MALAYSIA stands tall as a leader in the Islamic capital market (ICM), boasting impressive assets under management (AUM) and a steady stream of sukuk issuances – making it the world’s third-largest Islamic finance assets market.
The Malaysian ICM remains strong, totalling RM2.32tril at the end of December 2022 compared to RM2.31tril from the year before, according to an annual report by the Securities Commission (SC).
This accounts for a significant 64.4% of the RM3.61tril overall domestic capital market, proving the dominance of shariah-compliant financing.
Within the ICM, RM1.14tril is attributed to shariah-compliant equities, while RM1.18tril represents total outstanding sukuk.
Islamic AUM, meanwhile, stood at RM205.9bil at the end of December 2022, slightly down from RM224.8bil in December 2021.
However, within the realm of Islamic financial technology (fintech), particularly in the domains of Islamic peer-to-peer (P2P) financing and Islamic equity crowdfunding (ECF), there remains a noticeable disparity – leaving ample room for growth within these alternative fundings.
Islamic fintech focuses on harnessing technology to provide a viable alternative for shariah-compliant financing options for micro, small, and medium enterprises (MSMEs).
In 2022, Islamic digital market offerings, which include the Islamic ECF and P2P financing markets, raised RM368.1mil – showing significant growth from RM225.9mil in 2021.
While Malaysia’s competitive advantage remains in the ICM space, for its narrative to be comprehensive and appealing to investors, the Islamic digital market must develop as successfully as the sukuk and fund management segments.
A report by Malaysia Digital Economy Corporation and Islamic Finance News on the Islamic fintech sector in Malaysia in 2021 highlighted a lack of clarity among investors regarding the differences between Islamic and conventional finance, as well as the poor level of Islamic finance literacy.
These views are echoed by founders and chief executive officers of registered shariah-compliant recognised market operators (RMOs). However, they trust that the Islamic products as well as success stories on their platforms could potentially attract investors.
According to founder and CEO of the P2P financing platform Capsphere, Jun Jie Yoon, the platform began operations in 2020 but the group only obtained approval as a registered shariah-compliant RMO from the SC in 2022.
He said that since then, a steady stream of inquiries regarding Islamic financing has been pouring in.
Jun said once MSMEs are aware of Islamic financing, they often choose it over conventional financing options, as long as their company is shariah-compliant.
“Notably, 25% of investors had made the switch from conventional to Islamic financing since the previous year,” said Jun, who was a banker before founding Capsphere.
Year-to-date in 2023, Islamic financing accounts for 60% of Capsphere’s portfolio.
Jun said that in the P2P financing model, multiple individuals contribute small amounts of money to collectively fund larger financial endeavours for entrepreneurs and businesses.
In Islamic P2P financing, Jun said the process remains similar, but the main condition is that the company seeking funding must be shariah-compliant – ensuring it avoids activities related to alcohol, gambling, or pork.Jun added that in Islamic financing, late fees incurred and paid by MSMEs are typically donated to charities, whereas in conventional financing late fees may be collected as additional revenue by the lender.
Commenting on Capsphere’s unique proposition, he said the platform focuses on asset-backed financing which allows for a more competitive rate.
“Our financing uses assets or other forms of collateral as security. However, for MSMEs without assets at the company level, we look at the individual level,” Jun explained.
Additionally, he noted that Capsphere offers a profit rate ranging from 8% to 12%, which complies with the maximum regulatory limit of 18%.
Capsphere offers customisable financing options for MSMEs, with tenures of up to three years and loan amounts of up to RM1mil.
It has supported more than 180 campaigns, benefiting over 70 companies across four key sectors – namely food and beverages, retail and wholesale, manufacturing, and electrical and electronics.
For example, Jun cited a restaurant chain – an SME that used coffee machines as collateral. The SME received over RM600,000 in assistance for its cafe business since the onset of Covid-19, through eight rounds of financing.
Capsphere places a strong emphasis on financial inclusion, allowing individuals to begin investing with as little as RM50. Currently, the platform has over 1,000 investors, with the majority being retail investors, which has grown from 750 investors a year ago.
Over the past two years, Capsphere has achieved an average return of 9.5% per annum.
Another P2P financing platform, microLEAP, began its journey with conventional P2P financing in 2019 and received approval as a registered shariah-compliant RMO in March 2020 from the SC.
Its founder and CEO Tunku Danny Nasaifuddin Mudzaffar said there was a significant surge in business following this development.
At present, 99% of the group’s portfolio comprises Islamic financing, representing a strong shift towards shariah-compliant financial offerings.
“However, there remains a 1% grey area within the portfolio, attributed to retail stores that sell alcohol as well as video production, which presents challenges in terms of regulation,” he said.
Unlike Capsphere which operates on an asset-backed financing model, microLEAP follows a clean funding approach which necessitates the involvement of two guarantors.Tunku Danny said the group utilises a credit risk algorithm that gathers data from a credit bureau.
“Since we engage in a substantial amount of microfinancing, we also require applicants to undergo online psychometric testing to assess their ability to repay the funds,” he said, adding that the requirement is to mitigate credit risk.
Tunku Danny said the alternative credit scoring method complements its traditional credit scoring methods to assign borrowers a low, medium, or high credit score – which then determines the corresponding profit rates.
Regarding the advantage of obtaining financing within microLEAP, he said that the group covers the cost for any issuer or borrower to become shariah-compliant.
“We have many companies that were initially looking at conventional financing. However, as long as the company is shariah-compliant, we encourage them to switch to Islamic financing at no extra cost,” he added.
In terms of investors, the group has about 3,000 investors currently, with 80% of them being retail investors, 10% classified as sophisticated investors, and the remaining 10% representing corporate or institutional investors.
When it comes to the size of the funding, the majority or 80% comes from institutional investors.
microLEAP offers term financing options ranging from RM1,000 to RM50,000 for micro enterprises, with terms that can extend up to two years. For larger SMEs, the group provides invoice financing instead.
“In this method, SMEs need to submit an invoice, and microLEAP conducts an independent check to validate the invoice. If it’s confirmed, we will finance up to 80% or a maximum of RM500,000 of the invoice.”
He also noted that invoice financing SMEs often become repeat customers, citing a company that exports gloves which has turned to microLEAP for financing 40 times.
microLEAP has funded about 250 MSMEs, including 200 micro enterprises and 50 SMEs.
The platform, which facilitates financing of between RM3mil and RM5mil a month, averages an annual return of between 14% and 18%.
Regarding default rates, he said they are currently at 1.25%, having financed RM80mil since inception.
In comparison, the market-wide default rate ranges from 0.1% to as high as 13%, according to Tunku Danny.
Ethis is an ECF platform that enables shariah-compliant businesses, typically MSMEs, to raise capital by offering shares or ownership stakes in the company to a wide pool of investors.
In return for their investments, these investors become shareholders in the company and may have a stake in its future profits and growth.
Ethis Group co-founder and group managing director Umar Munshi describes the platform as a “mini initial public offering (IPO)”.
Umar explained that startups or issuers determine their own valuation.
“However, this valuation undergoes a due diligence process on our side, including market benchmarking, to ensure it is appropriately valued,” he said.
Umar said that companies with audited financial histories can potentially raise up to RM20mil through ECF, but those without audited financial histories could raise only up to RM500,000.
The timeline for an ECF process largely depends on how prepared the issuers are with their own data.
“If there’s a lot of handholding required, it may take months. However, if they have all the necessary information ready, it can be completed in as little as two weeks to a month,” he explained.
Umar also noted that the group offers an online accelerator programme called the Impact Fundraising Accelerator Track (IFAT) – designed to educate and prepare MSMEs for an ECF process.
He explained that the group’s investor base consists of a mix of retail, sophisticated, and institutional investors, with the majority being retail and sophisticated investors.
Umar highlighted the unique value proposition of the group, mentioning that half of the funds raised come from overseas investors, primarily from Singapore, the UK, and Saudi Arabia.
“These investors may provide valuable connections and resources to support companies that are looking to expand their operations abroad,” he added.
As an example of successful overseas expansion, Umar pointed to a Muslim lifestyle app that has expanded to Indonesia with the support of Ethis.
He added that app owner’s valuation has increased by about 25% from a year ago.
From the investors’ perspective, he believes that the group’s emphasis on seeking companies with a social impact is an advantage.
However, Umar acknowledged that through ECF, the return on investments could take three to five years.
Ethis has provided funding to nearly 20 companies in Malaysia since its inception, with a focus on high growth potential start-ups.
Looking ahead, Umar said that the group is eager to introduce ECF for franchises.
“Instead of investing in an MSME that is in the growth phase, we aim to provide investors with the option to invest in a franchise business,” he said.
Furthermore, Umar noted that the group is also exploring opportunities to facilitate the funding for waqf projects.
“In Malaysia, there is plenty of waqf lands and assets that remain undeveloped,” he pointed out.
Umar highlighted that since waqf land is not governed by the Land Act, it cannot receive funding from banks. Therefore, the group is keen on facilitating such opportunities.
In the broader context of ECF and P2P financing, these alternative fundraising platforms have emerged as vital tools for supporting MSMEs in Malaysia, which is the backbone of the economy.
With their expanding reach, focus on shariah-compliant options, and encouraging results in diverse sectors, these platforms are poised to continue driving economic growth and innovation in the country, facilitating greater access to funding for MSMEs.