Assistant Governor's Keynote Address at the ASAS Shariah Fintech Forum 2017Speaker: Datuk Ahmad Hizzad Baharuddin Venue: Hilton Hotel, Petaling Jaya Language: English Speech Date: 08 Nov 2017
I would like to thank ASAS for the opportunity to speak at this event. I am encouraged to see the presence of many industry practitioners, particularly from the Shariah community. This demonstrates deep interest in fintech and its potential impact on Islamic finance. As the future of fintech unfolds, the world waits with eager anticipation for its many game-changing abilities. Islamic finance, itself a challenger to the conventional paradigm, will have much to gain from an early head-start in the fintech scene.
Technological disruption is the challenge of our times, and one we must get to grips with quickly. The impact of the digital revolution is felt in virtually every sector, including ours. Banks were once an indomitable presence in finance. No longer. Technology is fast eroding the barriers to entry, allowing for the emergence of new and non-traditional players. This is the new normal that we live in. Take Grab for example. Having established itself in the ride-sharing space, the company has also made recent inroads into financial services through GrabPay - a mobile wallet that not only allows one to pay for rides, but to also perform peer-to-peer funds transfers and food purchases in Singapore. Further afield, on-line loan providers such as Deck Capital, Kabbage and CAN Capital are certainly shaking up the small business lending industry in the US.
With newer, faster and cheaper ways of facilitating finance, the financial world of old is unlikely to hold for much longer. There is truth to the claim that technologies like artificial intelligence, blockchain, internet of things and application programme interfaces (APIs) are only a few steps away from disrupting the financial ecosystem - down to its very core. Whether fintech ultimately proves friend or foe however, is our choice to make. Ensuring that fintech becomes an enabler of, and not a threat, to growth will require acumen and foresight. Here, I would like to highlight three ways in which incumbents in the financial sector stand to reap large gains from fintech:
- First, reducing the cost of providing financial services. The efficiency gains are no small amount – McKinsey Global Institute in September 2016 suggests the gains are up to 90%. This presents a highly attractive value proposition for financial services providers.
- Second, opening up new service channels and extending market reach, particularly to the underserved. An example is M-Pesa in Kenya. A revolutionary mobile phone-based platform for money transfer and financial services reaching millions of Kenyans, M-Pesa has also facilitated the emergence of thousands of small businesses.
- Third, customising financial services through the power of big data. The wealth of information available will help identify opportunities, enhance processes and address market limitations. For example, online lenders which employ advanced algorithms that capture data flows directly from business accounts and even social media platforms certainly have bountiful possibilities for processing and marketing benefits. With automated underwriting processes, loans can be processed much faster, with fewer errors while providing for a more bespoke customer experience.
Fintech is a tool - a powerful tool. But it is crucial to remember that it is not an end in itself. Whether brick and mortar or ones and zeros, the end remains the same - a customer experience that delivers on value and satisfaction. It is this principle that will determine the direction of our future transformation. History is replete with examples of how companies that used to dominate industries disappeared or were severely affected by failing to strategically embrace change.
The older ones in this audience would remember Blackberry and Xerox which were blindsided by changes sweeping their industries. Also consider how technology has disrupted entire industries on a global scale – as in the case of Airbnb and Uber.
With a population of 31 million, many of which are young “digital natives”, Malaysia has a prime, captive audience for fintech solutions. Our main challenge is to rise to the needs and demands of this generation. In this respect, I am pleased to note that our industry – both incumbents and new startups – have made strides in realising this vision. It is estimated that there are now over 80 players offering innovative fintech solutions in various areas. These include in areas such as lending, currency exchange, insuretech and payments. The presence of these players opens the avenue for incumbents to forge digital partnerships and co-create innovative fintech solutions. It is our hope that with this synergy, we can create more value-added and meaningful innovations that result in better products and services that ultimately touch the lives of customers, and that includes you and me.
What does fintech mean for Islamic finance? Islamic finance, being a relatively young industry, stands to gain significantly by leveraging on technology. We view technology as a great equaliser. With a sizeable market share of more than 28% of the total financial assets which commensurates with the size of the Islamic financial institutions, it is now time for the Islamic finance industry to compete alongside its conventional counterparts. For those who embrace technology for instance, it opens up opportunities that allow them to compete more effectively – with wider range of innovative products and better pricing to fulfil the needs of customers.
The time is right for the industry to capture the window of opportunities brought about by fintech to remain relevant and competitive, given the more challenging journey ahead. As we can be proud that the industry has met and surpassed its various milestones, the current operating environment that has in the past supported the growth of the industry, such as the granting of tax incentives will no longer be relevant. The industry now needs and I believe certainly can, to stand on its own two feet. Technology, amongst others, is a potent means for the industry to leverage upon to do so.
While technology is an agnostic tool, the Islamic finance industry can harness its power to deliver and realise the intended goals and objectives of Shariah. This will be a game-changer for the industry. Let me illustrate this through two examples.
First, technology can help realise Islamic finance’s promise in risk-sharing and support for genuine and productive economic activities. With the rise of entrepreneurship, technology can play a facilitative role in widening funding avenues for new and small businesses. Kapital Boost, an SME crowdfunding platform, has been active in providing peer-to-peer lending to potential SMEs in Asia. In 2016, the platform raised nearly a million US dollars for 26 SME deals across Singapore, Indonesia and Malaysia. Likewise, the Investment Account Platform in Malaysia, a multi-bank online platform that facilitates direct investment by investors to economic ventures, is expected to spur more widespread use of risk-sharing and equity-based Islamic contracts. Another example is Ethis Crowd, the world's first real estate Islamic crowdfunding online platform.
Since 2015, Ethis Crowd has funded a total of 5,000 houses, with close to 500 houses already completed , helping further social goals such as in the provision of affordable housing.
Second, technology is a powerful tool to widen access to and outreach of social financing instruments such as zakat, waqaf and sadaqah. Digitisation of collection and disbursement of proceeds can re-energise these social financing instruments. It will not only provide greater convenience to customers, but also strengthen public trust and confidence in the system. It is encouraging to see a number of fintech startups making their name in social impact initiatives. LaunchGood has funded 1300 social impact projects from a collection worth USD9 million in 20 countries, providing disaster relief and humanitarian aid, water and housing infrastructure in developing countries. For education, SkolaFund has raised over RM200,000 last year to fund 25 students from less-privileged families entering university and colleges . This may not sound like a lot, but it is a promising start, and I believe that this has meant a lot to those 25 students.
The Islamic finance industry, with over three decades of experience and built on strong foundation, is well positioned to make the desired leap towards embracing fintech. In making the transition, an imperative is for the industry to have the right talent to grow and develop through fintech. This can fuel the industry to reinvent and restrategise itself in the wake of disruptive innovation.
In our view, the right talent to develop fintech begins from the top with the right leadership. While others may see the rise of technology merely as a passing fad or threat, visionary leaders see tech as catalysts to energise innovation and to deliver a bigger impact. Islamic financial institutions also need to fight the war for talent to attract, retain and develop the best people – at all levels. In Malaysia, we have built a comprehensive ecosystem of talent institutions in Islamic finance to build a deep and large pool of human capital for the industry. These institutions, such as INCEIF, ISRA, CIIF and ASAS have served the industry well over the years, and they are respectively on their path to global recognition.
Ultimately, the decision to develop oneself is a personal decision. Events like this one taking place over these two days help prepare Islamic finance practitioners for the future – to ride and not be swept away by the wave of change being brought about by fintech. Here, the words of Rick Warren in his book “The Purpose Driven Life: What on Earth Am I Here For” resonate clearly: “We are products of our past, but we don’t have to be prisoners of it”.
A further imperative is for the Shariah community to play a role as catalysts and enablers for innovation within the Islamic finance industry. As technology blows the winds of change across the world of finance, so are the sands shifting within the realm of Islamic finance. Products, market practices and delivery channels are set to evolve rapidly with fintech. With this, various issues in the interpretation and application of Shariah would be raised. Some may see this as a stumbling block. But we as an industry see it as stepping stones! Remember Shariah is dynamic. Our own Shariah scholar, Datuk Dr. Daud Bakar, has mentioned in his book that “Shariah is not static and transcends time and place”. Shariah thinking and discovery are described to be “expanding exponentially all around us, particularly in Islamic finance”.
It is heartening to see Shariah issues surrounding some of these new technologies being discussed in this forum. I recognise that certain issues are challenging to grapple with, what more to resolve. But we are encouraged to see the Shariah community coming together in an effort to better understand and make sense of the changes taking place - to plant the seeds that will ultimately lead us to forging a common and shared Shariah understanding of these issues. It is our hope that this shared Shariah understanding will ultimately translate itself into practical outcomes in the Islamic finance industry, including through new and improved products and solutions that customers truly value.
To prepare themselves for this journey, the Shariah community must equip itself with the right skills and knowledge to navigate the path ahead. It is in this context that the launch of the Certified Shariah Advisor (CSA) and Certified Shariah Practitioner (CSP) today is a welcomed and timely initiative by ASAS to further elevate the professionalism of Shariah advisors.
These programmes are expected to elevate the technical and ethical rigour of scholars, and in turn, increase their capacity and effectiveness in spearheading Shariah advisory not only within our shores, but also in the global Islamic finance industry.
Fintech promises to revolutionise finance, and the entire world. To its advocates, fintech will democratise financial services. To its customers, fintech brings wider choice, greater convenience and better pricing. To financial institutions, it brings greater productivity and efficiency, business opportunities and stronger operational resilience. We are faced with a reality where tech-forward institutions will survive while those that refuse to evolve – or evolve too slowly – may be left behind, or swallowed by the competition. Islamic finance has to keep pace with the changing rules of the game. This might sound like a cliché, but the industry must embrace new technologies and evolve to stay relevant and competitive. The industry being nimble and relatively fresh, is equipped with greater agility to move fast forward.
In closing, it is my hope that the discussions over these two days will lead us to a step closer in bridging Islamic finance and Shariah towards realising the promise of fintech.
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