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The rampant proliferation of non-bank BNPL providers is indeed a cause for concern as more Malaysians are saddled with debts causing a rise in bankrupts especially among the
young adults. But it would not be fair to blame the BNPL players for the surge in household debts as the root cause is often pointed at consumers’ irresponsible credit card usage. The credit card
facility is a common BNPL instrument. Statistics showed that Malaysia’s household debt rose to
RM1.38 trillion (US$308.74 billion) as at the end of 2021, from RM1.27 trillion (US$284.13 billion) in 2020.
What is concerning about BNPL, which is normally interest-free, short-term financing, is that approvals are loosely given based on basic credit information of the consumers without a thorough assessment of their ability to service the installment payments. Tightening of the BNPL framework would hopefully address rising debts. The enactment of the Consumer Credit Act (CCA), which is expected to be presented in the second quarter of 2023, will serve as a preemptive approach after observing the trend, risk and potential impacts on consumers’ financial position. The CCA will be administered by the Consumer Credit Monitoring Board, which is led by the Ministry of Finance.
There is an ideal alternative to the conventional BNPL for these non-bank credit providers to consider. Shariah financing is not under the purview of the CCA as its principles are in accordance with Shariah (Islamic law). Islamic banking in Malaysia is strictly regulated as it is governed by the Shariah Advisory Council of Bank Negara Malaysia. This is a Shariah committee that essentially ensures all Islamic personal financing in Malaysia adhere to the Shariah principles which exclude all of the following practices:
● Haram — Businesses that include gambling, alcohol,
tobacco, pornography and more
● Riba — Income made from interest-bearing loans
● Gharar — Speculative or risky sales where the value is
dubious or uncertain, and
● Zulm — Activities and practices that are exploitative,
oppressive or cruel.
As Islamic finance emphasizes partnership and risk-sharing, it could be very useful in vastly bridging the access to financing for the poor and small businesses on a global scale, especially since non-Muslims are not prohibited from using Islamic financial services.
Overall, economic growth would be fostered as a decrease in poverty would be complemented by budding small businesses getting better opportunities to simultaneously grow, increase
output and generate jobs. Moreover, the further adoption of Islamic finance and its principles helps to strengthen financial stability as it avoids leverage and speculative financial products, two factors which brought upon the financial collapse of various banking systems across the world during the global financial crisis in 2008.
Recognizing the growing importance of Islamic finance, Sedania As Salam Capital (SASC) wants to play a huge role in helping financial service institutions (FSIs) move into this segment, backed by SASC’s strong track record in empowering Islamic financing and fulfilling its principles. Its notable accomplishments within the fintech spectrum encompassed pioneering As-Sidq, Malaysia’s only Shariah compliant digital Islamic financing platform which to date has served the Tawarruq needs of over 80 financial services institutions. Assidq.com launched in 2019, becoming the first online Islamic financial marketplace in Malaysia that facilitated customers’ Islamic financial needs through personalized profile checks, approvals and disbursements.
That is not all. We are also a strong proponent of financial inclusivity and unfortunately BNPL does not address the underbanked or unbanked segments, as those who want to enjoy the BNPL facilities need to own a credit card. However, the following question remains: how many of these underbanked or unbanked segments own a credit card? Not many.
As such, we are able to help financial service institutions to tap into these segments via our GoHalal Financing Programme (GHP) which addresses the urgent demand for financing, especially for those impacted by the COVID-19 pandemic. SASC’s GHP is an ideal solution, which enhances and improves the financing ecosystem for consumers, particularly amid the rapid digitalization of the financial services industry.
The GHP was launched by SASC in 2021, with Grab and JCL Credit among its prominent partners to date. The program offers Shariah compliant financing that would facilitate an Islamic financing environment by equipping community credit companies with the necessary procedures and required tools to provide more convenient and secure access to financing for the Malaysian community. The one-of-its-kind GHP has key Shariah compliant features such as Shariah advisory services by Afsha Shariah Advisory and the As-Sidq Digital Trading Platform using digital commodities for real-time transaction and processing, key features crucial in upholding Shariah principles for microfinancing. Subsequently, its capabilities were further strengthened through the incorporation of ‘E-mandate’ (automated recurring collection platform) in collaboration with Curlec, while also adding Takaful protection to the program by partnering with FWD Takaful.
As key clients Grab and JCL Credit continue to record an increasing average daily number of transactions via the GHP platform which has simultaneously grown over the same period, one of SASC’s huge goals going forward is to vastly accelerate the Islamic cash financing agenda. This would be supported by its constantly improving technological expertise, which includes a reliable credit scoring mechanism that accurately captures data on historical repayment track records and background checks to determine the amount of financing available to any
given individual. Besides continuously expanding the GHP’s reach and promoting
Islamic financing, SASC also aims to more effectively utilize strategic partnerships with internationally recognized technology players to create the most conducive fintech
ecosystem which caters to the needs of financial services institutions and consumers. SASC’s notable technology partners include Crealogix and Mambu, both who already operate seamlessly using digital solutions within new types of digital banking environments.
These partnerships provide SASC with the required capabilities to ably support the development of digital banking infrastructures and enhance convenience for customers to secure financing. While technology-driven SASC has the capabilities to empower Islamic financing toward circumventing risky BNPL schemes, it is also vital that Shariah-financing agencies understand the importance of having robust standard operating procedures (SOPs) in place, to avoid similar conundrums of the past which plagued conventional financial institutions. From a credit risk perspective, Islamic finance institutions can be exposed badly by defaults on loans as they are prohibited from charging any interest or imposing penalties. During this period, capital is trapped and cannot be utilized to generate income from other avenues.
To better mitigate this risk, SOPs which ensure better collateralization and more insightful pricing of contracts are needed, such as making it mandatory to use in-depth data analysis methods to evaluate the risk profile of customers. Additionally, Islamic financing institutions need to be wary about operational risks such as failures in internal controls involving processes, people and systems, as well as Shariah noncompliance which may damage their reputation. In this case, SOPs need to be crafted with a view toward creating reliable reporting procedures which provide reasonable assurance of the soundness of operations and maintain strong governance standards.
More importantly, having a dedicated Shariah advisory council to advise and assist the Islamic financial institutions in implementing Islamic financial products is key to maintaining the strict adherence to its principles. Essentially, the issue surrounding BNPL has brought to light the credit risks associated with it but on the other hand highlights the importance of Islamic financing, which we can further optimize and offer innovative as well as diversified financing products to (almost) all walks of life
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