Sunday 12 February 2017

Digital age smart contracts for Islamic finance

(Edited version of this article appeared in my column in the Malaysian Reserve on 13th Febuary 2017)
The mobilization of funds from the Surplus Fund Units (SFUs) to the Deficit Funds Units (DFUs) in Islamic Financial System must be through contracts permissible by the Shariah such as Mudharabah, Wakalah, Murabahah, Ijarah, Musharakah, Istisna’ and Salam. 

Islamic finance products are structured based on either one or a hybrid of these contracts. Examples of hybrid Shariah contracts include Musharakah Mutanaqisah, Tawarruq and Ijarah Thumma Al Bai’ (AITAB). Hybrid contract structures typically involve multiple contracts and/or multiple parties to complete the transactions.

In order to be Shariah compliant, Islamic finance products must observe the fundamentals of contracts in Islamic law. Three main fundamentals are contractual expression (offer and acceptance), parties to the contracts and subject matter of the contracts. Each of these fundamentals come with certain guidelines. For examples, the offer and acceptance must be unambiguous, the parties must have the competency to conclude the contracts and the subject matter must be ascertained by the parties at the time of the contracts.

In the implementation of Islamic finance products, these fundamental guidelines are translated into a set of legal documentations which must be executed according to the right sequence. In Murabahah case for instance, the contractual expression is in the form of Sale and Purchase Agreements (S & P), the subject matter is clearly specified in the S & P documents and the parties to the contracts are represented by the documents’ signatories. To avoid uncertainty (gharar) of selling something that has not been possessed, the sequence in signing of the S & P documents will have to follow the direction of the transfer of assets (subject matter of the contract) between the financial institution and the customer.

The number of legal documents will be more and the order in which the documents need to be executed will be trickier for hybrid Shariah contract structures as there are more contracts and more parties. Let’s look at Tawarruq (also referred to as Commodity Murabahah) as the case in point. Tawarruq refers to the contract of purchasing a commodity on credit by those who need cash and selling the commodity to another party (not the original seller) for a lower price on cash basis. In addition to Islamic financial institution (IFI) and the customer, at least two other parties known as commodity brokers are involved in the transactions. Assuming the product is Islamic personal financing, the sequence of transactions is (1) IFI purchases commodity from Commodity Broker A, (2) IFI sells the Commodity to Customer on deferred payment, (3) Customer appoints IFI to sell the commodity to Commodity Broker B and (4) IFI sells the commodity on behalf of customer to Commodity Broker B. Step 3 involves an agency contract known as Wakalah.

At present, most of the steps described above are still controlled manually. This exposes IFIs to Shariah incompliant risk. In the event bank disburses the financing amount to the customer before full completion of the above steps, the transaction violates the condition precedent of the contract. In Tawarruq application for personal financing, cash can only be generated out of selling the commodity purchased earlier to another commodity broker on cash basis. In addition, the current processes in handling Tawarruq in financial institutions are time consuming and costly.

Blockchain smart contract technology has the potential to significantly improve the process. Blockchain is a peer-to-peer public ledger maintained by a distributed network of computers that does not require central authority or third party intermediaries. First introduced in 2009, Blockchain is the foundation of cryptocurrency such as bitcoin. The scope of Blockchain technology is much wider and has the potential to improve the overall financial system efficiencies. Smart contract is one of Blockchain applications in financial services industry.

Smart contract is a computer program that can execute contract terms. Fully automated, smart contract can either complement or fully substitute typical legal contracts. The terms of the contracts are coded in computer algorithm as a set of instructions that will be executed based on the conditions specified. Upon meeting the preconditions in each step, the smart contract program will automatically execute the next step until the entire transaction cycle completes.  In fact, the advantage of smart contract is beyond automatic executions of contract terms. Leveraging on blockchain technology, smart contract programs allow immutable, verifiable and secure record of all contracts and transactions which are fully auditable.


In summary, Islamic finance products are structured based on underlying Shariah contracts. The terms and conditions of these contracts are specified in legal documents and these documents must be executed in the correct order to ensure Shariah compliant. At the moment, the controls are manual and the processes are time consuming and costly. Blockchain smart contract, an algorithm based computer program, can automatically execute contract terms and has the potential to significantly improve the overall process. 

Career Talk to Kolej PolyTech Mara Students


On the 6th February 2017, I was invited to give a talk to students of Kolej PolyTech Mara (KPTM) Bangi Campus on the topic of Islamic Banking and Finance. In addition to giving some basic info about the subject matter, I was also requested to give some motivations and share about the career prospects in the field of Islamic Banking and Finance.

With the organizing committee and their lecturers

With lecturers and the students that attended the talk

Monday 9 January 2017

Major Fintech Achievements in Islamic Finance in 2016

(Edited version of this article was published in my column at The Malaysian Reserve on Monday 9th January 2017)

Welcoming the New Year 2017, I would like to reflect on the progress of the financial technology (fintech) for Islamic finance. Despite the fact that fintech was not particularly familiar subject within Islamic finance communities until at least 2015, 2016 records quite remarkable achievements. Initial efforts by fintech entrepreneurs few years earlier became more concerted and prominent in 2016. The following are highlights which deserve recognition.

The Investment Account Platform (IAP), Malaysia’s first multi-bank platform for financial intermediation in the Islamic financial system, was launched on the 17th February 2016. Owned by a consortium of six Malaysian Islamic Banks, the IAP serves as a central marketplace to finance small and medium enterprises (SMEs) with an initial funds of RM 150 million. Datuk Muhammad Ibrahim, the Governor of Bank Negara Malaysia, in his keynote speech during Global Islamic Finance Forum 2016 referred to IAP as “the first Islamic banking intermediated internet-based platform that combines the expertise of Islamic banks and efficiency of technology to channel funds from investors to viable economic ventures”.

Eight Islamic Crowdfunding Platform operators from across the globe clicked together to form Islamic Fintech Alliance (IFT Alliance) and launched it on the 1st April 2016 in Kuala Lumpur, Malaysia. The founding members are BlossomFinance (USA/Indonesia), EasiUp (France), EthisCrowd (Singapore), Narwi (Qatar), FundingLab (Scotland/Palestine), KapitalBoost (Singapore), Launchgood (USA) and SkolaFund (Malaysia). According to the alliance’s chairman and the founder of EthisCrowd, Umar Munshi, “the alliance was set up to boost the growth of fintech among Muslims with hopes that they bring significant positive impact especially to those in developing countries”. The alliance has three primary objectives namely, (1) foster safety and trust by establishing, promoting, and enforcing shared standards for Islamic financial technology, (2) broaden the reach of Shariah and social impact financial technology by supporting a network of innovators, and (3) support development of a sustainable global ecosystem by interfacing with and providing industry insights to regulators and other key stakeholders.

Robo Advisors are fintech innovations that have been disrupting traditional investment advisory services. Robo advisors provide online, automated and algorithm-based wealth management services without the use of human financial planners. On the 26th September 2016, New York-based Wahed Invest Inc. launched Wahed, the world’s first automated Islamic investment platform with “the aim of providing access to halal portfolio management for 2 billion Muslims around the world”. In addition to being the world’s first automated ethical investment platform, Wahed offers lower minimum investment amount of USD 7,500. Wahed is claimed to be the first global Robo Advisor to be accessible by the world’s lower socio-economic demographic. According to the statement during the launching, Wahed was available in the United States and would be rolled out to over 100 countries worldwide by 2017.

On the 28th September 2016, Finocracy announced Future Finance 2030, the first Global Islamic Fintech Hub which would be the focal point of the fast growing Islamic fintech space. The fintech hub will be at CH9, a business accelerator that envisions to enhance the entrepreneurship ecosystem in Bahrain and GCC region. Future Finance 2030, expected to launch in the 1st quarter 2017, will include key elements that will continue to power rapid expansion of Islamic fintech while building connectivity with the wider Islamic finance industry. The plan includes an accelerator program, a virtual network to connect various businesses, educational programs for executives and students, and a global hackathon series that will encourage Islamic Fintech development across emerging markets.

Two months after the launching of world’s first Islamic Robo Advisor, Wahed, on the 27th October 2016, the Kuala Lumpur-based Faringdon Group announced that it would be launching the Asia’s first Shariah compliant Robo Advisor. The online tool called Algebra will provide automated portfolio management advice. Open to investors across all geographies with a minimum investment amount of USD 200 per month, clients can choose funds from Islamic Master Select Portfolio. The CEO Stuart Yeomans said that “Algebra brings together the sound investment principles of Shariah compliant funds with the next generation investment tools".

On the 3rd November 2016, Securities Commission Malaysia awarded six Peer to Peer (P2P) licenses, one of which is the world’s first license for Shariah compliant P2P. The license was awarded to Ethis Kapital which focuses on funding small businesses and real estate development projects. Together with seven other crowdfunding platforms, Ethis Kapital is part of Ethis Ventures that builds, runs, and initiates Ethical and Islamic Crowdfunding platforms. According to the Chairman, Dr. Shahridan Faiez, Ethis Kapital has twin focus which are to support and develop the Islamic Sharing Economy in Malaysia and to grow into a serious global player.


Although launched last year, some of these initiatives have been targeted to only start their operations in 2017. Further progress of these initiatives and new innovative entrants will position 2017 for more excitements. Malaysia and Bahrain are very likely to take the lead. Malaysia has issued Fintech regulatory sandbox framework on the 18th October 2016 and Central Bank of Bahrain is considering fintech regulations. With facilitative environments provided by these two leading Islamic financial hubs, I am optimistic that more amazing achievements will be recorded in 2017 for fintech in Islamic finance.

Fintech in Islamic Capital Market

Teaser of my interview with Capital TV Malaysia. The program was aired on Thursday, 5th January 2017, 8.30 pm.



https://www.youtube.com/watch?v=IS0AFsrBQNg