Singapore-based fintech investor tryb has become the first Southeast Asia-based venture capital (VC) firm to invest in the region’s sharia fintech industry by backing a pre-seed round for Indonesian startup Alami.
The deal, which was sealed earlier this year, marks only the second VC funding raised by a sharia fintech startup in Southeast Asia. Last year, Malaysia’s Ethis Ventures had bagged funding from Swiss VC firm Mountain Partners.
Other players in the space have been restricted to relying on angel investors and capital grants as VCs still seem hesitant to place a bet on the industry despite a sizeable market and considerable growth in the number of players, particularly in Indonesia.
Indonesia is home to the largest Muslim population in the world. This, coupled with an unbanked population as high as 64 per cent, makes for a large potential market. According to a 2017 Sharia Fintech Business Study published by state telco firm Telkom Indonesia, the sharia fintech market is worth up to 7.3 trillion rupiah ($525 million).
Tryb, which focuses its investments in the Southeast Asian fintech market, said its decision to invest in Alami was driven by the belief that the Jakarta-based company will be able to capitalize on this huge market opportunity.
“The sharia fintech market is a huge and untapped market in Indonesia with significant growth prospects. Fintech adoption and rising demand from across customer segments (e.g. SMEs, millennials and underbanked) will allow sharia finance to increase the share of total assets in Indonesia…The time is now for sharia finance to grow rapidly in Indonesia driven by significant unmet demand from borrowers and financiers,” said tryb principal Herston Powers.
Alami currently operates as a marketplace for Islamic finance, working with sharia banks to facilitate SME invoice financing. The company recently obtained a peer-to-peer (P2P) license from the country’s Financial Services Authority (OJK) and is set to soon expand its business into the sharia-compliant P2P lending space.
The main difference between sharia and conventional lending is how the returns are structured. Islamic law prohibits interest income, which is seen as an unjust and unscrupulous way of obtaining wealth. Sharia-compliant financial institutions replace this with a profit (and risk)-sharing scheme – which some, even those beyond the sharia market, see as a more just model.
According to Powers, the perceived lack of trust among consumers on aspects like fairness may be one of the hidden contributors to low banking penetration, and it is something sharia fintech players like Alami can address through its products. The startup, he said, is able to offer products that follow the same principles their consumers use in conducting their own business and living their own lives.
“We believe a significant number of Indonesians will prefer partners and products that fit their values and it will be natural for Alami to expand its product offerings to support the full life-cycle of its customers. We are looking forward with the perspective that the conditions in Indonesia are ripe for this segment to explode due to fintech adoption and demographics,” Powers said.
Commenting on the investment from tryb, Alami CEO Dima Djani said he believes the deal is not only a reflection of a change in tide for the sharia fintech industry but will also act as a catalyst for more VC fundings.
“Over time, we have experienced limited appetite from investors for this sector due to various factors. However, given the recent trends on both increase in Islamic lifestyle and rising middle class in Indonesia, I expect that investors will start looking at this sector,” he said.
Djani’s view is echoed by Erly Witoyo, CEO of Singapore-headquartered Kapital Boost, which is one of the pioneers in the region’s sharia fintech sector.
“I think a lot of investors see a big growth potential for Islamic-based fintech, given the large Muslim population in the SEA region and increased interest in ethical-based financing in general,” said Witoyo, whose company also operates in Indonesia and is a member of the country’s sharia fintech association.
According to Witoyo, whose company has received investment from an undisclosed third-party backer, one of the main challenges for players in the sharia fintech space is the regulations governing the sector, which he says are “mainly geared towards conventional fintech”.
In Indonesia, for example, sharia fintech lending startups have to comply not only with the OJK requirement of Rp 1 billion in capital to obtain a license but also with the Indonesian Ulema Council’s (MUI) diktat of setting up a Sharia Supervisory Board, a costly move. The companies must also undergo a business model review by the MUI.
At the moment, the Indonesian Sharia Fintech Association says it has 55 official and active members. Of these, only four are officially licensed.