Smart Investor Malaysia


The Rise Of Digital Banks And Islamic Finance In Malaysia


The pandemic has brought about a wind of change in the way we live our lives, with online activity becoming more common. We do more online shopping, we order more food online and have it delivered to our doorstep, businesses have to embrace online meetings, and schools and learning
institutions have their teachings and learnings online as well. We are also seeing the rise of digital banks and Islamic finance in Malaysia.

There’s also a surge of demand for online banking but not everything can be done online. Online banking primarily focuses on essential transactions such as money transfers, bill payments and basic online account management. For other transactions, we still need to perform it physically at the bank’s branch.

This is where digital banking will revolutionise Malaysia’s banking industry. A full-fledged digital bank is a financial institution that offers financial services solely through a digital platform. Almost all banking activities that were previously only available at bank branches can now be performed
online with digital banks.

Smart Investor spoke with Othman Abdullah, Chief Executive Officer of Islamic Banking at Silverlake Group, a global financial technology and
digital economy solutions provider to find out more about digital banks. Silverlake is one of the pioneers of Islamic finance IT solution providers, and is also the most prominent in the region. Being a Malaysian company, Silverlake Axis is proud to be the enabler for 70-80% of daily Islamic financial transactions in Malaysia. All full-fledge Islamic banks and the majority of Islamic entities of banking groups in Malaysia run Silverlake’s core banking solutions in their core businesses.

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Digital Banks And Islamic Finance In Malaysia: Are We Ready?

Photo by Sadie Teper on Unsplash

For those sceptical of Malaysia’s readiness for digital banks, Othman replies, “Ready or not, it is something that our country has to do as there
are real demands for digital banks.”

Quite a number of other countries are already far ahead. It is encouraging to see our central bank, Bank Negara Malaysia (BNM), implementing various efforts and initiatives to drive the growth of digital banking. This includes the issuance of a licensing framework for digital banks, which was announced on the 31st December 2020. As of April this year, BNM has issued five digital bank licenses to ensure that the digital banks and Islamic finance in Malaysia has a bright future.

The main advantage of digital banking for customers is convenience, where banking can be done anywhere, anytime. Through technology, service deliveries and business operations have become more efficient for financial institutions. Digital banking also addresses a key agenda as outlined by
BNM, which is to cultivate financial inclusion to reach the underserved or unserved communities.

“As a financial technologist, I tend to see digital banks as mainly advantageous. The only disadvantage I see in digital banking services is that users are vulnerable to cybersecurity risks such as loss of credentials to hackers that result in financial loss. Digital banks will have to strengthen their cybersecurity defences, while consumers need to be vigilant of cybersecurity threats,” mentions Othman.

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Digital Banks And Islamic Finance In Malaysia

The global Islamic banking and finance market is valued at over US$2.5 trillion. According to S&P Global Ratings Islamic Finance Outlook 2022 Edition, it is estimated that the global Islamic finance industry would expand by 10-12% in 2021-2022. In view of the expansion of Islamic banking assets in some Gulf Cooperation Council (GCC) countries, Malaysia and Turkey as well as sukuk issuances exceeding maturities, S&P Global Ratings opines that higher digitalisation and fintech collaboration could help strengthen the industry’s resilience in more volatile environments and open new avenues for growth.

Digital transformations of financial institutions greatly accelerated by the Covid-19 pandemic, has created huge demands for digital Islamic finance
solutions. According to a report, the Islamic fintech market within the Organisation of Islamic Corporation (OIC) countries alone is projected to grow at 21% CAGR to US$128 billion by 2025.

“We are also seeing digital banking initiatives launched by conventional Islamic banks such as Bank Islam with its Be U app, and Al-Rajhi Malaysia also shared some of their digital banking initiatives,” quips Othman.

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The Future Of Digital Banks And Islamic Finance In Malaysia

The future of digital banks and Islamic finance in Malaysia looks very bright for Islamic finance. In addition to Muslim countries intensifying their efforts to further grow their Islamic finance market, non-Muslim countries have also been expanding their interests in developing the Islamic finance market in their jurisdictions. Indonesia has a national agenda to support a Shariah-compliant economy, coordinated by the efforts of their Islamic fintech association to develop the ecosystem.

The Malaysian government through its Shared Prosperity Vision 2030 (SPV2030) has identified Islamic finance and the digital economy as one of their Key Economic Growth Activities (KEGA). Digital banks and Islamic finance in Malaysia has a bright future indeed.

About the Author

Othman Abdullah is the Chief Executive Officer, Islamic Banking at Silverlake Group, a global financial technology and digital economy solutions provider. Othman is also a consultant for Silverlake Integrated Banking Solution and Silverlake Straight Through Banking Platform. Qualified in both IT and Islamic finance and equipped with more than two decades of hands-on experiences servicing financial services industry, Othman has positioned himself as a financial technology thought leader in the space of Islamic financial services.

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