The Malaysian Government and its two main financial regulators, Bank Negara Malaysia (BNM), the central bank, and the Securities Commission Malaysia (SC) continue their drive to push the digital economy, FinTech and the ESG/SDG agenda, especially in the Islamic finance and Halal economy sectors.
The net effect is the consolidation of traction in these areas, whilst also being relevant for the whole economy and financial sector.
One of the key thrusts of Finance Minister Lim Guan Eng’s 2020 Budget is accelerating the Digital Economy by building the digital infrastructure. Malaysia, for instance, will implement the National Fiberisation & Connectivity Plan (NFCP) over the next five years which will provide comprehensive coverage of high speed and quality digital connectivity nationwide including rural areas. The NFCP will adopt a public private partnership approach involving a total investment of RM21.6 billion, of which the federal territory of Putrajaya is committed to provide at least half of the required investment, with corresponding investments by the private sector telecommunications players via a matching grant mechanism.
Budget incentives for the digital economy include: i) RM250 million to the Malaysian Communications and Multimedia Commission (MCMC) to leverage on various technologies, including via satellite broadband connectivity; ii) RM210 million to accelerate the deployment of new digital infrastructure for public buildings, particularly schools and industrial parks; iii) the introduction of a 5G Ecosystem Development Grant worth RM50 million; iv) RM25 million to set up a contestable matching grant fund to spur more pilot projects on digital applications such as drone delivery, autonomous vehicles and blockchain technology; v) RM20 million to Malaysian Digital Economy Corporation (MDEC) to grow local champions in creating digital content; vi) RM500 million fund over five years for SMEs to adopt digitalisation measures for their businesses; vii) RM550 million to provide Smart Automation matching grants to 1,000 manufacturing and 1,000 services companies to automate their business processes; viii) RM20 million to the Cradle Fund for the provision of training and grants to seed companies; ix) RM10 million to MDEC to train micro-digital entrepreneurs and technologists to leverage on e-Marketplaces and social media platforms to sell their products; and x) RM450 million to Khazanah Nasional to implement a digital stimulus initiative, which will benefit up to 15 million Malaysians.
“Malaysia’s transformation into a digital economy will only be realised with the adoption of digital culture and participation in digital transactions towards a cashless society,” stressed the Finance Minister. According to BNM’s 2011-2020 Financial Sector Blueprint, Malaysia stands to gain about 1% in cost savings to its GDP annually by switching fully to e-payments processes and becoming a cashless society. This is at a time where mobile payment transaction volume had increased twenty-fold to over 34 million transactions in 2018 from just below 2 million transactions in 2017. However, the overall adoption of e-wallet remains low at only 8%, based on a survey report by Nielsen in January this year.
BNM, revealed the Minister, is finalising the licensing framework for digital banks to be issued by year end for public consultation. The final framework will be issued by the first half of 2020 to invite applications. At the same time BNM in October also issued the “Value-based Intermediation Financing and Investment Impact Assessment Framework – Guidance Document” (VBIAF) following an extensive public and industry consultation. The guidance document is jointly developed by the VBI Community of Practitioners (CoP), the International Centre for Education in Islamic Finance (INCEIF) and The World Bank Group (Malaysia Office), with input also from the World Wide Fund for Nature (WWF) (Malaysia and Singapore Offices).
The VBIAF, says BNM, aims to facilitate the implementation of an impact-based risk management system for assessing the financing and investment activities of Islamic financial institutions in line with their respective VBI commitments. It also serves as a reference for other financial institutions intending to incorporate environmental, social and governance (ESG) risk considerations in their own risk management system.
In Budget 2020, the Government allocated RM50 million to the Malaysia Co-Investment Fund (MyCIF) to help finance start-ups and SMEs by co-investing on a one-to-four basis in campaigns listed on ECF and P2P platforms. A further RM10 million has been allocated to MyCIF under Budget 2020 specifically for social enterprises to raise funds via P2P financing platforms.
In neighbouring Indonesia, SME-focused FinTech start-up Investree Radhika Jaya, which is licensed by the Indonesian Financial Services Authority (OJK) to conduct both conventional and Shariah-compliant business, is in the process of closing its Series C funding round by December. By September, according to Salam Gateway, Investree had secured a total of 3 trillion rupiah (US$214 million) in loans and financing. The company had also disbursed 2.6 trillion rupiah (US$186 million) in loans this year, yielding an annual return of 16%.
Investree intends to intensively develop its Shariah-compliant business unit over the coming year. The start-up is targeting cross-border collaborations with institutions in Malaysia, Brunei and the Middle East, where they are looking for Shariah-compliant assets. Investree Syariah aspires to become a platform to deploy excess liquidity in these markets to Shariah-compliant SMEs in Indonesia.
At the same time, Indonesian microfinance institution BMT Bina Ummah raised IDR710 Million (US$50,000 USD) through a primary micro-Sukuk issuance on the blockchain via Blossom Finance’s SmartSukuk™ platform. Funds raised in the offering, which uses a Mudarabah (profit sharing) structure denominated in IDR and carries a maturity of one year, will be used to expand financing for local entrepreneurs.
Blossom’s SmartSukuk™ utilizes Ethereum “smart contracts”. All records, assignments, calculations, and payments pertaining to the sSukuk are managed via the smart contract, which leaves behind an indelible audit-trail at every step of the way.
In the GCC region, Kuwait’s Boubyan Bank and Zain Telecom are cooperating to launch the Middle East’s first digital Islamic bank, subject to regulatory approval from the Central Bank of Kuwait. Currently the first movers in digital banks include Neo by Mashreq, Liv by Emirates NBD and Meem by Gulf International Bank.
In Abu Dhabi, the state-owned sovereign wealth fund, Mubadala Investment Company, has launched MENA-focused tech investment funds in an aggregate amount of AED918 million (US$250 million) to support start-ups from the GCC and the wider Middle East region. The funds will invest in companies and venture funds that help boost the local tech incubator Hub71—which was launched earlier this year as part of a broader effort by the government to diversify the economy and in which Microsoft and SoftBank Group are partners.
The funds include: i) an AED 550 million ($150 million) ‘fund of funds’, which will invest in funds that are committed to support Hub71 ecosystem; ii) and an AED367 million (US$100 million) fund dedicated to direct investments in early-stage technology companies. According to Mubadala Capital, the first investment from the direct fund is in Dubai-based Bayzat.
Another potentially important development is the agreement signed in October 2019 by the Islamic Corporation for the Development of the Private Sector (ICD) and Malaysia’s IAP Integrated Sdn Bhd, the owner and operator of the Investment Account Platform or IAP.
IAP Integrated is a wholly-owned subsidiary of Raeed Holdings Sdn Bhd which is a consortium of six Islamic Banks in Malaysia, namely Affin Islamic Bank, Bank Islam Malaysia, Bank Muamalat Malaysia, Maybank Islamic, Bank Kerjasama Rakyat Malaysiaand Bank Simpanan Nasional.
IAP Integrated is an internet based multibank investment portal. The portal facilitates efficient intermediation by the sponsoring banks to match financing requirement of ventures with investment from retail and institutional investors via Investment Account (IA) product.
IAP is a multibank crowdfunding platform that has helped raise funds of more than RM200 million for various SMEs and private companies since it started in February 2016.
The ICD will assist IAP Integrated to market its crowdfunding fintech solutions to other major Islamic markets such as Central Asia and Africa, in addition to the traditional Islamic markets in the Arab regions.