This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on Feb 22 - 28, 2016.

Investors can now look forward to investing directly in and sharing the profits from shariah-compliant investment activities via the first Islamic bank-intermediated financial technology (fintech) platform in the world. 

The Investment Account Platform (IAP), launched by Bank Negara Malaysia on Feb 17, was developed by Raeed Holdings Sdn Bhd — a consortium of six Islamic banks, comprising Affin Islamic, Bank Islam, Bank Muamalat, Maybank Islamic, Bank Rakyat and Bank Simpanan Nasional.

Similar to crowdfunding and peer-to-peer lending platforms, the IAP allows investors to fund either private or government-related ventures that are seeking financing to grow their business. 

Investors will be allowed to choose the ventures they invest in and may define the investment mandate and eligibility criteria for their financing, for example, the investment tenure and types of industries.

The IAP is open to all investors, whether retail, sophisticated or institutional. The platform is regulated by the Islamic Financial Services Act 2013 (IFSA) and the Development Financial Institutions Act 2002 (DFIA).

The minimum investment varies according to the listed ventures on the platform and is denominated in ringgit for now. The IAP is looking to include other currencies in the future. 

Returns on the investment account will be based on the performance of the underlying ventures. The principal and profit will be paid either periodically or upon maturity, depending on the venture. However, the redemption of investment is only possible on the maturity date. 

The profit distribution is based on a profit-sharing ratio or expected profit rate, and the tenure of the investment will match the tenure of the underlying venture. Funds placed by investors are not capital-protected.

The six banks will perform multiple roles such as assess the eligibility and risk appetite of individual investors, conduct due diligence on prospective ventures to ensure the risks undertaken are aligned with the investment mandates and ensure that proper governance is in place to safeguard investors’ interests and the banks’ reputation. 

“A unique feature of the IAP lies in the intermediary roles undertaken by the Islamic banking institutions, which put forth the element of trust and credibility that is invaluable in boosting investor confidence and enhancing financing opportunities for entrepreneurs,” says Raeed chairman Datuk Zamani Abdul Ghani.

Prior to listing on the platform, these ventures will be reviewed and assigned a credit rating by RAM Holdings Bhd. Investors will have access to a rating rationale for each venture listed. 

“RAM’s role in the IAP is to provide an independent view on creditworthiness or the likelihood of the venture in meeting full and timely profit of expected profit and repayment of principal,” says RAM group CEO Datuk Seri Dr K Govindan.

“This would require us to take into account factors beyond the track record of the entrepreneurs concerned, including industry risks and the viability of the proposal itself,” he adds.

According to Raeed CEO Mohamed Izam Mohamed Yusof, the IAP is aimed at creating a conducive marketplace to match investors of all risk appetites with entrepreneurs with various funding needs. The platform will not compete with other crowdfunding platforms as it is in a different segment but it complements the fintech industry.

Mohamed Izam says crowdfunding is a possible approach for start-ups, but the IAP is a channel for small and medium enterprises (SMEs) and bigger institutions seeking financing.

For entrepreneurs and business owners, especially of SMEs, “raising funds via IAP can potentially be useful in assisting the SME owners retain their ownership in the course of seeking financial injection. This is as opposed to other fundraising mediums available in the market, which may dilute the equity interest of the SME owners”, says Zamani. 

The IAP provides a competitive financing option without the risk of dilution to the company’s equity. Through the platform, entrepreneurs can pitch their proposals to multiple banks concurrently and have access to the bank’s expertise in structuring financing that meets the targeted investors’ requirements, which saves time and effort. 

After passing the assessment criteria of creditworthiness and viability of the ventures and acquiring a rating from RAM, the minimum amount of financing is RM500,000. The cost of the RAM rating will be borne by the venture.

The tenure to raise funds is a maximum of five years. But if a longer tenure is needed, it could be provided with advice from the Islamic banks. 

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