October 24, 2016 (archive): The Islamic banking sector has not been affected much yet by the FinTech revolution which is threatening some of the most profitable areas of banking. These disruptable areas in the banking business models include some core functions including being the intermediaries between those with surplus funds and those needing financing. As some areas of banking face competition from peer-to-peer lenders, Malaysia’s Islamic Financial Services Act 2013 included provisions that can build some of the same types of disruptive innovation into the Islamic banking marketplace.
One of the most important was the launch of the Investment Account Platform (IAP) in February 2016 which is a crowdfunding platform owned by Malaysian Islamic banks. The launch provides a forum for investment of some of the bank’s investment account holders to directly invest in small companies, providing a new source of capital for SMEs. The launch of the IAP builds upon the Islamic Financial Services Act 2013 which came into effect in July 2015 and forced Islamic bank customers to choose whether to keep their deposits as insured deposits or shift them into (potentially higher earning) investment accounts.
The IAP serves as a way to measure customer interest in crowdfunding as an alternative to traditional bank deposits but, unfortunately, it is still to new to have published public information about the level of funds invested through it. The lag in publication of financial statements also means that there is not much data to show whether the IAP’s launch was a catalyst for growth in the investment accounts which would indicate that the industry is ripe for disruption by innovative alternative business models from the FinTech space.
In lieu of this data, we looked at the individual deposit figures for six large Islamic banks and then focused in on the three largest of them which had the most detailed breakdown of investment accounts and deposits for the period since the IFSA 2013 went into effect. Using data from September 2015 to March 2016, we found extremely rapid growth of investment accounts at two of the three with annualized growth rates of 168% and 277% for Maybank Islamic and Bank Islam, respectively. At the third bank (CIMB Islamic), the growth in investment accounts was not as large but it still comfortably exceeded the overall growth rate of individual deposits at the third.
Looking at the data a different way shows that the growth rate is not solely a factor of starting from a small base but has grown to be large relative to the overall individual depositor base. The table below compares the relative size of the investment account values and the individual deposits a bank holds. At the largest (Maybank Islamic), investment accounts are nearly the size of the individual deposit base.
Thomson Reuters’ State of the Global Islamic Economy Report 2015/16 estimated that the total Islamic banking assets globally accounted for $1.35 trillion and would nearly double to $2.61 trillion by 2020. The investment accounts at Malaysia’s Islamic banks are not insured by the deposit insurance scheme PIDM and represent more authentic risk-sharing instruments and have attracted significant customer interest.
The investment account growth in Malaysia demonstrates an opportunity for platforms similar to IAP and other innovative FinTech to disrupt the existing marketplace. Islamic banks watching Malaysia should realize that, just like the conventional banks they face both a threat and an opportunity from the FinTech revolution. Unlike the conventional banks, they have within their guiding principles a call to embrace risk sharing rather than risk shifting.
The upcoming Global Islamic Economy Summit, being held from 11-12 October 2016 will include a focus on the disruptive potential of FinTech and how it will affect Islamic banks. To register for #GIES2016, please visit www.giesummit.com.