Regulating the disruption

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Regulating the disruption

To regulate or not to regulate? That is the fi rst question regulators ask when it comes to fi nancial technology (fi ntech). Viewed as a potential disruptor to traditional fi nancial services, many find this alternative as a more eff ective and inclusive option. Technology reduces paperwork and improves speed by automating manual processes. That signifi cantly reduces legal and administrative costs. Fintech marketplaces do not adhere to bankability parameters. Fintech applies new credit screening methods, including qualitative screening, backed by big data. These platforms also serve
start-ups and social enterprises which are typically less bankable. That creates greater fi nancial inclusivity, and brings social good.

Based on those many benefi ts, regulators should focus on facilitating the growth of fi ntech in a controlled environment. Some regulators have a direct licensing approach, while others have adopted a sandbox approach to encourage innovation. In the absence of regulation, there will be room for arbitrage and abuse or even outright fraud. There may not be existing laws or regulations that capture such wrongdoings or criminal acts. Even if there are legal provisions broad enough to cover this, the punishment may be too light to eff ect deterrence.

Then the next question comes, who should regulate this? The central bank, the Securities Commission, the Ministry of Finance or the ministry in charge of information technology? This question is trickier than it may seem and very often results in delays in regulations.

Why are these issues relevant to Islamic finance? There are many ways technology can be used to facilitate financial transactions. All of which, without prohibitive (Haram) elements in them, are
deemed Shariah compliant. Encouraging the growth of fi ntech can arguably increase the total size of Islamic fi nance assets signifi cantly. It can also promote wider wealth distribution (through donation). Take crowdfunding for example. It is arguable that fi nancing arranged in a peer-to-peer (P2P) manner or by equity crowdfunding (ECF) is Shariah compliant. It is closer to the spirit of Muamalah in Islam as compared to Tawarruq fi nancing.

P2P and ECF platforms facilitate an interested party to invest in curated projects, businesses or individuals (projects). By investing in a particular project, the investor becomes the Rab Al Maal, who together with other investors, place the capital in the project to be run and managed by the project owner. Here, the true spirit of ‘no risk, no gain’ applies. The investors take a risk on the success of the project. If it is successful, they get their capital plus profi t in the agreed proportion. If not, then they risk losing their capital or part of it. This is where regulation is important, among others. Regulation can set the ceiling of projected returns so as not to let a project owner promise unreasonably attractive rates to attract investors, only to find it cannot meet the commitment.

Thus, some countries such as the UK, Malaysia, Thailand and Taiwan are leading the way with the issuance of regulations to govern fi ntech. Some other countries have announced that they are considering the issuance of such regulations.

The author would like to express gratitude to Umar Munshi, the founder of EthisVentures. com and Elain Lockman, the founder and director of ATA Plus for sharing their views.

Dr Hurriyah El Islamy is an IMF expert in Islamic fi nance, an FAA assessor and an AAOIFI CSB working group member. She can be contacted at

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