Malaysia’s Islamic fintech sector on the rise, set to hit US$12 billion by 2026

[KUALA LUMPUR] The chief executive of Malaysia Digital Economy Corporation – a government agency spearheading the economy’s digital transformation – is bullish about the future of the Islamic fintech sector as a key source of economic growth.

Mahadhir Aziz said: “Leveraging Malaysia’s market dominance in Islamic finance and Islamic fintech, we have been successful in exporting Malaysian Islamic fintech solutions to international communities.”

He noted that the government has been actively supporting efforts to strengthen Malaysia’s global standing in the Islamic fintech industry.

At last year’s Islamic Fintech Leaders Summit, Mohd Daud Bakar, chairman of the Shariah Advisory Council for the Securities Commission and Bank Negara, made the point that Islamic fintech is “growing exponentially” in Malaysia, with a third of the world’s Islamic fintech companies headquartered in the country.

He noted that Malaysia remains the global leader in Islamic finance, and was ranked first among 81 countries for the ninth straight year.

Data from market research firm Statista showed that Malaysia’s Islamic fintech sector was valued at US$4.8 billion in 2021. This was a 60 per cent increase from the previous year, with the market size expected to grow to US$12 billion in 2026.

Globally, the Islamic fintech market reached US$79 billion in transaction volume in 2021, and this is expected to grow on average by 18 per cent annually to reach US$179 billion by 2026, said the latest Global Islamic Fintech Report.

Industry observers say Malaysia’s main advantage is that about 60 per cent of the population is Muslim; this has resulted in a steady build-up of demand for Islamic finance services over the years.

A report in The Malaysian Reserve last August stated that there are 47 Islamic fintech companies offering various financial services that comply with syariah law and principles.

Among the Islamic fintech firms that have been making their mark at home and abroad is Global Psytech, which has a growing presence in Singapore, Indonesia, Oman, Qatar and Fiji. The company offers fintech analytic solutions to government agencies, financial institutions and clients in the private sector.

Analysts say the growing market is also attracting the attention of foreign funds looking for investment opportunities in the space.

Last December, Hong Kong-based FWD Group Holdings collaborated with Malaysian venture-capital firm Artem Ventures to set up a RM45 million (S$13.5 million) fund, to invest in startups in the insurtech and Islamic fintech space.

The fund has already invested in Senang, an on-demand subscription-based insurance company; du-it, an Islamic fintech company; Pewarisan, a service provider for online Islamic inheritance planning; and Blueduck, a zero-deposit insurance agency.

Artem Ventures director Low Zhen Hui said that Malaysia has a strong reputation for being an Islamic finance hub, with well-developed policies and financial infrastructure.

“Since we are a new fund, our top priority is to deploy and invest aggressively this year, with a heavier focus on pre-Series A to pre-Series B companies,” he told The Business Times.

He added that the fund is also looking at engaging with more ecosystem partners for knowledge sharing and value creation activities.

Low said there is strong demand for innovative fintech products and services to cater to those who are financially underserved and unprotected.

In a report in 2019, Bain & Company estimated that around 55 per cent of Malaysia’s adult population are either unbanked or under-banked.

“Other than providing capital, we will facilitate the collaboration between startups and technical experts and business contacts within our network to accelerate their growth,” he added.

Sophia Lee, RAM Ratings’ co-head of financial institution ratings, said that Malaysia’s favourable regulatory and business environments have bolstered the development of Islamic fintech sector.

She also noted that Malaysia was among the first few markets in the world to issue Islamic digital-bank licences.

Last year, Malaysia’s central bank awarded two of its five digital-banking licences to two consortia in Islamic banking. One went to a consortium of Aeon Financial Service, Aeon Credit Service and US-listed fintech firm MoneyLion; the other was awarded to a consortium led by KAF Investment Bank.

“Besides having global leadership in the Islamic fintech market, we continue to be a market mover in the international Islamic finance scene, where Malaysian Islamic banks made up the largest share of assets – nearly 22 per cent – of the top 100 Islamic banks globally,” said Lee.