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Abu Dhabi Regulator Issues Framework for Robo-Advisers in Investment and Finance While Malaysia Prepares the Ecosystem for Digitisation and FinTech Inclusion in the Waqf Sector

Abu Dhabi Regulator Issues Framework for Robo-Advisers in Investment and Finance While Malaysia Prepares the Ecosystem for Digitisation and FinTech Inclusion in the Waqf Sector

The connectivity between Islamic finance and digitisation and FinTech continues unabated with new initiatives in regulatory framework, digitisation of social finance and the launching of an Islamic E-commerce marketplace in the UAE, Malaysia and Indonesia during July 2019.

The Financial Services Regulatory Authority (FSRA) of the Abu Dhabi Global Market (ADGM) for instance issued its regulatory framework for Digital Investment Managers (also known as ‘robo-advisors’), operating in ADGM.

According to ADGM, Digital Investment Managers (DIMs) provide investment management services using algorithm-based tools and technology to interact with more tech-savvy clients. This technology allows investment managers to provide tailored investment management services to clients in a cost-effective and scalable way. DIMs, says ADGM, have the potential to play an important role in promoting financial inclusion and providing a wider range of options for retail client investors in the Middle East and Africa region.  To support the industry, the FSRA has prepared this guidance framework to illustrate how its regulatory framework applies to these businesses and how robo-advisors can operate more effectively in ADGM. 

“Robo-advice leveraging AI and data analytics,” explained Richard Teng, CEO, FSRA of ADGM, “is an area of FinTech that has enormous potential to improve investment decision making in the Middle East and Africa region. With this guidance, we aim to make it easier for digital investment businesses to operate in ADGM and in turn provide investors with greater access to professional investment tools to help achieve their financial goals. As an international financial centre, ADGM actively enhances its framework and platform to support innovation and the varying financial needs of businesses, investors and consumers.”

The guidance outlines the key areas of regulatory permissions that may be required to provide digital investment services in or from ADGM; and how the FSRA will apply its authorisation criteria in key existing areas of technology governance, suitability and disclosure, and newer areas such as algorithm governance.

The FSRA’s requirements, with respect to algorithm governance, are closely calibrated to match international best practices and incorporate principles of fairness, transparency and accountability, which include human oversight over the design, performance and security of the algorithm model; ensuring that the algorithm model is not affected by possible behavioural biases; adequate safeguards to protect the integrity of the algorithm model; and ensuring the outcomes produced by the algorithm model are explainable, traceable and repeatable.

In line with the FSRA’s risk-proportionate regulatory approach and framework, the guidance also states that the FSRA will permit DIMs to hold a lesser amount of prudential capital should they meet the stipulated criteria and requirements.

In Malaysia on the other hand, the Waqf sector is set to move towards digitalisation and FinTech inclusion, according to Minister in the Prime Minister’s Department Dr Mujahid Yusof Rawa.

Dr Rawa has been working on an updated Waqf Act, which includes the government working with experts in the information technology (IT) space to discuss the possible incorporation of AI and blockchain into Waqf structures and applications. Recent developments in the digital economy, Dr Rawa said, can play a crucial role in addressing the issue of transparency and trust in implementation of Waqf.

“We are taking into consideration all these as our components in the Waqf Act. As it involves money, we need a regulatory body to manage it. Together with this regulation, we are also moving towards the digitalisation and using blockchain technology and AI, within our Islamic agencies,” he stressed at the launch of a Report on Waqf in July 2019 in Kuala Lumpur co-authored by the World Bank, INCEIF and ISRA.

The Minister identified three major current issues in the Waqf sector – the lack of a professional management culture among Waqf administrators; the lack of transparency in managing Waqf funds in a number of jurisdictions; and the lack of a regulatory framework governing the collection of cash Waqf through online platforms to ensure transparency and integrity of such collections vis-à-vis the stakeholders.

“We, the policy maker, in addition to the establishment of the Malaysian Department of Waqf, Hajj and Zakat (JAWHAR), which collaborates with the State Religious Councils on zakat, hajj and Waqf, would continue to work on building the ecosystem that encourages and nurtures the Waqf development,” he said.

In Indonesia, Halalvestor, a new online marketplace for Shariah-compliant investment products, is in the process of launching subject to final approval from the Financial Services Authority (OJK) following the company’s application for a licence to operate.

Halalvestor will compete with existing e-commerce platforms such as Bukareksa, that offers both Islamic and conventional investment products, and Tamasia, which specialises in gold-backed investments.

Meanwhile the Securities Commission Malaysia (SC) has warned the Malaysian public to be wary of persons selling initial coin offerings (ICOs) and digital asset exchanges (DAX). The SC has not authorised any ICOs pending the finalisation of its guidelines. Any offering of digital assets as well as its associated activities such as marketing or inducing others to subscribe to an ICO will require authorisation from the SC. This follows the coming into force of the Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019 (Prescription Order) on 15 January 2019.

According to the SC, an ICO issuer not having a physical presence in Malaysia would make it difficult to verify the authenticity of the ICO. Further, the recovery of invested monies may be subject to foreign laws or regulations. The involvement of unauthorised individuals heightens the risk and exposure to fraud, money laundering and terrorism financing. The ICO may be structured in such a way as to limit the legal protection and recourse for the investors against an ICO issuer. The SC also highlighted cyber-security risks including hacking and stealing of online personal information.

The SC is also urging investors to be cautious when considering buying or selling digital assets through trading platforms. Even though a platform may call itself an ‘exchange,’ it does not mean it has been authorised by the SC.

As of 4 June 2019, the SC has registered three Recognized Market Operators (RMOs) to establish and operate DAX in Malaysia. These three DAX operators, namely Luno Malaysia Sdn Bhd, SINEGY Technologies (M) Sdn Bhd and Tokenize Technology (M) Sdn Bhd, have been given nine months to fully comply with all regulatory requirements.

No other online platforms are permitted to establish and operate a DAX in Malaysia currently.

Global Sukuk Issuances Set to Thrive Through Innovation and the Use of Fintech and Blockchain Technology as IIFM Sukuk Report 2019 Confirms Primary Issuances Topped US$123.2bn in 2018

Manama – Global Sukuk issuances during the year 2018 totalled US$123.2 billion, which is a 5.5% increase over 2017 primary market Sukuk issuances of US$116.7 billion, says the Bahrain-headquartered International Islamic Financial Market (IIFM), in the 8th edition of its Annual Sukuk Report.

IIFM is the industry standard-setting body focusing on standardization of Sharia’a-compliant financial contracts and product templates relating to the Islamic financial services industry.

The Report notes that currently 90.44% of the US$443.78 billion Sukuk outstanding globally are issued from only a few well-established markets, namely Malaysia, Saudi Arabia, UAE, Indonesia and Bahrain, while other countries such as Turkey, Pakistan, Qatar, Oman and regions such as Africa in particular are set to gradually increase their market share in the coming years.

The Report identifies global Sukuk (with issue size of US$100 million or above and with tenor of more than a year) set to mature during 2019 and 2020 will be around US$73.34 billion. Considering investors’ appetite and Sukuk issuances in the pipeline, these maturing Sukuk will likely be refinanced with new Sukuk issuances as has been the case in recent years.

Another trend in the Sukuk market is the continued growth in issuances from sovereigns, while the quasi-sovereign, corporate and financial institution issuances also remained stable contributing to an optimistic outlook for the Sukuk market.

“Sukuk’s commercial success should not lead us to ignore the underlying principles which are its distinguishing factors when compared to conventional bonds. Sukuk are an innovative way to raise financing in a Sharia’a compliant manner with link to the real economy. IIFM’s current initiatives on standardizing Sukuk Al Ijarah and Sukuk Al Mudarabah suite of documentation will address some of the critical issues which surfaced in recent cases of Sukuk defaults and restructuring,” said Khalid Hamad Abdulrahman Hamad, Chairman of IIFM.

According to Ijlal Ahmed Alvi, Chief Executive of IIFM, innovation is not only changing the dynamics of the Islamic finance industry but the Sukuk market is also likely to benefit from technological advancements in the area of FinTech and blockchain technology. “It is pleasing to note that the new issuances also include environmentally friendly Green Sukuk, Socially Responsible Sukuk and blockchain related Sukuk,” he added.

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