The pandemic has forced Islamic banks to change how they look at Malaysia’s growing unbankable population.
KUALA LUMPUR: The head of one of Malaysia’s main Islamic banks insists he has no fear of a new wave of digital banks that will open in the country next year.
Arsalaan Ahmed, chief executive of Al-Rajhi bank, is himself gearing up to unveil the institution’s new suite of digital services at a time when Malaysia’s central bank will issue five licences for challenger banks.
Nevertheless, he is urging other Islamic institutions to beware of the intentions of these digital banks, which will be only too willing to deviate from their social remit and face them on their own turf.
“I don’t think for one second that the digital banks are only going to stick to financial inclusion. I’m sure their application will say that, but I’m certain their business case won’t,” Ahmed said.
Early in 2022, Bank Negara Malaysia, the central bank, will name the recipients of the new digital banking licences, which are set to transform the country’s traditionalist financial landscape. At least one of the winners is expected to be an Islamic bank.
The successful banks, chosen from 29 applicants, will be expected to contribute towards greater financial inclusion by offering products and services to address market gaps in the financially underserved and excluded segments.
“Whose market share do you think they are going to take? It will be the largest banks in the country. For the likes of [Saudi Arabia’s] Al-Rajhi bank, which is a behemoth on the globe but still modest in Malaysia, I’m not worried about these new digital banks,” said Ahmed at the recent Islamic Fintech Dialogue, an online conference in Kuala Lumpur.
Bank Islam, one of Malaysia’s Islamic banking giants, appears to have foreseen this and is preparing to tackle the newcomers head on. By tailoring its business to attract a legion of financially excluded customers, it is preparing to squarely face off against the socially inclusive challenger banks.
Financial inclusion is becoming an important strategy for Malaysian banks, not least because of the wholesale changes to society brought about by the pandemic that have seen more people denied access to the banking market.
Before the first lockdowns in 2020, one in four Malaysians were already self-employed or part of the gig economy according to the World Bank.
“Over the last two years, this number is expected to have risen substantially,” said Mohd Muazzam Mohamed, Bank Islam’s chief executive. “Since banks continue to use traditional means of gathering data to examine loan applications, those people will be considered to be excluded from banking. We need to prepare a roadmap for these unbankables so that they become bankable.”
To this end, Bank Islam has set up a financial inclusion division and recently launched several microfinance products for micro-entrepreneurs and low wage-earners that use instruments such as zakat, waqf and sadaqah in combination with traditional banking products.
Mohd Muazzam predicts that more institutions will follow by finding new ways to assess risk when providing loans, in place of the traditional rating model, which assumes the applicant will have a credit history.
“One of the key things we are trying to do is understand the persona of the unbankable people. We are developing products and services to address their needs and to evaluate the credit-worthiness of this group,” he said.
The current model focuses on the ability to pay, he said, whereas a new one that Bank Islam is working on will look at different data-points that touch on the willingness to pay. These may include metrics such as financial behaviour, cashflow data and even psychometric assessment.
“Soon enough, this new approach to credit assessment will be part of the mainstream financial system,” Mohd Muazzam added.
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