Fintech redefined: why Islamic finance matters to the development of Hong Kong’s fintech ecosystem

At Hong Kong FinTech Week, panelists shared their views on the capacity for fintech developments to improve regulatory and ethical standards, including ESG, across Asia’s financial markets.

From October 30 to November 5, Hong Kong hosted its eighth annual iteration of FinTech Week, with “Fintech Redefined” as the theme set to colour the conversations of the event’s 500 speakers, 650 exhibitors and thousands of attendees from over 90 economies.

“[In Hong Kong] we offer unparalleled opportunities for fintech businesses – for your businesses – to grow and thrive,” chief executive John Lee, told the audience during his opening speech on November 2.

Growth is synonymous with Asia. In spite of the varied headwinds that have shocked the global economy, leading to slowdown and recession in some markets, the International Monetary Fund (IMF) maintains optimism for Asian economic activity, projecting that the region will account for around two-thirds of global growth in 2023.

Core to the development of any successful financial hub is an environment that fosters financial inclusion. With Asia being home to approximately 70% of the world’s 1.2 billion-strong population of Muslims – one that is projected to grow to approximately 1.3 billion by 2030 – the significance of Islamic finance, or Islamic fintech in particular, is set to become far more important.

“Islamic finance is much smaller than traditional markets, it represents just 1-10% of the total financial universe,” Wai-Lum Kwok, senior executive director of Authorisation and FinTech, at Abu Dhabi Global Market (ADGM) told FinanceAsia during a panel discussion at the event.

“It is concentrated in the Gulf Cooperation Council (GCC) markets, the Middle East and Southeast Asia. However, it offers growth prospects – the demographics of these regions are fast-growing and are largely untapped.”

Saif Khan, chief product and technology officer at Malaysia-headquartered impact investment and Islamic crowdfunding firm, Ethis Group, explained that similar to the fintech industry itself, the Islamic finance industry is new, compared to the conventional finance universe.

“The industry is small, but the potential for its application is vast,” he said.

For example, on October 30, Fusang Exchange achieved a world-first for the market by digitally issuing and listing the first tokenised sukuk to be backed by an institution, the International Islamic Liquidity Management Corporation (ILLM).

The transaction comprised 20 Ethereum tokens and was led by Fusang, using its proprietary Fusag Depository Receipt (FDR) structure to wrap the underlying sukuk into a digital form. 

Early ESG enabler

Islamic finance adheres to Shariah law and is founded on the idea that managing money and implementing financial strategies should comply with the moral practices of the Islam religion.

Specifically, it prohibits financial activities related to tobacco, drugs, alcohol, pork products, gambling, speculation, pornography and armaments; and it condemns “riba” – most closely translated in English as “usury” – implying that wealth should not be gained in an unproductive manner, instead, in some way it should serve a greater good.

“Going back 13-15 years or so, ESG (environment, social, governance) was a smaller universe, but Islamic finance was a first mover in the space, in terms of limiting investment in certain areas,” Sandra Ernst, chief operating officer of Singapore-headquartered insurtech Igloo, shared with FA.

According to a report published by Fitch Ratings on October 25, outstanding ESG sukuk (a Shariah-compliant bond-like instrument) rose by 66% year-on-year (YoY) to account for $33.3 billion globally at the end of Q3 2023, with the ratings agency expecting “further growth over the medium term.”

At the end of this month, Islamic nation the United Arab Emirates (UAE), is set to host the United Nations Climate Change Conference (COP28).

Ernst explained that, in order to better serve a rapidly expanding Islamic economy, the finance community should address market pitfalls.

Discussing the insurance space, she said, “With Islamic finance, in some cases, you may end up paying the same as you would for a conventional product, but the overall benefit is less.”

Additionally, she shared, “Looking at fully Shariah-compliant banks in the UK – either some don’t pay riba at all, or they pay a very small amount and make accommodations for it – they give part of the money away. [Islamic finance] is about ethical investment and finding better solutions to serve its proponents.”

And this is where fintechs come in.

Shariah by design

“Tech is an enabler that can achieve speed, efficiency and greater reach,” said Kwok. “However, with this, comes some new forms of risk – operational and reputational repercussions can also deliver impact at speed.”

“The dichotomy between Islamic and conventional finance in the GCC world is not so stark from a regulatory perspective. Investors still keep a look out for relevant opportunities and for risks that impact ESG considerations…There is opportunity for Islamic fintechs to serve specific needs.”

Echoing this, Khan proposed: “There’s a need for Islamic entrepreneurs to create unique offerings and products that are not ‘Shariah-compliant’ but ‘Shariah by design’.”

“There has to be a much-needed step-change in the thought process of entrepreneurs as [currently] they’re not being creative – the whole focus of Shariah is different and we need to foster an ecosystem of venture capitalists (VCs), accelerators and innovators, to come together and enable an ecosystem that better serves Islamic finance needs.”

Khan considers Islamic finance as equal to real economy finance. “It has to be inclusive and sustainable… it should serve the bottom of the pyramid successfully.”

He notes however, that regulators can encounter challenges when it comes to implementing a framework that serves all facets of the financial community. He offered the example of Malaysia, which he described as “slow but strong”.

“The Islamic framework in Malaysia is mature – the population has been doing business using it for 35 years – this is well-developed and now, regulators want to pivot towards growth.”

Khan sees potential for improved collaboration between start-ups active in emerging industries and long-established market regulators, to adapt and create new regulatory norms. He pointed to Oman’s success in offering licences that enable businesses to raise funds from anywhere in the world, in order to support local endeavours.

“This is an interesting concept because crowdfunding is very local, but this offers extensive funding opportunity,” he said.

Meanwhile, Ernst proposed that financial market participants can increasingly draw upon the support of the fintech community to improve the due diligence processes that affect both conventional and Islamic finance.

“Consumers have become much more critical in the context of ESG – what it means, pink-washing, Shariah-washing. They are interrogating delivery. There is an inherent ‘risk’ in Islamic finance – it does things ‘differently’. It can involve definitions that can be perceived to be ‘foreign’ or ‘new’ and there might be issues with reporting,” she explained.

Technology can also offer transparency.

Khan expanded: “For instance, Islam’s charitable donors (the faith calls on its practitioners to contribute to charity on a regular basis) want to know the reach of their impact – some fintechs are involved in offering blockchain based products, that can track the full supply chain, through to end use.”

While Khan said that ethical standards can also be improved, noting the need to "encourage the development of fintech to serve above and beyond." He added: "Fintech not only has the capacity to cater to Muslims – but to improve ethical finance standards overall.”

Given that Islamic finance seeks to extend access to financial services to otherwise unbanked populations, coupled with its emphasis on sustainable and responsible financial practices, developments in the Islamic fintech space offer significant potential when it comes to shaping the next phase of fintech developments in Asia, the panel concluded.

This article is based on content discussed at Hong Kong FinTech Week, as well as during a preparatory content call prior to the event.

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