Islamic finance grabbles with FinTech

FinTech brg

Earlier this week, Datuk Muhammad bin Ibrahim, the Governor of Bank Negara Malaysia (the Central Bank of Malaysia) gave the Keynote Address at the Global Islamic Finance Forum 5.0 – “Future of Islamic Finance“.

The Governor pointed out that in many parts of the world, Islamic finance is one of the fastest growing segments of the financial industry: “Its reach and influence has expanded beyond the traditional Islamic markets, with increasingly strong footholds in banking, takaful and the capital markets”.

According to the Central Bank, Islamic banking now represents more than 20% of total banking assets in at least 10 jurisdictions (a feat that has been achieved in under a decade), with Islamic financial services are now available alongside conventional financial services in many markets.

The Central Bank acknowledges that the FinTech revolution, coupled with the digital revolution and the widespread penetration of technology, is also impacting Islamic Finance:

FinTech opens up new possibilities for improving efficiencies, reducing wastage and enhancing the customer experience… equally, it is not without risks, particularly with rising cybersecurity threats that could compromise safeguards that protect financial assets and customer data”.

The Central Bank of Malaysia has commenced a review of the changes and additional guidance needed to ensure that the regulatory framework remains appropriate to manage FinTech risks using three lenses:

  1. the impact of FinTech strategies on the management of risks by financial institutions;
  2. the potential for FinTech start-ups to introduce new risks to the broader financial system as a result of regulatory arbitrage;
  3. the impact on consumers

Islamic financial activities in Malaysia are governed by a comprehensive contract based regulatory framework designed to achieve end-to-end Shariah compliance whereby financial institutions are expected to evaluate and manage the impact of their activities, beyond that which is solely concerned with financial gains.

Arguably, FinTech and Islamic finance techniques are both disrupting traditional structures in the conventional financial industry. It is appropriate therefore that consumers, companies and investors in Islamic finance are equally able to optimise digital developments.

According to the Central Bank Governor “to elevate the Islamic finance industry to the next level, the formulation of game-changing strategies must bring in elements that leverage on technology, accelerate innovation and develop well-rounded talent to meet future needs of Islamic finance”.

The challenge for regulators around the world is how to regulate FinTech in a manner which does not kill innovation. In reality, “what you are” should not determine the regulatory approach; regulation should be based on “what you do”! And central to this, in every market, is the protection of consumers.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.

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