Recently, Islamic finance and related investment products show a positive growth in Malaysia, particularly within the debt and equity markets, due to the increasing demands among the public as part of the initiatives to avoid forbidden elements in conventional finance and banking sectors, such as riba (exploitative gains / interest), ghara (uncertainties), speculations and et cetera. Before moving further, from a theoretical perspective, Islamic finance fundamentally considers both human desires and also qualities for eternity and omnipotence along with the attributes of God. In the eyes of Islam, the materialistic civilization of the modern society opposes the spirit and essence of submission to the Creator of the world, which makes people nowadays slaves to the material world who fail to find the balance between mind, intellect and spiritual needs that eventually turn them to neglect other people rights to justice. Under Islam, there are three main aspects to be considered – Aqidah (faith and belief), Shariah (practices and activities) and Akhlaq (moralities and ethics). 

Shariah concerns the practical aspects of a Muslim’s daily life and is then divided into two smaller aspects, Ibadat (man-to-God worship) and Muamalat (man-to-man activities). Muamalat plays a significant part in the conduct of a Muslim’s economic activities within his economic system, for example, the banking and financial system where relevant activities take part. Therefore, Islamic finance is often said to be based on Shariah (Islamic law) that comprises of two main elements – injunctions and rules, in which the former signifies the dos and don’ts in both the Quran and Sunnah, whereas the latter signifies the derivation and inference from injunctions made by the fuqaha (experts). Within the Islamic scheme of life and Shariah framework, Islam imposes its ahkam (laws/norms/ values) into five different levels, which are as below:

  • Wajib or Fard – An obligatory duty, of which the omission is punishable;
  • Mandub or Mustahab – A rewarded action, of which the omission is NOT punishable;
  • Mubah or Jaiz – An action which is permitted, and the law is indifferent;
  • Makruh – An action which is disliked but not punishable, of which the omission is rewarded;
  • Haram – An action which is forbidden and punishable.

From an overview, with the entire relationship between Islam and Shariah tied together, a Muslim’s banking and financial activities can be traced to his daily economic activities, to Muamalat, to Shariah, to Islam and finally to Allah, showing the principal and root of Islamic finance.

 While interest in the global fintech landscape has expanded at pace in recent years, fintech in Islamic Finance has lagged globally and is also still in its infancy stage in Malaysia. According to consultancy Accenture, of the more than $50bn that has been invested in fintech globally since 2010, just 1% has gone to companies in the Middle East and North Africa region, which is home to one-quarter of the world’s Muslim population. This speaks volumes, considering that Islamic finance has a huge market including but not limited to 1.8 billion devotees, accounting for 24% of the world’s population. Hence, fintech should be implored further to realise a world of possibilities for Islamic Financial Institution (IFIs), who are seeing an expansion in their reach which includes their non-muslim partners and consumers. To summarize Malaysia’s efforts in improving the skill gap problem faced by Islamic fintech, one study categorized the multiple response strategies into three major themes: 

(1) Educational Interventions, eg promotion of STEM-related education and careers and the integration of Islamic Fintech into university programs like MBA programs.

(2) Incubators and Extra-Curricular Events, eg hackathons, start-up accelerators, independent course offerings, and industry/university conferences.

(3) Government and Policy Interventions, eg financial incentives for new graduate start-up networks, immigration process reform, and mobilizing policy papers directly addressing the chronic skill shortage. 

Fintech in Islamic Finance is only beginning to gain international attention and development, however, it is positioned to greatly supplement Islamic Finance itself, which has seen rapid growth in acceptance and assets globally. According to a recent ICD-Thompson Reuters report, the Islamic Finance industry will grow from $2.2 trillion in assets in 2016 to $3.8 trillion in assets by 2022. To demonstrate this, in April 2017, Saudi Arabia had issued its largest-ever Shariah-compliant bond on the Irish Stock Exchange at the valuation of USD$9 billion, and being wildly subscribed, the bond (Sukuk) successfully attracted more than USD$33 billion in orders, proving the attractiveness of Islamic finance to investors outside of the Islamic world. In the meantime, Malaysia has maintained its position as an Islamic finance global leader, showing an evident statistic of 34.1% of total financing while Islamic banking assets stood at 31.4%. According to the Bank Negara Malaysia Governor, Datuk Nor Shamsiah Mohd Yunus, the Islamic finance industry records a healthy growth in overall and is now integrating socio-finance in product offerings, to further leverage the strengths of Islamic banking for greater accessibility, governance and transparency. By leveraging on Islamic banking and socio-finance, some product offerings such as sedekah and zakat can be used to improve and uplift the livelihood of the marginalized and underprivileged communities, so that the development initiatives on quality growth and value can be furthermore promoted. From a bigger picture, it is conclusive to say that Islamic finance is getting more vibrant with a diverse set of industry players in Malaysia’s market. 

Sources: (PDF) The Impact of Fintech On The Sustainability Of Islamic Accounting And Finance Education In Malaysia

Besides Islamic finance’s implications in the world of business and finance, what is its effect on global politics? Islam is one of the most widely practised religions across borders, accounting for 24% of the total population, with an estimated total of over 1.8 billion devotees. Predominantly, the Islamic world is often associated with those that practice Islam scheme of life in three different ways – religious, cultural and geographical, in which the community is often known as Ummah. Meanwhile, the Islamic states refer to the political areas or countries that use Shariah as its basis in the formation of a government, constitution, laws and social norms. These countries include Saudi Arabia, Pakistan, Afghanistan, Iran, Yemen and Mauritania. Negative perceptions on Islamic finance were far most visible during the first five years after September 11, 2001 terrorist attack in the United States. For example, a few offshore Islamic banks in U.S. were forced to shut down, not to mention the ignorance of the authorities who were lack of Islamic finance knowledge at that point of time decided to closely monitor any Islamic bank with increased surveillance. Nevertheless, currently, the rise of Islamic finance across the world has created a new political alliance and shift that influences substantial segments of majority opinions in both Muslim and non-Muslim countries, of which subsequently contributes to the establishment of working relationships between the poor and wealthy countries. For instance, the U.S. and International Monetary Fund actively encourage the Middle East and other Islamic governments to adopt policies related to economic liberalism and capitalism based on Islamic values and beliefs. One of the significant results was that in April 2017, Saudi Arabia had issued its largest-ever Shariah-compliant bond on the Irish Stock Exchange at the valuation of USD$9 billion, and being wildly subscribed, the bond (Sukuk) successfully attracted more than USD$33 billion in orders, proving the attractiveness of Islamic finance to investors outside of the Islamic world. 

In the meantime, in Malaysia, the introduction of the Anti-Money Laundering and Anti-Terrorism Financing Act (AMLATFA) in 2001 and the establishment of the AML/CFT regime by financial institutions have contributed greatly to much better perceptions towards Islamic finance. Visibly, the public perception of Islamic financial institutions has been corrected through an awareness campaign to reposition the Shariah-compliant finance and alleviate misconceptions in order to sustain its potential growth. Recent news also revealed that Malaysia has successfully maintained its position as an Islamic finance global leader, showing an evident statistic of 34.1% of total financing while Islamic banking assets stood at 31.4%. According to the Bank Negara Malaysia Governor, Datuk Nor Shamsiah Mohd Yunus, the Islamic finance industry records a healthy growth in overall and is now integrating socio-finance in product offerings, in order to further leverage the strengths of Islamic banking for greater accessibility, governance and transparency. By leveraging on Islamic banking and socio-finance, some product offerings such as sedekah and zakat can be used to improve and uplift the livelihood of the marginalized and underprivileged communities, so that the development initiatives on quality growth and value can be furthermore promoted. From a bigger picture, it is conclusive to say that Islamic finance is getting more vibrant with a diverse set of industry players in Malaysia’s market. 


Writers: Cherrish Ng & Vikky Beh

Editor: Vikky Beh