Islamic Finance

Malaysia’s business-friendly regulatory environment is reaping rewards for fintech

This article is part of a sponsored series by the Malaysia Digital Economy Corporation (MDEC). 


Regulatory requirements for fintech start-ups can be so challenging at times that even a promising platform may be shelved before it is tested in the market. However, this is not the case for more persistent start-ups that usually search the entire globe for jurisdictions with more user-friendly regulations and, ideally, provide a helping hand to steer them through what can appear to be a maze of both international and domestic regulations.

At the same time, with fintech being innovative and disruptive by its very nature, regulators have also faced challenges to keep up with the pace of change. For countries wanting to attract fintech and bolster the digitalisation of their economies, regulators have had to be flexible and open to amending legislation for the sector to progressively develop.

Globally, two approaches have emerged over the past few years: revolutionary and evolutionary.

The revolutionary approach emphasises innovation with regulatory testing; interaction with fintech as they develop; and extensive trials based on facts and data.

The evolutionary approach treats fintech the same as traditional financial institutions, with regulations tinkered with to cater to the disruptive nature of fintech.

In Malaysia’s case, a combination of the two approaches is often combined.


Malaysia has opted for a more user-friendly way by adapting to the revolutionary approach as it strives to digitalise the economy and become an emerging fintech hub in Asia, particularly for Islamic fintech. The country’s two financial regulators, Bank Negara Malaysia (BNM) – the central bank – and the Securities Commission Malaysia (SC) have worked closely together to create a conducive regulatory environment. They have also teamed up with the Malaysia Digital Economy Corporation (MDEC) to facilitate fintech start-ups’ entry into the market and draw in investors to create a mature fintech ecosystem that will contribute to Malaysia’s potential to be the heart of digital ASEAN.

The three initiatives that have enabled the creation of a flourishing fintech environment include:

In 2015, the SC launched its Alliance of FinTech Community (aFINity) programme. “It was the first digital initiative to reach out to the fintech community. We have had a lot of participants, from peer to peer (P2P), to robo advisory… whenever we are drafting a new framework, like for P2P, we used aFINity as a sounding board, for feedback and to get input, so when it is rolled out, it’s fit for purpose,” said Azrina Azmel, Deputy General Manager of the SC at the SCXSC 2020 Fintech Conference, held in October 2020.

The programme attracted over 431 registrants, and 675 engagements within the fintech ecosystems. Moreover, a continued engagement was demonstrated throughout the COVID-19 pandemic. “We were able to conduct over 100 engagements, and responded to the interest which is still growing in the digital community, despite the movement control restrictions,” Azrina added.

In 2016, BNM launched its fintech regulatory sandbox framework that enables experimentation of fintech solutions in a live environment. Its key requirements are to improve the accessibility, efficiency, security and quality of financial services; to manage risks; and address gaps and create new opportunities for financing and investments in the Malaysian economy.

“The sandbox was introduced as there are fintech models that do not fit into a specific regulatory framework that was available within BNM. It is an incubation platform that allows BNM to steer these start-ups for 12 months to comply with the law, regulations or standards administered by BNM; or for the unsuccessful start-ups to diversify their business instead,” said Jonathan Lim Hon Kiat, a partner at ZICO law firm in Kuala Lumpur. Under the Fintech Booster programme led by MDEC and BNM, ZICO is also one of six legal and consulting firms that have volunteered to provide their expertise in legal and compliance matters.

The MDEC’s Fintech Booster Programme was introduced in August 2020 to enable digitally-powered fintech companies with legal, compliance, regulation and other requirements, such as assisting them in adopting a risk-based approach involving understanding financial crime and the digital onboarding of customers. The programme’s workshop sessions have also brought in Shariah scholars to ensure Islamic fintech platforms are aligned with the ethics and principles of Islamic finance. “This is important as the regulators want to ensure the contracts using digital apps are Shariah-compliant,” said Aida Othman, Director of ZICO Shariah.

The SC has also issued its first Islamic fintech crowdfunding license to Islamic fintech venture builder, Ethis Ventures, while in mid-2020, the SC’s Shariah Advisory Council permitted the use of digital currencies and digital tokens for investment and trade through registered digital asset exchanges (DAX). This will spur product innovation and development in different asset classes and attract broader participation and investment channels for Shariah-compliant fundraising.

“The regulators are implementing a suitably appropriate ecosystem for Islamic fintech, and MDEC has implemented a number of digital economy initiatives to boost the Islamic fintech ecosystem. The regulatory authorities with the partnership of MDEC wants to ensure Malaysia advances in the field of Islamic finance in Malaysia and across the region,” said Aida.


Consequently, with the support of the regulators, MDEC has enabled 26 Islamic fintech companies and start-ups in Malaysia, a figure outpacing the UK’s 19, the UAE’s 16, Indonesia’s 12 and the USA’s 10 fintech service providers (according to a 2020 report by Islamic Fintech News (IFN)).

At the same time, Malaysia’s regulators are adopting an incremental approach to approving new financial operators and technologies, which has prevented any major stumbling blocks from hindering the sector before the regulators fully open up the market. In digital assets, for instance, the SC has only licensed four operators to trade. “We don’t want to introduce 50 assets, so we are taking a step-by-step approach,” said Chan Zhong Yang, Assistant General Manager of the SC during the SCXSC event recently.

Fintech players have welcomed this approach. “This is because Malaysia doesn’t want to be like China’s massive P2P failures, where online P2P lending went crazy with 6,000 players came crashing down. Malaysia is on the right path, by limiting the numbers as well as allowing for growth at the same time,” said Tunku Danny Nasaifuddin Mudzaffar, Chief Executive Officer of microLEAP, a Shariah-compliant P2P microlending platform licensed by the SC this year.


“In terms of market entry dynamics, Malaysia is being selective in issuing licenses to foreign players. This is because they have to have a proper capability and understanding of the local markets,” said Chan.

Nonetheless, the SC is working to create a level playing field for both foreign and local fintech companies. “There are no biases between local or foreign companies. We look at competencies, and what they can bring to the market. We are looking for potential foreign companies, and we do encourage local fintech players to be innovative and add value,” said Chin Wei Min, Executive Director, Digital Strategy and Innovation of SC, recently at the SCXSC 2020.

Several foreign players have chosen Malaysia to operate their businesses, including a British start-up called IslamicMarkets, a market intelligence platform that has established its base in the capital of Malaysia in 2020. New York-based Wahed, an ethical investment fintech firm, decided to enter the local market in 2019 as part of its global expansion plan.


The global outreach of Malaysian regulators and MDEC has deepened the understanding of what the fintech market needs at a cross-border level. This led to the SC signing agreements with major financial regulatory bodies to cooperate in the development of fintech innovation, including the Dubai Financial Services Authority, the Hong Kong Securities and Futures Commission, and the Monetary Authority of Singapore.

The regulators are also assisting fintech service providers to comply with the international regulations, such as anti-money laundering rules, including electronic Know-Your-Customer (e-KYC) requirements. “All our fintech operators, whether equity crowdfunding (ECF) platforms or P2P have to do e-KYC, this applies equally to all operators,” Chin explained.

Data privacy concerns are also being addressed as more services are digitalised, with legislation potentially amended to align with the European Union’s General Data Protection Regulation (GDPR). “For this, Malaysia is thinking of implementing some of those principles through the Personal Data Protection Department,” said Chin.

As Malaysia pushes ahead with the roll-out of Islamic fintech to improve financial inclusion and spur economic growth, the regulators remain ready to assist fintech companies to enter the new market. “Fintech players can knock on the SC’s door and are welcome to have a conversation with us,” Chin said.



To learn more about Malaysia's plans for fintech click here

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This article is part of a sponsored series by the Malaysia Digital Economy Corporation (MDEC).