Photo: Joann Enriquez, chief executive of the Investment Account Platform and Dr Said Bouheraoua, senior researcher and director of research development and innovation at the International Shari'ah Research Academy for Islamic Finance (ISRA) at the ISRA Islamic fintech dialogue on Feb 19, 2019 in Kuala Lumpur. Photo supplied by ISRA.
*Correction has been made to state that the IAP was launched in 2016 and not 2014
*The interview has been edited throughout to ensure accuracy and better clarify meaning
KUALA LUMPUR - It is not only entrepreneurs bringing more new Islamic fintech solutions that promise painless access to liquidity. In 2016, Malaysia's central bank launched its very own.
At the time of the launch of the Investment Account Platform (IAP) central bank governor Dr Zeti Akhtar Aziz said the internet-based platform would provide more convenience to channel funds from investors to viable commercial projects.
Aziz called it “a means by which both investors and entrepreneurs can experience and benefit from new risk-rewards concepts embedded in an investment account”.
Joann Enriquez, IAP’s chief executive, says the platform can provide projects with the liquidity they might struggle to find elsewhere by providing crowd-sourced finance underwritten by banks.
Though the projects IAP has supported have so far been light on numbers, they have each been successful, to the tune of 160 million Malaysian ringgit ($39.2 million) in total investments. The challenge now is to attract more entrepreneurs and find ways to finance the projects that banks reject.
Salaam Gateway: What makes IAP different from a typical crowdfunding platform?
Joann Enriquez: IAP is like crowdfunding in a way, because investors go to the platform and choose whatever investment they want. Its origins come from a white paper from Bank Negara (BNM), Malaysia’s central bank. BNM wanted to find a way to channel Islamic deposits more efficiently through banks.
Investment Accounts have the potential of differentiating Islamic finance products with conventional banking products. Many contend that this differentiation must be made otherwise it is looking very similar with each other.
If you had a project and you wanted it listed on IAP, you would first fill in your details and tell us all about it online. This then goes to all our sponsoring banks, to see if they want to sponsor the project. Those banks that feel it is something they want to be involved in will give an offer of financing, and the project head chooses which one to accept. When the project is listed by the bank on the platform, it’s offered to retail, corporate and institutional investors.
The sponsoring bank will already have the money that’s needed for the project set aside to invest. But when we offer the investment on the platform, it will generally be funded by other investors themselves, who place cash into the bank under an investment account.
The bank disburses financing for the project from the investors and collects the principal and profit from the project head until the financing is paid off. That completes the process.
How did you persuade traditional banks to work with a disruptive platform?
Because we are an initiative by the central bank, all Malaysian Islamic banks were invited to be involved and six are now our primary shareholders. They have invested time and money to develop this multibank technology platform.
Investors pick out which projects they want to go with, whether it’s a pool of investments or if it’s directed into a specific project. Obviously because the risk is higher, the return is higher. Typically, your return on deposits will be about 3.5 percent; IAP projects have ranged from 4.9 - 7.5 percent per annum. It’s pretty similar to the bond/sukuk market more or less in terms of returns, though of course our platform runs investments through the banks.
How successful have the projects listed on IAP been so far?
We’ve only been able to churn in total 160 million Malaysian ringgit through the platform, but there’s still a lot of potential.
What we’re lacking is the projects. We don’t have enough applications for two reasons: one is knowledge—it’s not very well known to many; the second because the projects aren’t bankable. The banks may refuse to underwrite funding.
To get more applications, we offer the platform to any suitable project. We are also looking at ways we can still help if the proposal is not approved by the bank. We could bridge financing for the project with another entity, or that entity may design a product as co-signer through the platform. So then it will get financing.
How big an issue is access to finance in Malaysia?
In Malaysia, 98 percent of the total number of businesses are small and medium scale. This accounts for about 37 percent of GDP. It employs about 65 percent of the total labour force, but SMEs remain to have challenges in financing. There is liquidity in the system and a lack of Islamic assets to invest in. We hope to bridge that in the platform. We have to find a way for us to churn that money and really support the SME sector for the sake of the Malaysian economy. Other sovereigns are following suit, they’re seeing what we’re trying to do and looking at how they can duplicate it in their own countries as well.
We have been in conversations with the ICD (Islamic Corporation for the Development of the Private Sector) to see if all the other member countries of IDB (Islamic Development Bank) might be willing to duplicate this in their own milieu.
Why should non-Muslim companies consider this form of Islamic finance?
For you to be able to see the beauty of what we are trying to do, you first have to understand Islamic Finance. Simply put in my own humble words and understanding I believe Islamic Finance is aimed to ensure that both the the giver and receiver of funds benefit from the transaction. That the gains/losses are justified by the effort and or the risk that the parties take. With this, profits are justified. If there is no justification, it becomes riba and is therefore haram or forbidden in Islam.
The conventional banking system is laden with riba which is forbidden in Islam. Islamic Finance doesn’t believe in: gaining without the risk or commensurate effort.
When the conventional banking system tried to Islamize conventional banking products it was a challenge and remains to be. A lot of the proponents of Islamic Finance will say it’s almost the same, there’s no difference. I believe that the investment account product is a step towards differentiation. This is an admirable move by the bank, a step towards true Islamic finance, where what your gain is justified.
But banks don’t like change, do they. What’s in it for them?
Bank Negara is one of the drivers of Islamic Finance. They’re much of the reason behind why Malaysia is a global centre for this. Dr Zeti Akhtar Aziz is an advocate of Islamic finance.
Bank Negara planted the seed for the IAP. With the evolution in financial technologies, the industry is veering towards the utility of fintech, it’s dictating its terms and the banks are listening. When IAP started, Bank Negara was playing a developmental role but slowly it is being shaped by the industry and the demand of the times.
In the ecosystem we have created, Islamic banks back up investments in projects and customers have the choice of where to invest the money in their accounts. I say it’s like we’re standing on the strong legs of the banking system to promote equity with the utility of Islamic contracts.
What sort of investments have been made?
Right now it’s financing for SMEs across all industries, as long as the applicant meets banking and shariah criteria, though it’s not just for Muslim companies. There is a minimum size of investment of half a million ringgit.
All 11 of our projects have been fully funded with no defaults. We are currently fundraising for another project. Because it is underwritten by the banks, there we can ensure certainty in funding— an accepted project will never go unfunded.
There’s no limit to the number of projects we can do. We just haven’t found that sweet spot between our maximum and our minimum. There’s still a lot of potential, the mechanism is ready to churn.
We’ve only been listing one project at a time, though my hope is to have at least three projects at the same time there. Right now we have a project looking to purchase computer hardware that can be given to teachers for rental.
On a final note, there is much creativity that must be utilized in order to make the mechanism cater to current needs and bridge gaps that exist. We are very encouraged with the reception we have gotten thus far. Many want to collaborate to promote what we have and innovate to widen the horizon for IAP and create various verticals for the consortium.
(Interview by Richard Whitehead)
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