FinTech industry in Malaysia

By: Iliyas Ismail, Huda Kamarudin and Farhana Badrol

Malaysia is among the top ranked countries in Islamic Finance sector which undertakes the largest market for sukuk and Islamic funds. The country has produced 26% of the world’s Shariah-compliant financial assets by the end of 2017—amounting to RM2.05 trillion (Pikri, 2019). 

FinTech is pushed as a game changer that turned the Financial Institutions on its head. 82% of the Financial Services are worried about losing to the FinTech industry (PricewaterhouseCoopers (PWC) & Asian Institute of Chartered Bankers (AICB), 2016). The worries have dragged the time taken to stabilize the Islamic FinTech in Malaysia. Currently, the question of “Is FinTech a threat or an opportunity of a lifetime?” is no more a suitable argument. The rulers and Financial Institutions should wake up and act now to adopt and embrace this revolution. Although there will certainly be risks involved, not taking a step into FinTech is however a plan destined to fail since the world is adapting it.

Malaysia should stake the name in Islamic FinTech too as at now UAE, Bahrain and Saudi are trying hard to boost their Islamic finance sectors, amid a FinTech boom. Bahrain has recently recognized the gold-based savings platform HelloGold as the Best Islamic Wealth Management Fintech Company at the World Islamic Fintech Awards on November 26th (Lago, 2018). Meanwhile, for Saudi, they have penned an agreement with a FinTech company to develop a variety of block chain solutions for real-time platform in commodities trading and solve the inter-banking issues between conventional and Islamic banks (Pikri, 2019).

Figure 1 illustrates that both payments (at 19%) and wallets (at 17%) remained the largest representation of the Fintech Malaysia scene (Fong, 2018). The growth is caused by a combination of players being conscious of the growing demand for mobile payments. Besides wallets and payments, in June 2017, Bank Negara Malaysia has approved four FinTech firms (GoBear, getcover, worldremit and paycasso) for its regulatory sandbox (Cosseboom & Abdul Alim, 2017). In the meantime, for cryptocurrency, it has bubbled down considerably since November – December 2017. In year 2018, there are many players gearing up to enter the space. Statistically data collected by Ernst & Young in Asean FinTech Census 2018, 73% of firms in Malaysia are planning to expand their footprint beyond their current markets and enlarge beyond their home markets in the next 12 months. It indicates that more than half of businesses and industries in Malaysia are ready to develop and compete internationally.

This article opens with outline of the demand and growth of Islamic Fintech in Malaysia. It continues with several draws out of the factors for slow paced movement and challenges encountered in the development phase of Malaysia Islamic FinTech. Before concluded, the article provides the suggestions for the Islamic FinTech growth and evolution.

2.0              The factors of slow growth in Fintech development and the challenges faced

What are the factors which lagged the development of Fintech in Malaysia? While a lot of aspects which delayed the growth gathered, our views on lagged reasons and obstacles experienced are as follows:

2.1              Shortage of talent tailored for digital process

In general, many respondents in the Asean region (around 60% of of 251 companies surveyed) agree that there is a shortage in talent (Ernst & Young report 2018). With regards to Malaysia, according to the World Bank data (2016) on digital adoption, Malaysia falls under the category of “adopter”, in contrast with laggard and forerunner status, which shows that the country’s performance in the digital arena has a good foundation, however the focus should be on becoming forerunner. Data shows that Malaysia faces a mismatch in talent production, with projections for 2025 showing that students from the arts and social sciences will be the most produced as compared to science, technology, engineering and mathematics (STEM), which the latter is more needed in bringing the country towards forerunner status.

Ghazali and Yasuoka (2018) studied the perceptions of SMEs towards Fintech such as peer to peer lending and crowdfunding, and found that the level of awareness is still rather low and this needs to be addressed by the government by raising awareness. It could be argued that by raising awareness on the perceived ease of use and relative advantage will create more demands (Seong et al (2018)) for Fintech among users, and by extension SMEs. 

However, an increase in demand requires more supply, hence the need to produce more talents. In order to increase Fintech adoption in Malaysia, the country already has a good foundation, for the digital adoption is quite high (Department of statistics, 2017), however when contrasted with countries such as South Korea and Estonia, it pales in comparison (OECD, 2016). Thus, the government should put more emphasis to develop sufficient talent to address this issue and align Malaysia with other countries such as Singapore to become a forerunner.

2.1              High speed internet initiatives

To become a leading player in technology, it is crucial to have a good broadband service (Broadband Commission, 2012), and this is crucial in the objective to become a main player in Islamic fintech. However, there is evidence showing that Malaysia still needs improvements in this field. Data from the World Bank (2016) shows that though Malaysia has affordable broadband services, it falls under the category of slightly above being a laggard. Average speed is 22mbps and this should be one of the main targets to address.

2.2              Demand of internet security.

Pricewaterhouse cooper (PWC) released a report in 2016 stating that the top concerns among 84 respondents from various industry surveyed is internet security. With the rise of the internet of things (IoT), several literatures has raised the concerns if new technical standards should be created (Li et al, 2016) and on a more macro level, Radu (2013) has highlighted the need for the United Nations to come up with an official adoption for cyber security for best practice sharing, rather than just an integrated vision for protecting cyberspace.

In Malaysia as in many other nations, cyber security is always a main concern and the ever-looming threat of information hacking and breaching should be addressed by adopting tight security to convey the message that the country prioritizes this field and has very strong mechanisms to address this.

2.4       Government Support and funding

Government support is essential for Fintech to grow as this is how other developed countries are able to flourish, which is, with consistent government support. Insufficient government support could lead to lesser adoption of any new technology (Wonglimpiyarat (2017), Gupta and Xia (2018)), however too much intervention in financial services sector, could lead to hindrance in growth, such as the case with South Korea (Ryu, 2018). A more pragmatic approach is thus required by government with regards to institutional control.

Although the Malaysian government has been seen to be quite supportive with regard to innovation technology in the financial sector, more specifically Fintech, such as BNM’s Financial Technology Enabler’s Group among others, the most improvement that can be done could be on the financial side.

 

A study done by Ernst and Young (E&Y) of respondents in the Asean market shows that most around 76% agree that funding is sufficient, but many (56%) believe that support is not easily accessible. With regards to Malaysia, around 43% believe funding should be made more accessible, however, the survey falls short on explaining what do the respondents mean by more accessible. However, Singapore and Thailand are said to have good funding and high ease of access. 

 

3.0              The way forward and current actions taken towards the growth

3.1              Fast action

Do not waste any more time. One single seconds counts. Do not just stand and watch the growth being exploit by others. It is true that it almost impossible to find one winning strategy that satisfy all players when it comes to embracing FinTech, however here we come out with some key points from our readings and review. There needs to be a sense of determination and urgency amongst financial institutions to address the gaps originated from the FinTech surrounding. PwC recorded 82% of FI respondents were concerned about the threats presented by FinTech; but only 47% of them have placed FinTech as one of the important elements of strategic decision making.

As an example, when financial advisers are equipped with highly personalised customer insights based on analysis of individual customer data, wiser decision making could be made. As in FinTech situation, when its elements is included promising decision making could be arrived. FinTech companies are an unavoidable addition to the already packed financial services group. Whether they end up an enemy who takes your shares, or a friend you can work with to add to it, depends not only on how you choose to react, but also when. To conclude, it is hard to avoid, we better embrace it and let it be on our side and take full advantages out of it.

3.2              Set Focus

Move forward and throw away the mind-set of maintaining the status quo towards one that is forward looking and puts the customer first. Existing assumptions should be challenge and the customer’s perspective should be the priority.New technologies may not be what customers are asking for, but the advantages they could gain from those technologies would be more important such as user friendly, cheaper, faster and always-on services.

The key is engaging your customers to essentially understand their wants and altering your operations, capabilities and service to satisfy your customers in the way that they value most. Consumers will one day interact with technologies on complex decisions such as home buying, retirement planning or corporate financing. As an addition, their routine transactions would most probably depend on technologies. It is how important to stay focus and set appropriate strategy.

3.3              Be the leader

Divergence will become critical to competitive success of any players. First movers and large-scale players will definitely win the most advantage. Therefore, Malaysia should consider to initiate the creation of a holistic FinTech ecosystem. Following that become the powerful centre of it. Creating a robust FinTech lifecycle and taking centre stage in the digital world will require a lot of learning and efforts that include engagement with other FinTech stakeholders, which are startups, technology companies, talent from non-FS fields, regulators and others.

Besides that, we must go out of our comfort zone and find new investments, products and partners that we can work effectively with. Good relationship with the regulators would also contribute a big hand in setting the foundation for the local FinTech ecosystem. A unique product would give a good and wonderful impact in the way to be a leader as we discussed earlier. Again, all of the combine efforts would eventually meet our goal successfully.

4.0              Conclusion

It is highlighted in introduction, Malaysia is among the topmost rank in Islamic Finance world which undertaking the largest market for sukuk and Islamic funds. On the other hand, when it reaches to the Islamic FinTech, the performance is not as good yet. When we mentioned ‘yet’ it should be triggered and bear in mind, it does not mean Malaysia cannot be awarded the same performance as sukuk and Islamic funds, it is just the matter of time, opportunity taken wisely, and good planning as well as actions alongside.

As we discussed earlier, there are few factors of slow growth in Fintech development in Malaysia and the challenges faced which are shortage of talent tailored for digital process, high speed internet initiatives, and demand of internet security, government support, and funding challenges. All of this challenges is believe not face only by Malaysia, but of course all other country that wanted to involved in this new industry that are rapidly evolving globally, specifically in Islamic finance market.

Accordingly, following the challenges, we clarify some criteria to be considered to move forward and take full advantages of the new industry which we simplified in three points 1) Fast action, 2)Set Focus, 3) Be the leader. This would be align with the suggestion as per mentioned in the introduction that Malaysia should stake the name in Islamic FinTech too as at now UAE, Bahrain and Saudi are trying hard to boost their Islamic finance sectors, amid a FinTech boom. To conclude, we believe that Malaysia will thrive with the opportunities that lie ahead and strike excellences provided the past performance.

 

 

References:

Agrata G. , Chun Xia (2018), A Paradigm Shift in Banking: Unfolding Asia’s FinTech Adventures, Banking and Finance Issues in Emerging Markets (International Symposia in Economic Theory and Econometrics, Volume 25) Emerald Publishing Limited, pp.215 – 254

Broadband Commission (2012,June), Retrieved from https://www.broadbandcommission.org/Documents/BBCom-G20.pdf

Chua C.J., Lim C.S. & Khin, A. (2018). Factors Affecting the Consumer Acceptance towards Fintech Products and Services in Malaysia. International Journal of Asian Studies. 9. 59-65.

Cosseboom, L., & Abdul Alim, E. (2017, December 14). TIMELINE-What happened in Islamic fintech in 2017? Retrieved from Salaamgateway: https://www.salaamgateway.com/en/story/timelinewhat_happened_in_islamic_fintech_in_2017-SALAAM14122017042935/

Ernst & Young. (2018). Asean FinTech Census. Retrieved from EY Publication: https://www.ey.com/Publication/vwLUAssets/EY-asean-fintech-census-2018/$FILE/EY-asean-fintech-census-2018.pdf

Fong, V. (2018, July 18). Fintech Malaysia Report 2018 – The State of Play for Fintech Malaysia. Retrieved from FinTech News: https://fintechnews.my/17922/editors-pick/fintech-malaysia-report-2018/

Ghazali, N. & Yasuoka, T. (2018). Awareness and Perception Analysis of Small Medium Enterprise and Start-up Towards FinTech Instruments: Crowdfunding and Peer-to-Peer Lending in Malaysia. International Journal of Finance and Banking Research.

Hyun-Sun Ryu, (2018) "What makes users willing or hesitant to use Fintech?: the moderating effect of user type", Industrial Management & Data Systems, Vol. 118 Issue: 3, pp.541-569

Jarunee Wonglimpiyarat, (2017) "FinTech banking industry: a systemic approach", foresight, Vol. 19 Issue: 6, pp.590-603

Lae, H. T., & Mohamed Iqbal, S. M. (2018). FinTech firms in Southeast Asia and Malaysia show strong growth aspirations amid funding challenges. Kuala Lumpur: Ernst & Young (EY).

Lago, C. (2018, December 3). Malaysian startup wins World Islamic Fintech Award. Retrieved from CIO Asean: https://www.cio.com/article/3323414/malaysian-startup-wins-world-islamic-fintech-award.html

Pikri, E. (2019, January 2). Malaysia is a Leader in Islamic Finance, But Why Not Islamic Fintech? Retrieved from Fintechnews: https://fintechnews.my/19512/islamic-fintech/islamic-fintech-malaysia-shariah/

PricewaterhouseCoopers (PWC) & Asian Institute of Chartered Bankers (AICB). (2016, November). A Malaysian Discourse. Catching the FinTech Wave - A Survey on FinTech in Malaysia, pp. 5-72.