Islamic Finance

Islamic fintech: Malaysia wins in Islamic finance but its tech start-up ecosystem still a work in progress

A woman browses the Internet at a cyber cafe in Kuala Lumpur June 15, 2011. REUTERS/Bazuki Muhammad

Malaysia’s developed Shariah-compliant finance infrastructure and ecosystem draws in Islamic fintech start-ups even though it is not a global technology hub like neighbouring Singapore.

Dr Farrukh Habib, a researcher with Kuala Lumpur’s International Shariah Research Academy for Islamic Finance (ISRA), whose academic interests include fintech, believes Islamic fintech holds some promise for Malaysia, but only if authorities keep their eye on the ball and find ways to coax new entrepreneurs to their jurisdiction. He stresses it is starting from a very low base.

“Although Malaysia has been focusing on being the leader in Islamic finance, in technology terms I haven’t seen much progress from the authorities,” he told Salaam Gateway. “There’s been a lot of talk but we haven’t seen many initiatives on the ground to promote this.”

In this respect, Malaysia may have the Islamic finance part of the equation but not enough of the tech start-up ecosystem.

In the State of Southeast Asian Tech Report 2018, which surveyed more than 100 leading figures in the technology industry in six regional countries, half of respondents said they would choose Singapore if they were to launch a new tech company in the region, with Malaysia coming a distant second. Over a quarter said access to capital and quality of a jurisdiction’s ecosystem would inform their decision on where to locate. Regulatory ease of doing business was a distant second.


In the overall tech space, Singapore leads Southeast Asia, doing so by offering start-ups a good supply of funding and incentives, as well as rigorous regulation.

Singapore has a formalised, official approach towards nurturing and developing technology, with government agencies offering a plethora of incentives to position the city-state as a start-up hub.

The Startup SG scheme offers a variety of programmes, such as Startup SG Founder, where the government matches 3 Singapore dollars ($2.17) for every 1 Singapore dollar raised by a first-time entrepreneur, and Startup SG Tech, which provides proof-of-concept and proof-of-value grants.

In the Startup SG Equity scheme, the government co-invests with qualified third-party investors, while Startup SG Accelerator provides funding and other support to incubators and accelerators in Singapore. It even has a talent programme that helps non-residents gain work passes and subsidises certain human capital development costs. Start-ups can also benefit from loans backed by the government.

Moreover, revenue authorities offer tax exemptions to qualifying new start-ups, while a scheme for angel investors offers tax deductions to individuals and groups willing to put money into fledgling technology companies.

Specifically for fintech start-ups, the Monetary Authority of Singapore provides funding support for qualifying costs, subject to certain criteria, under its 225 million Singapore dollar Financial Sector Technology and Innovation Scheme.


In Malaysia, small businesses, including start-ups, are given preferential tax rates as well as some tax incentives. There is also an angel tax incentive granted to investors in technology-based start-ups, while entities in the Malaysian Digital Hub are offered partial corporate tax exemption.

The Malaysia Tech Entrepreneur Programme, under the Malaysia Digital Economy Corporation (MDEC), is designed to attract individuals and help them set up and develop their start-ups by offering accelerated work passes.

To bridge the funding pipeline between the private and public markets, the regulator Securities Commission has developed some initiatives to expand private sector funding for seed capital and growth financing through the venture capital and private equity sector.

It is also addressing gaps in early-stage capital through equity crowdfunding and peer-to-peer financing platforms. This has been complemented with the launch of the Leading Entrepreneur Accelerator Platform market by Bursa Malaysia, the Kuala Lumpur stock exchange.

Which country has the most Islamic fintech start-ups?

In the absence of comprehensive official data, it’s difficult to pinpoint the number of Islamic fintech start-ups. Industry stakeholders disagree on which country is home to the most Islamic fintech start-ups.

INDONESIA: “I’m quite sure Indonesia has the most number of Islamic fintechs,” Umar Munshi, co-founder of Shariah-compliant Ethis Ventures and chairperson of global industry body the Islamic Fintech Alliance, told Salaam Gateway. Munshi cites the Indonesia Shariah Fintech Association (ASFI), of which his Ethis co-founder Ronald Wijaya is chairperson. Wijaya told Salaam Gateway last month there are 12 fully-Islamic P2P platforms that are members of ASFI. Further, Adrian Gunadi, the vice chairperson of the Indonesian Fintech Association, said that 20 to 30 of the association’s 130 members offer Islamic products and services.

MALAYSIA: Still, some in Malaysia believe the country tops Indonesia. “You will be amazed to know that, from an Islamic finance perspective, the biggest number of Islamic fintech start-ups are in Malaysia,” said ISRA’s Dr Farrukh Habib. Further, Malaysia-based industry publication IFN Fintech last year said there were 18 Islamic fintech start-ups in Malaysia, 16 in the UK and 15 in Indonesia.


What differentiates Malaysia and Singapore as fintech start-up bases is the likelihood of prospering over time, said Robin Lee, co-founder and chief executive of Kuala Lumpur Shariah-compliant fintech start-up HelloGold, which uses blockchain technology to support gold trading.

“In terms of the ability to operate a business, Malaysia is probably there or thereabouts: I don’t think there is a whole lot of difference between Singapore and Malaysia in terms of what you can or cannot do, or the opportunity to innovate,” the former CFO of the World Gold Council told Salaam Gateway.

“The real issue is the licence to flourish,” said Lee.

“The issue concerns the ability to get talent and the ability to get funding,” he added.

He believes Singapore will always have an advantage in attracting start-ups because of the ability to get the grants that are available there. “As entrepreneurs, we have to go where the money is,” he said.

“When you look at the actual deals, and the amount of capital invested in deals in Malaysia and Singapore, you have overwhelmingly much better-funded start-ups in Singapore,” said Lee.

“By order of magnitude, on a per-deal basis, what has been raised in Singapore is about six times the size of [investment in] Malaysia—which is even lower than in the Philippines,” added Lee. 

“That means, if Malaysian companies and start-ups were to have the same per-deal average as Singapore companies, you would be looking at an extra $1.3 billion in capital missing. That’s a chunk of change that has to come from somewhere.”

While Lee doesn’t advocate the Malaysian government stepping in to boost funding levels by offering a pot of money, not least because most start-ups fail, he says an environment is needed to help businesses like HelloGold “bridge the gap between what is available in the current environment and what we need”.

“This is important because, when we’re building a business, if we all started at the same time, with the same idea, with the same capabilities, and the same lucky breaks and unlucky breaks, by the time we start to look at regional expansion, it’s the Malaysian companies that will be the ones that will be lucky to succeed,” said Lee.

“This is because the valuation for start-ups in other countries [like Singapore] is going to be much higher because they have much larger funding. This sets us at a significant disadvantage,” he added.


Ethis Ventures' Umar Munshi believes Malaysia’s regulatory environment for Islamic fintech is “good” overall but pointed out start-ups still face challenges.

“Overall the regulators have come up with a sandbox and also the Securities Commission has regulated P2P but I guess it is still a little bit heavy-handed in some aspects and that makes it difficult for good, promising founders to come in because they may not have the ability or the capacity to come up with, for example, capital requirement or to engage lawyers who are familiar with these kinds of submissions,” said Munshi, whose Shariah-compliant fintech platforms operate across Malaysia, Singapore and Indonesia. 

Like many other jurisdictions, including Singapore, Malaysia operates a sandbox system. This is commonly used in the fintech universe to refer to a mechanism for developing regulation that keeps up with the fast pace of technology innovation.

Whereas regulators tend to employ a suck-it-and-see approach to fintech regulation currently, as they wait for more significant developments that might not have been foreseen to arise, ISRA’s Habib believes Malaysia needs to adopt a full framework soon that will integrate the whole technology ecosystem as it becomes more overarching.

“The current guidelines are not comprehensive enough, so we may need new legislation and a regulatory framework,” he said.

“The regulators will play a very important role, so they must look into regulations that are accommodating for technology start-ups—not only fintech start-ups, but tech start-ups overall.”

(Reporting by Richard Whitehead; Editing by Emmy Abdul Alim

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