Episode Five

The ABC's and ESG of Sharia Fintech:

Dima Djani of ALAMI

9 February 2021


ALAN  0:11  
Welcome everyone to Season Two, Episode Five of the Indo Tekno podcast. I'm Alan Hellawell, founder of tech consultancy Gizmo Advisors, and Venture Partner Alpha JWC Ventures. Selamat berjumpa kembali semuanya. Saya berharap hari anda berjalan dengan baik. Now one of the most fascinating aspects in the rise of any major internet ecosystem are the unique business models that each of these distinct markets delivers to the world as it matures. In the case of the United States, Netscape was in 1995 the first ever publicly listed internet company, and it gave the world its first internet browser. Silicon Valley shortly thereafter delivered to the world its first online portals and search engines. China internet, meanwhile, also introduced entirely new paradigms to the rest of the world, in areas from marketplace e-commerce, to totally new forms of online payments to the introduction of "zhibo" or live broadcasting. We expect Indonesian tech similarly to deliver uniquely Indonesian paradigms to the global stage in its rise to prominence. With the world's largest Muslim population, Indonesia will, for instance, invariably drive innovation on a global scale across areas such as Sharia compliant FinTech services. We're thus very excited to explore the potential for such innovation with today's guest, Dima Djani, CEO of Indonesia's leading online Sharia financial solutions provider ALAMI. Great to have you join us today, Dima.

DIMA DJANI  1:44  
Great to be here, Alan. Thanks for inviting me.

ALAN  1:47  
To begin with Dima, can you share with the uninformed of us what differentiates Sharia banking from what we might call plain vanilla banking?

DIMA DJANI  1:57  
Sure, Alan. Very, very interesting questions that a lot of people are asking. For me personally (there's so many angles to it) Sharia banking is simply a more socially responsible type of banking. There are three elements that would differentiate it from its conventional counterparts. First is being more prudent and certain. Given that all financing activities in Sharia banking generally need to be directly linked into underlying assets or activities, it creates a more prudent system when it comes to the connection between "Wall Street" and "Main Street". Second, with the transparency, we do have an extra layer of compliance, which is Sharia compliance. So it's adding trust as well into the system. And last but not least are more social elements. For example, the extra profit from late payments: I know some of the FinTech's have the late payment fee as the major revenue driver. But in terms of the Sharia, those things cannot be recorded as revenue. Instead, it's going through CSR (Corporate social responsibility.) So being more prudent, more transparent and more social creates a more socially responsible type of banking. So for me, that's the definition and the differentiation of Sharia banks.

ALAN  3:13  
Super interesting and very useful - that definition. Thank you for that. And how exactly the Sharia P2P (peer-to-peer) lending operate differently than non-Sharia P2P?

DIMA DJANI  3:23  
Similar as the banking counterparts, the financing structure needs to be tied into the underlying activities or assets. So the concept of a loan in is actually a type of aid, helping others with 0% interest loans, not to get returns that underlie the concept of a loan. But then when we examine the Sharia loan, as we know it as of now, it's actually the structure of investment that is either profit sharing, or buy-and-sell. So selling at a profit and being open and transparent about it. So when it comes to P2P, with the same spirit as in the Islamic finance framework in general, all of the Islamic P2P platforms would usually go either into asset-based loans or activities based on what we do ourselves: really invoice financing.

ALAN  4:15  
Understood. So I want to come back to the differences between Sharia banking, and for lack of a better word, non-Sharia banking in a second. I however wanted to ask a more fundamental question. The latest research would suggest that only 6% of Indonesian banking assets were Sharia in 2019. Why is that?

DIMA DJANI  4:34  
That comes back to the late development of the industry worldwide. I think, if I'm not mistaken, it started in about the 1960's. And in Indonesia, it really started in 1991 with the creation of the first Islamic bank, Bank Muamalat. The focus of the entire industry back then was the same, which was very much starting with the conventional banking play, with the Sharia angle being pushed to the front. So that resulted in a low literacy in the market for over 30 years. But the interesting fact is, over the last eight years, given the power of social media and the new generation of millennials, actually the demand from the market is increasing significantly. So I think this is a great time of momentum for the Islamic finance industry in Indonesia.

ALAN  5:22  
That is fascinating. So the drivers today are largely social media, and millennials. It's surprising. What I would have thought to be a very traditional approach to financial services is being embraced by the youth and through social media. Is that what you're saying?

DIMA DJANI  5:38  
That's absolutely correct.

ALAN  5:40  
Fantastic. Now Dima, do we find that customers are quite "binary" in Indonesia; meaning that one is either: a) quite definitely seeking Sharia-compliant solutions, or b) not looking for them at all? Or is it more of a nuanced, less bipolar customer market?

DIMA DJANI  6:01  
The way we see the market, we split it actually into two segments. One is what we call the "Loyalist" segment, and one is the "Universalist" segment. And the Universalists would see the actual product, how competitive the product and the solutions are, and how it can address their pain points. And if it's competitive enough compared to the conventional ones, then they will be okay and open to adopt it. While on the loyalist side, even though the Sharia finance product is not as competitive (it might be a little bit more expensive, or the service is not as good), given their awareness of the Islamic teaching, they will still go for the Islamic finance product. So the loyalists is still very much a niche market. But it's actually growing rapidly driven, by as I said, the millennials in urban areas. Because these are people, probably my age, also trying to rediscover their religion. They might go to Islamic school for elementary or junior high without really knowing what they're learning. And when they form a family, having their first child, then they feel the responsibility to live a better life. So then they move back to relearning what Islam is all about. So we're seeing strong trends here. And this is what actually is growing the loyalists market. Now the universalist market is still the largest chunk of the two. And these people are pretty much the swing market. So if they find a competitive enough product in Islamic finance, they would be open to use it. So that's how we see the market, Alan.

ALAN  7:33  
Excellent. Well, I wanted to continue right on that. Because it's been suggested by some that Sharia banks could not be as competitive as the conventional banks, given some of the ordering principles that you've mentioned at the beginning of this podcast. Are there specific quantifiable, economic or business model advantages if I want to borrow on a Sharia basis versus non-Sharia?

DIMA DJANI  7:55  
The reason for that, if I take a step back, is really the relatively higher cost of funds for the Sharia banks traditionally historically, given the limited infrastructure and low literacy. As you know, much of the Casa current account and savings account are held by the top four banks, top five banks in Indonesia. And given the low literacy of Sharia banks, people are actually hesitant to put their savings in Sharia banks because they don't understand what they're going to get. And there's only a limited number of ATM's and branches in comparison to the top four banks in Indonesia. In fact, around 50% of the total liabilities in the Islamic banks are comprised of deposits, which is really expensive. Hence, their loan pricing is going to be pricier than the conventional banks; that's one. And second is the inefficiency; we don't see a lot of efficiency or move towards more efficiency using technology in the banks. So these two factors create relatively higher pricing when it comes to loans. But an interesting feature would be that when you get into an Islamic mortgage that has the fixed rate option, it's a little bit more expensive than the floating rate option, but then it's predictable for the entire term of the loan. So I think for those who want to have a certainty over their mortgage, a lot of them actually prefer to go to the to Islamic banks. And I know that Islamic banks are working hard to lower their cost of funds. And coming to my point earlier with the recent awareness, there's the Wadi'ah product which is interestingly able to lower the cost of funds of the Islamic banks.

ALAN  9:34  
You've preempted my next question, which is: in Islamic finance "Wadi'ah" refers to the deposit of funds or assets by a person with an Islamic bank. Is it true that no interest can be earned by the lender? And what are the biggest misperceptions of Wadi'ah that exists out there in your mind?

DIMA DJANI  9:52  
First of all, the concept of interest is nonexistent. So typically, what they give out to the depositors is a profit sharing of the bank's monthly revenue, in a way to compensate the depositors for putting money there. On the Wadi'ah, it's not a profit sharing scheme. It's actually a safekeeping scheme. So there shouldn't be any returns given back as a promise to the depositors. Yet some Islamic banks are actually giving out a bonus at the end of the month to those using the Wadi'ah just to incentivize them, which is allowed. But then the amount of the bonus cannot be promised upfront. So the biggest misperception I think, on this product is that while this is an Islamic savings product, because it really doesn't give out anything, there are those who think that even the Islamic banks are not fully Sharia. And there are some people that think like that, then they will go into this Wadi'ah because they really clear that their money wouldn't grow, and they feel comfortable with it.

ALAN  10:53  
Gotcha. So Dima, how should we think about the expansion of ALAMI's financial services over say, the next five years?

DIMA DJANI  11:01  
For us, we aim to be the full fledged Islamic finance provider for SMEs. Then probably in the next two to three years, we will go into the consumer market. So now we have the lending and investment products, and we would like to extend that to also have various products such as savings and others.

ALAN  11:20  
Got you. Now Dima, how do the offline Sharia banks and other Sharia-based solutions view us at ALAMI?

DIMA DJANI  11:27  
Yes I think so. And from the market, I've heard that they view us favorably, especially now that we have one of the few permanent licenses to offer Sharia peer-to-peer lending. I guess for them, they only have limited options to work together with FinTech and P2P. Because for them, they need to work together with a Sharia compliant P2P. And there are only two in the market right now. And we're one of them. So we're in discussion with some of them to partner up; be it from channeling, from the lending perspective, from the operational perspective and also from joint marketing. It takes time for all of them, I guess, to really embrace the FinTech partnership as conventional counterparts. But I believe the Islamic banks are actually moving faster more than ever to embrace partnerships with FinTech companies.

ALAN  12:15  
Understood. I note that the government has mentioned it seeks to raise Sharia financial services as a percentage of the banking sector from 6% currently to 15% by 2023. What might suddenly drive this sharply growing penetration after not having moved much for decades?

DIMA DJANI  12:33  
Some of the key important drivers would be, as I mentioned earlier, the advancement of social media just by Muslim millennials who are rediscovering Islam and its lifestyle. And this has really pushed the development of Islamic Finance and Halal economy from the demand side. Because what I understand all around the world, a lot of the governments in the Islamic countries and Muslim-majority countries have a "top-down" approach. But in Indonesia, the approach goes both ways. So the "bottom-up" approach has actually been pretty strong over the last five to eight years. And the second driver would be obviously the government push on Indonesia to be the global hub for the Halal economy. This is shown by the current literacy that the government is pushing, facilitating global Islamic economy events by the Central Bank, before the pandemic, especially and during the pandemic by online options. I think these initiatives really create awareness indirectly to people. So the more they heard about these initiatives on the Halal economy and Islamic Finance; especially if they work effectively, the more people will want to find out how this would affect their life and create more options for them. And last but not least, obviously, is the technology push from the Sharia banks and the Sharia finance players to level with conventional banking. So I think these three things can actually spur the growth of Islamic Finance and Halal economy in Indonesia.

ALAN  14:01  
That makes sense. Now, does the appeal of Sharia banking differ amongst cities, suburbs and rural markets? And why is that and how does that inform our market growth plan at ALAMI?

DIMA DJANI  14:15  
You're right. Based on the OJK's (Central Bank) data, about 50% of Islamic banking assets still sit in Jakarta. And recently, Aceh has been catching up because they just turned the whole region to be Islamic-compliant from banking and finance perspective. Other than that, we see that West Java and East Java are actually growing quite fast as well. So it's still pretty much dominated by Java Island, with the exception of Aceh and some of the region like South Sumatra and some part of Sulawesi as well. I think for us, given our national license, we're able to tap other markets outside of Jakarta. And we're going to look more into the details of West Java given the close proximity to Jakarta as well. This is also another interesting point. The urban population have higher financial literacy, but relatively lower Islamic awareness, as opposed to the other side: the rural population. Now, some of the urban Millennials are rediscovering this and increasing their willingness to embrace and to be aware of more on the Sharia finance side. And since they have a relatively higher financial literacy, it's easier for them to adapt to the system. Whereas on the rural side, it's really about the access to finance. So I see that technology can bridge these two gaps. First, they can bring stronger branding and identity to the Islamic finance startup scene so that the urban population can be welcome and adapt to it, as well as bring the access to the rural market. We're trying to help improve Islamic finance literacy.

ALAN  16:00  
Got you. Now Dima, how do you think about other markets in Southeast Asia?

DIMA DJANI  16:09  
Malaysia is an interesting and mature market. I think their penetration in terms of Islamic Finance banking assets has already reached about 30%. And obviously Brunei Darussalam is a relatively smaller market. But then it's also very familiar with the concept of Islamic finance. So these two markets are the next markets outside Indonesia for us. But interestingly, Alan - and this is an interesting fact for me as well - there is one Islamic bank in the Philippines. And I recently saw the news that the government is actively encouraging the banks in the Philippines to have Islamic business units over there. There's also an Islamic bank in Thailand to serve the Muslim minority population in the southern part of Thailand. And it's owned by the government, if I'm not mistaken. Outside of the Big Three Muslim markets; Indonesia, Malaysia and Brunei; actually, the Philippines and Thailand are also interesting markets. 

ALAN  17:06  
Very interesting. Now Dima, what about other markets that are further afield, such as the Middle East and South Asian markets such as Pakistan and Bangladesh?

DIMA DJANI  17:10  
I think Pakistan and Bangladesh are definitely going to be the next markets. I think  Pakistan penetration is 14%. And it's expected to grow to between 20% to 25% of total banking assets. So it's an interesting market and it's a growing market definitely. In terms of Middle Eastern markets, I think Saudi Islamic banking assets are about 50% of  the Saudi market. And I know that the government is opening up and pushing FinTech development. The UAE is about 70% penetration being Islamic banking. So three out of every five people there have Islamic banking accounts, and they're all trying to become the hub of Islamic finance. And some of the biggest Islamic banks are from that region. I think from Saudi, there's  Al-Rajhi Bank that is well known. And in Kuwait, there's Kuwait Finance House. So I think the deep market is obviously there. But in terms of the growing market and the population, I believe Southeast Asia is definitely one of the big countries in addition to South Asia.

ALAN  18:07  
So it sounds as though we're likely to go at least regional over the next few years. And going global is also part of the longer term plan. Is that correct?

DIMA DJANI  18:16  
Yes. Fingers crossed. I think that that will be an interesting plan for us. I know that even London is trying to capture some of the Islamic banking assets, so that would be an interesting angle for us as well to check out later in the next few years.

ALAN  18:32  
Now, Dima, can you tell us about the licensing regime around Sharia lending? Is it difficult to obtain a license? How many of them exist currently? And how many can we expect over the next two years for instance?

DIMA DJANI  18:44  
When we talk about the FinTech industry, in Indonesia payments and P2P are regulated and relatively mature. Everything else is under a sandbox type of approach. On the P2P, there are about 160 or 170 players that are registered, and only about 35 to 36 already have their permanent license. And among the 35 or 36 that have a permanent license, only two are Sharia. If the question is whether it's that hard to get: Yes and no. The government is encouraging startup and development to also help the economy. But at the same time, they're also wary about what was seen in China, for example. So they're trying to be more rigorous in terms of coming up with regulations with a focus on consumer protection. So they raised the bar. And I think that's fair, because only those who are seriously in the business and really want to develop would ultimately be successful in getting the license. So the process itself is pretty rigorous. We need to be automated from end-to-end. Data centers need to be in Indonesia. We need to be ISO certified for data protection. We need to be integrated with some of the supporting services such as the digital signature, connection with the credit bureau to check credit history. And also they do site visits. They check our customers and do randoms visit and all these things. So it's a pretty thorough process from the OJK to grant a license.

ALAN  20:13  
Okay, you clearly have gotten a copy of my playbook because you once again preempted my next question. What learnings do we have from the rise and fall of P2P lending in China and other markets?

DIMA DJANI  20:25  
I think the OJK's approach has been spot on, learning from what's happening in other markets, such as China, where there was very loose regulation and all sudden they had to clamp down on the industry. My two cents: in Indonesia, it's still a small but maturing industry, and I'm pretty happy with how the government and regulator are facilitating this innovation. 

ALAN  20:47  
Understood. Now Dima, when did ALAMI's business bottom out during the COVID pandemic? And where are we now relative to pre COVID levels? 

DIMA DJANI  20:56  
We started to field queries from our borrowers and our potential lenders starting at the end of February. And we really felt the impact in March. And the worst was the lockdown in May. We were pretty happy as we managed to select quality borrowers. So actually, our NPL was still 0%. There were a couple of late payments, but they were within two weeks due to administrative issues. But other than that, it was all pretty good in terms of the repayment. Our problem was actually from the source of liquidity, because everybody suddenly on the retail side was preparing for the emergency funds. And on the institutional side of it, they were trying to rebalance their portfolio first, so they were not giving out more money to be lent out. So at that moment, our monthly disbursement went down by about 50%, which is still good compared to the rest of the industry. All the bigger players I heard were down 70% to even 90%, compared to their monthly disbursement levels pre-COVID. After May and in June, we started to recover when the lockdown was stopped by the government, and the market was just a bit more open. Then it felt like spring to us, really. People started coming in and they wanted to lend money again. And we were back to the pre COVID level. And at that time, our pre COVID disbursement on a monthly basis was about IDR15 billion, which is around USD1 million equivalent. And subsequently, we managed to boost our disbursement. And today our disbursement is about IDR60 billion per month. So it grew rapidly, like four times.

ALAN  22:37  
Excellent. Good to hear. Continuing that question Dima, what are your targets for loan growth and overall size of the business in 2021, and 2022?

DIMA DJANI  22:47  
We target in 2021, in terms of value that we can disburse around USD80 million to USD100 million. We target an average loan of about IDR100 billion per month in 2021. And hopefully in 2022, we can triple it to reach about IDR250 billion to IDR300 billion  per month in 2022. And on top of that, we obviously want to offer more products across funding and lending to the communities. Now we are serving the SME market, and going forward hopefully can grow more and serve the micro and nanopreneur. I think this is a market that has been underserved for years by the traditional financial institutions. So with the knowledge we have we're going to go into that segment.

ALAN  23:32  
Now Dima, is there any objective attraction to do Sharia banking for a non-Muslim business owner?

DIMA DJANI  23:39  
To my earlier point on understanding the concept of Sharia banking, or Sharia finance: it's really similar to ESG (environmental social and governance). In fact, in ALAMI, it's safe to say that 50% of our borrowers are non-Muslim, and from our retail lenders, probably about 30% of them are non-Muslim. And we asked why they're interested to do business with us, to lend and borrow from us. It is really the value of the Sharia that we promote; which is the transparency, the social impact, and the prudent and the responsible qualities, and all of these things. So despite getting from a retail lender's perspective relatively lower returns per annum (say about 14 to 15% per annum from us, and 17 to 18% from another P2P) we managed to keep our NPL at zero; while the others might need to deal with some NPL's (non-performaing loans) over there. So I guess this is really the trade off of the value that we would like to bring to the market, regardless of for the Muslim or non-Muslim.

ALAN  24:39  
It's amazing. So there's quite a broad appeal with the ALAMI offering amongst both Muslim and non-Muslim customers. I was not aware of that. Now Dima, panning out to the sector at large, what do you think the public and private sectors have to do in order to make Indonesia the global Sharia finance hub that we would like to see?

DIMA DJANI  24:58  
Top-of-mind there are three things. The first one would be to come up with stronger and more comprehensive data through a data center or something similar to that. Because our problem right now, when we try to explain our business to potential investors or potential partners, we know what's happening in the market. But then the real data to back it up sometimes it's not available because the Central Bank or the OJK only record, I would say, the lagging indicators, rather than the leading indicators. If the private and public sectors can together and come up with a more comprehensive data center, I think that will help the industry a lot, opening up the view and understanding by potential investor who wants to come into this industry. And second would be synergies and collaboration. I think the government could provide incentives for those public and private partnerships. For example, there are the state-owned Islamic banks. There are the Haji funds as well, and there are a lot of private FinTech players, or traditional Islamic financial institutions. This collaboration amongst them needs to be incentivized, at least for the first stage. So there's a lot of potential synergy within the industry, and hopefully, it can be pushed outside of the Islamic finance industry as well. And last, but not least, would be joint marketing, I would say, focusing on social finance, to improve financial literacy and understanding within the society. Because when the traditional Islamic bankers sell the concept of Islamic banks, I think they're focusing more on the commercial side of it, rather than the comprehensive view of what is the purpose of this. And right now, the millennials actually comprise most of the workforce in Indonesia, followed by Gen Y, and also Gen Z. But then, in terms of the percentage, I guess, millennials are dominating right now and will going forward. And they are concerned about the purpose, the value of why such an industry exists at all. So I guess the way we sell the industry needs to be changed as well. And this needs to be coordinated among the public and private. For example, a couple of days ago, the government was pushing the Cash Waqf program ("a trust fund established with money to support services to mankind in the name of Allah"). And this is one step that could improve literacy. At least it gets the people talking, whether they're pro or con, about this initiative, to get people talking and trying to find out what is Cash Waqf and all of these things. So yeah, all publicity is good publicity. It gets people to be aware and find out for themselves. So I think we're in the midst of good momentum going forward.

ALAN  27:31  
Great to hear. Now Dima, really appreciate you taking the time to share with us the unique attributes of Sharia finance. It's very exciting to be able to catch this business model relatively close to the ground floor. And we're looking forward to seeing ALAMI to leave its own unique mark on the world of Sharia finance, both in Indonesia and eventually globally. So thanks again for joining us today, Dima.

DIMA DJANI  27:53  
Well, thanks, Alan, for having me. I hope this is helpful for everyone and happy to connect with those outside who are interested in our journey.

ALAN  28:01  
I'm sure there is interest. And thanks to our loyal listeners for tuning in today. Terima kasih telah mendengarkan.  Sampai jumpa lagi!

DIMA DJANI  28:09  
Sampai jumpa!