A muslim women is seen passing a Bank Islam commercial sign in Kuala Lumpur, Malaysia.
Faris Hadziq/SOPA Images/LightRocket via Getty Images
At our Singapore-based venture capital firm, we keep an eye on emerging tech sectors across Southeast Asia, and we’re seeing a surge of new growth potential in a traditional niche business. Few non-Muslims even know about the Islamic financial industry. Fewer still know that the Malaysia-Singapore-Indonesia corridor is a breeding ground for innovation in the industry.
Islamic fintech firms in this region are providing digital services with wide appeal. The prime Southeast Asian market is Indonesia, home to the world’s largest Muslim population, at over 230 million. But some startups are already going global, as their online and mobile-first services have two notable advantages. The services—especially peer-to-peer financing and crowdfunding—can easily be used by the world’s 1.9 billion Muslims, and the tech-savvy firms are able to compete well with conventional Islamic banks.
Islamic Finance in Brief
To grasp what these firms are up to, some context is helpful. Islamic finance follows principles spelled out in sharia, Islam’s body of religious law. Although such finance has been practiced for centuries, modern sharia-compliant banking took shape only from the mid-20th century onward, spurred by the independence and growing prosperity of Muslim-majority nations. Financing differs from the standard kinds in several ways.
First, most Muslim scholars agree that sharia forbids charging or paying interest. Passages in the Quran and the hadith equate interest with usury, so there are arrangements that allow the parties to earn money otherwise.
For example, instead of giving you a mortgage loan at a specified rate, a sharia-compliant financial firm would buy the desired property, then lease or sell it to you in installment payments that add up to more than the initial purchase price. Other services are structured on profit- and loss-sharing. When making a bank deposit, you’d earn a specified share of the bank’s profits on the money rather than interest. For a business loan, you would pay back the principal plus a share of your profits. Critics say the net result in these cases is just interest by another name, but to observant Muslims, the difference matters.
Sharia further rules out investing in anything that involves haram (prohibited) substances or activities, such as alcoholic drinks and gambling, which are deemed harmful. Thus, an Islamic financier wouldn’t trade in casino bonds, and many now avoid tobacco-related investments as well. Sharia-compliant finance also frowns upon overly risky investments, deceptive practices, and the like.
On the positive side, sharia strongly encourages investing and giving for the good of the community. Projects that help the poor and needy are esteemed. So are investments in halal (permissible) ventures such as sharia-compliant food processing and halal tourism, which includes alcohol- and pork-free hotels. The zakat—an annual 2.5% tax on surplus wealth, to be directed to charity—is viewed as an obligation by strict Muslims, who may prefer financial firms that will calculate and disburse their zakat for them.
The summary above touches only on some main features of Islamic finance. In Islam, as in every religion, one can find varying interpretations of the basic principles, and not all Muslims feel bound to (or are aware of) all the principles as they apply to financial affairs. This helps explain why Islamic finance hasn’t come close to market saturation in any predominantly Muslim country.
Yet the demand for sharia-compliant services is strong and growing. Compliant assets worldwide were recently pegged at over $2.4 trillion—up from a mere $200 billion in 2003—and were projected to reach $3.8 trillion by 2022, according to Thomson Reuters. New fintech ventures are expected to drive much of the growth.
I spoke to Hamood Al Fanna of Islamic finance, sharia, sharia-compliant, investments in halal, zakat, IDO Investments out of Oman to get a better understanding of how the Arab states in the Gulf region view Islamic banking as a way to fuel growth in regional economies. He said, “The Central Bank of Oman (CBO) continuously encourages Islamic windows of commercial banks and Islamic banks to help fuel the productive sectors of the economy. For example, SME financing that can stimulate the economy and create jobs instead of consumer sectors e.g. car or property loans.”
While media attention has focused on developments in the Persian Gulf region, Islam’s birthplace, multiple factors point to Southeast Asia as a rising powerhouse in Islamic finance.
Foundations of Islamic Fintech in SE Asia
A main factor is the vast Indonesian market. Not only are 87% of the country’s 270+ million people Muslims, about two-thirds are currently unbanked—many in remote or rural regions—and the great majority carry cell phones. This makes them prime prospects for mobile-based fintech. Moreover, though Islam isn’t the state religion, Indonesia’s government actively promotes a progressive sharia economy.
Malaysia, a fast-developing nation with over 20 million Muslims among its 33 million, does support Islam as the official religion and has long been a center of Islamic finance. Malaysia typically ranks third (after Iran and Saudi Arabia) in measures of sharia-compliant assets. The country is HQ for leading financial entities like Bank Islam Malaysia and the Islamic branches of Maybank and CIMB Group, as well as Islamic-savvy law and accounting firms and the international Islamic Financial Services Board.
Singapore, where we sit, is small and only 14% Muslim. But it is the most highly developed ASEAN state and a hub of new tech industries. Now consider some fintech firms in this three-country swath of the world.
What the New Firms Do
Alami (Indonesian for “natural”) has a sharia-compliant P2P service to link funders with small and medium-sized businesses in Indonesia. Many funders are themselves business owners or professionals. In testimonials publicized by the firm, they say they use the service because it helps build the nation’s sharia economy, and they trust Alami’s screening process to choose SMEs that will pay relatively low-risk returns. Thus far, the company has steered P2P funding into over 30 businesses and is recruiting for expansion.
Ethis, based in Singapore with a growing network of country offices, is the region’s best-known Islamic fintech. The company operates a variety of sharia-compliant crowdfunding platforms. Some pay profits to funders by investing in Islamic causes—e.g., affordable housing for Indonesian Muslims, or equity investment in Malaysian startups and SPVs—while the Global Sadaqah (“charity”) platform channels donations to needy Muslim individuals and groups anywhere. Ethis was born global. The company says its Indonesian housing venture has built over 8,000 low-cost homes with investments from 65 countries, and a new Ethis platform now provides crowdfunding for real estate projects in Dubai.
Two other promising firms are Investree, a P2P marketplace for a range of business financing needs, and Ammana, with similar services. Both are Indonesian and sharia-compliant; Investree has raised Series C venture capital. We’ve seen additional Islamic fintech startups launched recently, in areas that range from back-office support systems for SMEs to sharia-friendly payment apps and e-wallets for consumers.
Challenges and Keys to Success
The road to mass acceptance is still uncertain for these companies. They must compete with Islamic banks and myriad non-Islamic institutions. But as I wrote in a previous Forbes column on digital neobanks, today’s new digital providers have some key edges over most incumbent financial firms. They don’t have to support physical branch offices. They are well positioned to recruit bright young talent. And by using the latest technology instead of building on legacy IT systems and management structures, they can move quickly to offer services that incumbents often don’t. (How many major banks provide crowdfunding or P2P lending, with rapid AI-based vetting of creditworthy recipients? That’s a proposition that can, and increasingly does, appeal to even non-Muslim investors.)
Keep your eye on Islamic fintech from Southeast Asia. As the world’s Muslim population grows and propagates—across South and Central Asia, through the Middle East and North Africa, into Europe and North America—some new firms we’re watching may come your way sooner than you think.
With contributions by Justin Hall of Golden Gate Ventures