BANKING ON SUCCESS

Malaysia 2017 | FINANCE | FOCUS: SME FINTECH FUNDING

Malaysia is a major financial hub and the sector is looking at new ways to increase access to financial services for all consumers.

Malaysia has assumed a leading role in the global market of Islamic finance and in February 2016 took a new step in this direction. Six Islamic banking institutions launched the investment account platform (IAP), the first bank-intermediated fintech platform. The opening ceremony was attended by now-former Governor of Bank Negara Tan Sri Dato' Sri Dr. Zeti Akhtar Aziz, who iterated in her speech that SMEs are key drivers for jobs and economic prosperity and that the platform to boost the financial landscape of Malaysia was greatly welcomed.

The platform was developed by IAP Integrated, a subsidiary of Raeed Holdings, and involves a consortium of six banks: Affin Islamic, Bank Islam, Bank Muamalat, Maybank Islamic, Bank Rakyat, and Bank Simpanan. Rating agency RAM will provide independent ratings on the ventures or assets listed on IAP.
The initiative is targeted at reducing initial investment costs for Islamic banking institutions that are working on new business lines. In doing so, the platform shifts the role of Islamic lender from credit providers to investment intermediaries. The goal is to enable SMEs and entrepreneurs to gain easier access to financing and for the platform to serve as a central marketplace. Raeed Holdings' chairman, Datuk Zamani Abdul Ghani, expressed, “It is an opportunity to earn competitive returns as well as a new avenue to diversify [the bank's] investment portfolio."

The Malaysian government is backing the platform with an initial MYR150 million and the idea is to raise another MYR200 to 300 million in the next two to three years. Via IPA, the participating banks provide a secondary market for investors, where they continue to have the ability to underwrite equity transactions, if necessary. The investment accounts in the platform are meant for consumers with a higher risk-appetite, and will exist along with the Islamic deposits, which can already be withdrawn and guaranteed by Perbadanan Insurans Deposit Malaysia (PIDM). The IAP accounts will retain funds for a longer period of time and have the opportunity to earn more returns, though with more restrictive withdrawal conditions. At the same time, this implies the accounts are not guaranteed by the PIDM.

Islamic financing has been on the rise globally in countries with Islamic majorities and Malaysia has played a pioneering role in creating the necessary financial infrastructure. The launch of this platform fits with the market trends that are signaling a growing demand for sharia-compliant assets. The proportion of investment accounts to total funding increased to a mere 10% for the participating Islamic banks, indicating growing interest.

In the Islamic Financial Services Act of 2013, Islamic banks were required to separate Islamic deposits from investment accounts, which were also a driver for this innovation and might have prompted these banks to diversify the financial products that were offered. In this sense, the platform allows the banks to take on another funding profile, offering new investment avenues, complementing private equity financing and venture capital funds, for businesses to have access to financing. It provides opportunities to tap into new sources of funding and broadens the intermediary role of Islamic banks in promoting economic growth and development. For consumers, it expands opportunities to participate on a risk-sharing basis with value-based confidence, thus potentially enhancing entrepreneurship and other economic activities in the country where over 60% of the population practice Islam.

The IPA allows international investors to come in, has no restrictions on the inflow foreign capital, and offers an exemption on income tax for the first three years. On a longer timeframe, the platform targets multi-currency financing, also for ventures outside of Malaysia. These indicate the strong ambition of the Malaysian financial sector to take on a leading role in Islamic SME financing in the region and worldwide.