finance as it opens up new possibilities for improving efficiencies, reducing wastage and enhancing the customer experience.
The newly-appointed Bank Negara Malaysia governor Datuk Muhammad bin Ibrahim on May 11 told an Islamic finance forum in Kuala Lumpur that fintech offers opportunities for industry players to radically transform operational models by adopting digitization strategies that will be able to deliver much greater or alternatively, a high degree of specialization.
He says that to further explore and leverage on these opportunities, plans are currently underway to organize an inaugural Islamic finance symposium on innovation that will provide a platform for the academia and industry to come together to develop and test breakthrough ideas and innovative solutions in Islamic finance.
On its part, Bank Negara has been actively engaging with fintech firms to better understand their activities and provide guidance on the regulations that may apply to them. The adoption of fintech is clearly not without risks, Ibrahim says, particularly in the wake of rising cybersecurity threats that could compromise safeguards that protect financial assets and customer data.
Bank Negara has commenced a review of the changes and additional guidance needed to ensure that the regulatory framework remains appropriate to manage the risks, while encouraging productive innovation that will drive costs down and improve the quality of service to consumers.
Ibrahim says they are looking at this from several perspective, including the impact of fintech strategies on the management of risks by financial institutions, the potential for fintech start-ups to introduce new risks to the broader financial system as a result of regulatory arbitrage, and on the impact to consumers.
“Fintech is challenging the status quo of the financial industry,” Ibrahim points out. He says the potential impact of technological disruptions is significant. An estimated 10% to 40% of overall banking revenues could be at risk by 2025 due to fintech innovations outside banking institutions that are able to achieve a significant pricing advantage.
Ibrahim says: “New business models will emerge. Delivery channels will challenge the existing norms. Transaction costs will be reduced. Rather than looking at the fintech revolution as unwelcoming, financial institutions ought to embrace it as an opportunity.”
In the area of payment services, for example, e-payment has revolutionized payment mechanisms through convenient and accessible channels. In Islamic finance, a recent initiative in Malaysia has been the Investment Account Platform (IAP) that was launched in February this year. “It is an important example of a collaborative strategy by the industry to bring game-changing innovations to the market,” Ibrahim explains.
The IAP is the first Islamic banking-intermediated internet-based platform that combines the expertise of Islamic banks and efficiency of technology to channel funds from investors to viable economic ventures. It promotes risk-sharing financial transactions by providing the platform for musharaka and mudharaba-based equity financing. The platform has strong prospects to support cross-border investments and increase global connectivity through the participation of banks worldwide.
