This article first appeared in Digital Edge, The Edge Malaysia Weekly on June 10, 2024 – June 16, 2024
In the dynamic landscape of Islamic finance, Malaysia stands out as a global hub with a 24% market share of the global Islamic financial assets of more than US$3.6 trillion (RM16.9 trillion). In respect to the Islamic digital economy, Malaysia often ranks first for its Islamic fintech.
With a robust regulatory framework and a burgeoning fintech ecosystem, the country has been at the forefront of promoting shariah-compliant financial solutions. Within this thriving ecosystem, however, a concerning trend has emerged — an increasing focus on financing and debt creation at the expense of savings and future-planning tools.
According to the Global Islamic Fintech Report 2023 by DinarStandard, there are 417 Islamic fintechs globally, 57 of which are in Malaysia. The same report also shows that, by sector, financing comprises 53.7% of the total versus only 32% for the savings and invest sector.
Malaysia’s Islamic finance industry has traditionally been guided by principles that emphasise ethical investment, risk-sharing and asset-backed transactions. These principles are enshrined in shariah law and intended not only to encourage Islamic finance but also enhance financial stability, equitable wealth distribution and responsible financial behaviour among Muslims.
Despite the foundational principles of Islamic finance, many Islamic fintech start-ups have shifted their focus towards financing and debt-centric models. This shift can be attributed to several factors, including market demand, profitability considerations and the challenges of creating new behavioural patterns. It is easier to give money — that is, loans — to people than to influence behaviour to encourage savings and financial future-proofing.
A driving force behind the emphasis on financing and debt is perceived demand in the local market. While Malaysia boasts a sophisticated Islamic finance ecosystem, access to credit remains a challenge for many individuals and businesses, particularly among lower-income segments of the population and gig workers. In response to this demand, fintech start-ups have stepped in to offer alternative financing solutions, including micro financing loans, equity crowd funding, peer-to-peer lending platforms and “buy now, pay later” schemes.
While these products address an immediate need for liquidity and financial assistance, they may inadvertently contribute to a culture of debt dependency among Malaysian consumers, especially since the educational aspects of debt is rarely addressed.
Instead of promoting savings and responsible financial planning, these platforms facilitate easy access to credit, potentially exacerbating the problem of over-indebtedness.
The latest statistics on the Employees Provident Fund and Permodalan Nasional Bhd showing that most Malaysians have only RM10,000 in savings are telling of the major retirement crisis that will soon be an issue for all in the coming years. This is especially true, since the country is on the cusp of being an aged society.
Moreover, the pursuit of profitability and scalability has incentivised Islamic fintech start-ups to prioritise products that generate higher returns in the short term.
Financing and debt-based products often yield greater profit margins compared to savings and investment tools, leading companies to allocate more resources towards their development and marketing.
As a result, start-ups opt for the path of least resistance, focusing on products that are easier to implement and monetise, even if they deviate from the core principles of doing the right thing as required by the Quran.
The consequences of this trend are significant and extend beyond the realm of finance.
By prioritising debt over savings, fintech companies risk undermining the long-term financial stability and well-being of their customers. Excessive reliance on debt can lead to financial distress, reduced savings rates and a cycle of indebtedness that perpetuates economic vulnerability — a core reason that riba is strictly prohibited in Islam.
Furthermore, the neglect of savings and future planning tools deprives consumers of essential resources for building wealth, achieving financial goals and safeguarding against unforeseen emergencies. In a rapidly changing economic landscape, the importance of prudent financial management cannot be overstated.
To address these challenges, Islamic fintech companies must realign their priorities and refocus their efforts on promoting savings and responsible financial planning.
This requires a concerted effort to develop innovative savings products, investment platforms and financial education initiatives that empower consumers to take control of their financial future.
It is encouraging to see local regulatory authorities and industry stakeholders playing an active role in shaping the trajectory of Islamic fintech.
To ensure that debt is not the mainstay of Islamic financial assets, however, more needs to be done to ensure that savings and investments are prioritised and the connectivity of the zakat and waqaf institutions to addressing social inequalities is better leveraged to benefit the entire country.
While Malaysia has made significant strides in advancing Islamic fintech, the predominance of financing and debt-centric models represents a departure from the foundational principles of Islamic finance.
To realise the full potential of Islamic fintech as a catalyst for positive change, stakeholders must prioritise savings and future planning, fostering a culture of financial empowerment and resilience within society.
Only then can Islamic finance through fintech fulfil its promise of delivering ethical, inclusive and sustainable financial solutions for the benefit of all.
Rejina Rahim is the founder of Wahine Capital Sdn Bhd, a digital vault uniquely crafted for women
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