Fuelled by digitalisation and technological advancements, the financial services sector is witnessing a significant transformation, one that is positive and inclusive for all types of customers with their various financial needs and requirements.

Following the trend of increased use of technology in the conventional space, Islamic finance has adapted and integrated financial technology (fintech) to provide consumers with more efficient and accessible financial services.

Technology has the potential to contribute positively to Islamic finance, particularly in the area of financial inclusion and sustainable development, offering new ways for integration, particularly for those historically excluded from traditional financial services, while ensuring they have access to a wide range of financial products that are in line with their values.

One of the benefits of combining fintech with Islamic finance is the possibility of increased financial inclusion, which enables more individuals and enterprises to access shariah-compliant financial products and services.

While Islamic fintech is still in its infancy and a limited number of platforms have emerged compared with their conventional counterparts, the start-ups that have stood out over the last three to four years have shown credible performance and seen increased acceptance from consumers.

Recent developments in the Islamic fintech space include shariah-compliant digital fundraising platforms, peer-to-peer (P2P) financing platforms and Islamic robo-advisors. Islamic crowdfunding remains the key segment of Islamic fintech, with several platforms already using some aspects of blockchain.

Local companies such as equity crowdfunding (ECF) platform pitchIN are on the front line of impact-based Islamic crowdfunding for diverse sectors, positioning themselves in the vanguard of the industry.

pitchIN has reaped the benefits of a dynamic ECF scene in Malaysia, attributed to the progressive regulations of the Securities Commission Malaysia (SC), with the first shariah-compliant company listed on its platform in 2023. The campaign was oversubscribed, exceeding its initial minimum target by 1,286%, reflecting the great response from both issuers and investors.

pitchIN received approval from the SC to list shariah-compliant companies on its platform in 2022, a move that was driven by the regulator and pitchIN. Acknowledging that the Islamic digital markets have not shown a similar growth trajectory with the progress of conventional registered market operators (RMOs), pitchIN co-founder and CEO Sam Shafie says a key challenge hampering further growth of Islamic digital fundraising and investment is a lack of awareness among issuers and investors.

“Issuers and investors may not be fully aware of the shariah-compliant options or the principles behind them. Educating issuers and investors on these options and their benefits is crucial for successful implementation,” he tells The Edge in a recent interview.

As such, Sam advocates for comprehensive educational resources on shariah-compliant investing to be provided to issuers and investors. “This should include the principles of Islamic finance, the screening process for shariah compliance and the types of investment products available.

“Also, conduct targeted awareness campaigns through various channels, including social media, seminars, webinars and traditional media, to reach potential investors and inform them about the benefits of shariah-compliant investments.”

The SC issued its Equity Crowdfunding Framework in 2015. There are now nine SC-registered ECF platforms in Malaysia for enterprises  to raise  funds.

According to the SC’s 2022 annual report, the cumulative amount raised on ECF platforms saw strong growth of about 181% to RM560.34 million in 2022 from RM199.23 million in 2020, with total investor participation increasing to 14,640 at end-2022 from 6,580 at end-2020. The ECF market has grown tremendously year on year to complement funding by the private markets.

Meanwhile, SME P2P financing platform Funding Societies observes a growing demand for Islamic assets across all investor segments — retail, high-net-worth individuals and institutions.

“Demand for Islamic assets is not limited to Muslim investors. Given many similarities and shared principles between Islamic finance and ESG investing — such as having consideration for positive impact on the environment and society — Islamic finance serves Muslim and non-Muslim investors alike, particularly with ESG/impact investing on the rise,” Funding Societies Malaysia country head Chai Kien Poon tells The Edge.

He credits the SC for being supportive of Funding Societies’ ambitions to offer shariah-compliant financing propositions on its platform. He points out that Malaysia has a set of comprehensive regulatory guidelines that clearly list the requirements for fintech players — specifically P2P financing providers — to operate their business, creating a conducive environment for the proliferation of shariah-compliant financial products.

“The process is clear and the requirements are spelt out in the guidelines. The offering of shariah-compliant products is not new in Malaysia [even though it is relatively new in our business]. Local shariah-compliant financing frameworks have been developed and refined over the years, creating a conducive environment for the proliferation of shariah-compliant financial products. The regulator and shariah advisors have in place established frameworks and processes when working with the industry,” says Chai.

Since the formal introduction of Funding Societies’ comprehensive Islamic financing solutions in May 2023, the platform has disbursed more than RM100 million in shariah-compliant financing, exceeding its internal target by 80% in terms of leads eligible for shariah-compliant financing, he says. “We target to have at least 50% of annual disbursement from our shariah-compliant financing portfolio by 2025,” he adds.

In 2021, P2P financing platform Cofundr became one of the few P2P RMOs to have a dedicated team to ensure that not only their products but the entire operations are shariah-compliant.

Not long after that, the SC in the first quarter of 2022 approved two Islamic products submitted by Cofundr, which are Takaful Contribution Financing and Islamic Invoice Financing. The company is in the process of submitting its third Islamic product, Islamic Working Capital Financing.

“Without doubt, shariah-compliant products naturally appeal to a bigger market, as opposed to conventional products, because both Muslims and non-Muslims can invest in shariah-compliant products. As such, by offering shariah-compliant products, Cofundr is able to tap a bigger investor base,” says Roslinda Ahmad, head of Islamic products and services at Cofundr.

She highlights that Malaysia is already the global leader in Islamic finance and now aspires to be the leader in Islamic digital economy. Malaysia is also one of the countries that have consistently promoted halal products with the objective of being the biggest halal hub in the world. Because of this, most of the business activities of MSMEs that are potential issuers are predominantly shariah-compliant.

As a benchmark, about 75% of the stocks listed on Bursa Malaysia are shariah-compliant. As such, Roslinda stresses that finding a shariah-compliant issuer is not a challenge.

“However, because shariah products are relatively new compared with conventional ones, we do have to educate our issuers on certain aspects of the process that are peculiar to shariah products in order for them to appreciate why shariah would require things to be done in a certain manner that is different from the conventional approach. The same goes for investors,” she says.

On its part, Cofundr organises talks for MSMEs to create awareness among employees and owners of P2P financing investments, says Roslinda. In June 2023, the company conducted a session with the International Women’s Federation of Commerce and Industry Malaysia as part of its efforts to support women entrepreneurs being included in the funding and investment ecosystem. “Apart from these, Cofundr also conducts webinars for the general public from time to time,” she adds.

Limited awareness of the availability of shariah-compliant funding and investment options for small businesses and retail investors is often cited as a challenge for the ecosystem. Notably, Capital Markets Malaysia, an affiliate of the SC, is one of several agencies working to support the Islamic fintech ecosystem by creating further awareness of shariah-compliant fundraising and investment opportunities available through the Islamic digital market. This is in line with the SC’s development initiative to support micro, small and medium enterprises (MSMEs) and mid-tier companies (MTCs) in providing access to alternative funding instruments.

Over the past twelve months CMM has embarked of several initiatives to enhance awareness of the concept of Shariah-compliant investment through digital platforms such as ECF and P2P financing, focusing its efforts outside the Klang Valley where there is less awareness of such funding instruments.

As ethical investing continues to gain traction, it is worth noting that the category extends beyond the environmental, social and governance (ESG) space. Islamic finance has been around for decades and its growth has been in tandem with that of sustainable finance. Indeed, there is a high degree of commonality between the two that could be strengthened further.

Much has been written about the growth of ESG, and Islamic finance is benefiting from the cultural megatrend that is ethical investing. With the mainstreaming of Islamic fintech, access to ethical financing will grow even further, benefiting emerging MSMEs and conscious investors, as well as the entire financial ecosystem.