Originally published in the News Straits Times, 20 September 2016
‘Fintech’ or financial technology is one of the most significant recent developments in the global financial sector. Last year, fintech transactions totalled more than US$769 billion (RM 3.1 trillion) globally and the numbers show no sign of slowing.
Malaysia is positioning itself at the forefront of this emerging sector. The Bank Negara Malaysia recently released a discussion paper on the introduction of a fintech ‘regulatory sandbox’ which would allow fintech businesses to test a new financial technology in the ‘real world’ for a short period of time without the cost of complying with all existing laws.
Bank Negara is expected to release details of its regulatory framework to encourage greater fintech activity in Malaysia by the last quarter of this year.
While Malaysia’s share of fintech transactions is currently small, at around US$6.4 million, I am confident this regulatory framework will provide the base needed to assist technological innovations in Malaysia’s financial sector and increase Malaysia’s share of the burgeoning fintech sector, particularly in Islamic finance.
Malaysia is a global centre for Islamic finance and fintech offers the opportunity for Malaysia to lead the world in improving the quality, efficiency and accessibility of Islamic finance for people and business.
Malaysia’s Islamic banking institutions are already implementing fintech solutions to better service their customers. One example is the recent launch of the Investment Account Platform (IAP) by several Islamic banking institutions.
The IAP provides an online investment platform for customers to invest in and share the profits from Shariah-compliant investment activities.
Malaysia is of course not the only market trying to take advantage of this emerging and disruptive sector. The United Kingdom, Singapore, Hong Kong, Australia and others are all at various stages of implementing policies to encourage fintech in their market.
In Australia for instance, the corporate regulator, like Bank Negara, recently released a discussion paper proposing to introduce a ‘regulatory sandbox’ to enable innovation and remove regulatory barriers that make it difficult for a fintech start-up to succeed.
We are supportive of the constructive role Bank Negara and other regulators are playing in facilitating innovation in financial services. This innovation should improve outcomes for users of financial services and could support Malaysia taking a more central role in the global financial system.
Of course, a more amenable regulatory environment is only one part of encouraging greater fintech in Malaysia.
Access to talent, access to other ASEAN markets and the market for Islamic finance, the quality of technology infrastructure, robust intellectual property protections and sufficient financial resources, including from government grants and loans will all play an essential role in encouraging fintech to take place in Malaysia.
A competitive tax regime can also encourage an entrepreneur to choose to develop and run their fintech business idea from Malaysia rather than somewhere else.
Malaysia already has a wide range of tax policies that make it attractive for business but many of these are only accessible to businesses making a profit.
Given high up-front costs and long-product development cycles tend to mean start-ups are more likely to incur losses initially, the government may wish to consider whether its tax policy settings are sufficient to support loss-making fintech businesses during their early years.
Tax incentives that may assist fintech start-ups in loss situations include making allowances and rebates accessible to all businesses regardless of whether they are making a profit or loss.
Making the payment of such rebates or allowances on a quarterly basis rather than waiting until an income tax return is assessed would assist cash flow as would allowing fintech start-ups in a tax loss situation to cash-out their tax losses.
The work of Bank Negara to spur innovation in the financial sector is welcome.
Fintech offers Malaysia the opportunity to cement itself as a global centre for Islamic finance and increase its role in the global financial system therefore Bank Negara’s focus on this area is absolutely right.
Alex Malley is chief executive of CPA Australia