Can Malaysia find its niche as a Shariah fintech hub?

In Southeast Asia’s tech scene, Malaysia occupies a no-man’s-land of sorts.

Its 32 million population – substantially smaller compared to its neighbors’ – is less conducive to cultivate single-market, local startups. The country also isn’t a global financial hub like Singapore, which has attracted startups and venture capital firms to set up regional operations.

But there is one niche where Malaysia could differentiate itself: Islamic fintech.

The country is a global leader in traditional Islamic finance. According to a report by the Islamic Corporation for the Development of the Private Sector (ICD), Malaysia represented 13.2% of global Islamic banking assets. The country comes in third after Iran (28.5%) and Saudi Arabia (21.2%) and has nearly 8x more assets than Indonesia (1.7%), which has the world’s largest Muslim population.

So far, however, its government and startups have been slow to capitalize on this advantage.

In 2021, Malaysia’s Islamic fintech sector generated US$3 billion in transaction volumes. Meanwhile, the country’s Islamic finance space as a whole reported assets of over US$272 billion, according to central bank data.

What gives?

Malaysia’s long history in Islamic banking – it introduced the Islamic Banking Act and established Bank Islam Malaysia in 1983 and enacted the Takaful Act in 1984 – is an undeniable advantage for Islamic fintech startups.

Malaysia was also in pole position in the Global Islamic Fintech (GIFT) Index for 2021 and 2022. The index measures 19 indicators in over five categories: talent, regulation, infrastructure, capital, and Islamic fintech market and ecosystem.

Naoto Nomura, a general manager at the Malaysian outpost of Japanese lender Aeon Credit Service, says that for aspiring Islamic fintech players, Indonesia is more attractive in terms of market size and talent pool.

However, the Kuala Lumpur-based executive adds that Malaysia has a better regulatory system in place. This makes it easier for companies in the sector to set up operations, launch products, and collaborate with larger incumbents.

“It’s a very good strategy to start [in Malaysia] and then explore out into other markets,” says Nomura, whose company was part of a consortium – along with Aeon Financial Service and MoneyLion – that obtained a digital banking license from Bank Negara Malaysia (BNM), the country’s central bank.

Nomura says that part of the infrastructure includes Shariah finance scholars who can help draft new financial products, providing advice even on new trends like blockchain and cybersecurity.

“We are quite amazed at the knowledge and literacy they have beyond finance,” he says. “For them, Islam is a value system, [but] it’s also a science.”

Thus far, however, local startups have not seized the opportunity that Malaysia’s status in traditional Islamic finance presents.

A launchpad for expansion

More urgency?