Over the past few weeks, MEDICI has brought you a series of articles, exploring FinTech in the ASEAN region. These articles, each focused on a different ASEAN country, have provided comprehensive insights into the FinTech investment landscape in the region. MEDICI now brings you the concluding article in the series.
ASEAN in Figures
ASEAN (the Association of Southeast Asian Nations) is the third-largest region in Asia. It is home to more than 630 million people with one-fourth of the population living in urban areas. ASEAN has an annual growth rate of 4.7% and has $119.97 billion in FDIs; it is also one of the fastest-growing regions as well as the seventh-largest economy globally.
Its population is young, and educated with a literacy rate of over 80%, phone-savvy with more than 0.5 phones per person, and enjoys a low-to-mid unemployment rate of 0.5–6.9%. ASEAN members also have an average to a high life expectancy of 69–82.7 years, and a gender parity of 49.9% males to 50.1% females.
It has been interesting, so far, to explore and review ASEAN countries’ FinTech landscapes such as those of Thailand, Singapore, Vietnam, Indonesia, and the Philippines. Bringing the series on countries in this region to a conclusion is this fascinating look at Malaysia through the lens of FinTech investments in the country.
Malaysia in Figures
Malaysia has a population of 30.5 million inhabitants, with more than 74% of them living in urban areas, and no more than 1.7% living below the national poverty line. The country also has one of the highest phone and internet penetration rates with 1.44 phones per person and 71% respectively. The literacy rate is also quite high at 94%, and the unemployment rate is relatively low at 3.2%.
In terms of ease of doing business, the country is ranked 23rd worldwide, but foreign ownership is capped at 30%. Malaysia’s corporate tax rate is at 24% – and increases gradually if income is MYR 500K or less (starts at 19%).
Macroeconomic Overview
Following a decade of impressive +6% real GDP growth, the Malaysian economy reported a growth deceleration during 2015, mainly influenced by external factors including a drop in crude oil prices, weak global economy (particularly the slowdown in Chinese economy), slowing private consumption, and a threat of rate hike in the US.
In January 2016, Moody’s lowered Malaysia’s outlook to stable from positive, driven by (i) the deterioration in Malaysia’s growth and external credit metrics; (ii) the weakening ringgit; (iii) political tension & higher prices; and (iv) rising macro-financial risks posed by system-wide leverage. Analysts expect that the Malaysian economy will stabilize in late 2016 if the oil prices could rebound.
The size and strength of the middle class in Malaysia are driving the country’s economic growth and is expected to double by 2020 to 10 million.
Snapshot of Malaysia’s Financial Sector
Trends
Malaysia’s AUM is projected to reach RM 1.6 trillion by 2020. The Securities Commission’s (SC) projection is supported by Malaysia’s position in the high-growth ASEAN market, liberalized regulations, and a rapidly growing economy with an expanding young workforce.
Malaysia’s Islamic funds’ AUM YoY growth has been in the double-digits in the past five years. This trend is likely to continue with planned government initiatives to further develop this segment; and emerging Muslim economies. Malaysia’s Islamic funds have achieved a CAGR of 17% over the past five years.
Funds investing in ESG-driven (Environment, Social, Governance) assets are gaining popularity. Currently, ESG investments are mainly made by institutional investors. Both conventional and Sharia ESG funds are performing well, boosting investor confidence. Uptake of sharia funds is expected to help ESG investments grow as they share commonalities.
Challenges
Active managers in Malaysia are facing pressure to lower their front-end fees as they face difficulties outperforming their indices in the current environment. With expected returns remaining low for an extended period, investors may be discouraged by their experience if it takes too long for them to recover their initial investments.
Another notable challenge is the low participation of the ASEAN Collective Investment Scheme. Six Malaysian funds have applied for cross-border sales, and only four have received approval. A Cerulli survey reported that 85% of asset managers from the scheme’s participating countries said they were not planning to offer products via the scheme in the near future. They preferred a master-feeder route instead.
Islamic funds are not very attractive to institutional and foreign investors. Investors tend to invest directly into Islamic bonds or ‘sukuk.’
Opportunities
Greater internationalization of Islamic funds is expected to offer growth opportunities. The Securities Commission plans to establish Malaysia as a leading international hub for Islamic funds and wealth management by enhancing cross-border capabilities and connectivity.
The funding industry is buoyed by positive economic metrics and increasing demand for investment products. Rapid economic growth, a young workforce with higher incomes, and a high saving rate have led to a sustained increase in the demand for investment products – this offers opportunities for existing and new fund companies looking to launch new products.
Finally, the Securities Commission’s initiatives could boost the number of ETFs in Malaysia, which is a market still fledgling and with low demand, but this could change following the announcement that the Securities Commission is looking to develop the market. The Commission proposes to reduce the cost of issuance, among other initiatives in a bid to drive market growth and provide more opportunities for issuers.
Regulatory Developments
Regulatory initiatives to further develop and strengthen key market segments include:
Launch of the Islamic Fund and Wealth Management Blueprint in January 2017, including introduction of the framework for Socially Responsible Investment (SRI) funds and establishing Malaysia as a global hub for an Islamic Funds.
Implementation of key recommendations to drive growth for ETFs, mid-cap public limited companies and VC/PE segments.
Revised Malaysian Code on Corporate Governance and establishment of the Institute of Corporate Directors Malaysia.
Revised Principal Adviser Guidelines and a new Licensing & Conduct Handbook.
Introduction of the Digital Investment Management Framework will permit approved licensees to offer robo-advice and the deployment of blockchain infrastructure to provide more effective clearing, settlement, and depository functions.
Key Themes of the Malaysian Banking Sector
Malaysia has been attracting global businesses due to its sound fundamentals and healthy financial environment. Its aggressive government reforms are strengthening the banking sector, giving it enhanced international status. Also, Malaysia’s banking sector is facing headwinds due to slowing loan growth, low net interest margin, and subdued non-interest income. Despite the headwinds, there are also several positive drivers which analysts believe would at least partly offset the headwinds. In December 2015, Fitch Ratings revised the banking sector outlook to negative due to higher pressure on earnings and asset quality.
The Malaysian banking system remains well capitalized with an average CAR of 16% in tandem with healthy loans growth. Total loan CAGR has stood at 11% since 2007. Large banks, including Public Bank and RHB Bank, are planning to raise capital to repay external debts and fund future growth opportunities.
Asset quality has improved in the last decade, and no alarming trends were noted during 2015 despite a macroeconomic slowdown. Gross NPL ratio improved to 1.60% (from 1.7% in 2014) and is expected to hold on. Despite stable asset quality, banks are monitoring the situation for signs of trouble including credit card balances, household delinquency levels, and corporate/SME asset quality trends.
Digital banking is expected to grow strongly in Malaysia as increased usage of smartphones, tablets, and the internet allows banks to offer more value-added services online to meet the diverse and distinct financial needs of consumers, including the underserved. Banks such as RHB are also active in accessing the underbanked population outside of branches. E.g., via ATMs.
MaGIC
MaGIC aims to build a sustainable entrepreneurship ecosystem and to catalyze creativity & innovation for long-term national impact. Launched in 2014 by President Barack Obama and Prime Minister YAB Dato’ Sri Mohd Najib Tun Abdul Razak, MaGIC signed an MoU with Stanford University and UP Global to further foster and develop a vibrant startup ecosystem in Malaysia and beyond.
With the mission of helping entrepreneurs, MaGIC has 10 programs available for startups focusing on learning, growing, initiating and inspiring. MaGIC is a resource tool acting as a virtual platform for information and referrals with 700 products & services from over 180 organizations available for entrepreneurs.
CER for Entrepreneurs: CER for Entrepreneurs is a platform for corporations, SMEs, and startup communities to capitalize on disruptive technologies and build a continuous innovation pipeline through partnerships.
MaGIC Academy Symposium: The symposium offers fours day of immersion into the latest innovations and disruptive business models across multiple industries, delivered by the successful entrepreneurs and leading experts in the field.
MaGIC Activate: MaGIC Activate connects large corporate, SMEs, and startups at scale around market opportunities.
MaGIC Global Accelerator: MaGIC Global Accelerator is a program that accelerates 80 global startups to be investment-ready in four months and to build a strong startup community.
Social Enterprise Ventures: Social Enterprise Ventures is a fund for scalable and sustainable youth-driven social projects. It is a collaboration between MaGIC and MyHarapan.
MaGIC’s Impact Driven Enterprise Accreditation (IDEA) Program: MaGIC IDEA Accelerator aims to create a systemic shift by involving private and public sectors to drive social procurement as part of their activities.
MaGIC Academy: This is MaGIC’s list of events for entrepreneurs and innovators to attend on all topics and markets of interest.
MaGIC @ Stanford: This is an immersive innovation & entrepreneurship program at Stanford University and networking in Silicon Valley.
FinTech Investors – Malaysia
Interestingly, this is where Malaysia differs from its ASEAN counterparts. As opposed to other ASEAN countries such as the Philippines, Indonesia, Vietnam, Singapore, and Thailand, there are no FinTech-focused venture capital funds among the most active investors in Malaysia. FinTech-Focused Funds
With three investments each, 500 Startups, Cradle, and Mavcap are market leaders when it comes to investments in the financial services industry. Outside of SBI holdings, which participated in the $8 million Jirnexu fundraising (one of the top three FinTech fundraises in the country), no FinTech-focused players are leading the market in terms of value.
Strong Local Investors
Along with foreign companies, 500 Startups & Gobi Partners, local players Mavcap, Cradle, and 1337 Ventures are present in more than half of cross-industry and FinTech investments. In terms of values, the largest deals are mainly made by foreign players along with some local investors such as Mavcap, OSK, and Cradle. The government seems to be quite involved through its different initiatives.
Accelerators & Incubators
Government Accelerators
MaGIC Accelerator Program: This program is open to startups from all ASEAN to startups that are ideally less than three years old. The goal is to accelerate startups to be investment-ready within the span of the four-month program. Notable alumni include BloomThis, Ombre, and Happy Bunch. The MaGIC Accelerator Program is an initiative by the Government of Malaysia.
RAVE Accelerator: This is another government initiative that runs over three months and provides RM20K for a certain percentage of equity.
Private & Corporate Accelerators
NEXEA Accelerator: NEXEA provides RM 50K for 8% of equity and up to RM 500K at program completion, consulting from early-life startup experts, a dedicated tech team to take care of the MVP or IT development, mentoring from successful entrepreneurs, and introduction to investors. The program lasts for four months.
Cyberlab (run by FinNext): This is a five-month program.
Khazanah NEO Accelerator: Khazanah has gathered three accelerators called 1337 Ventures, CodeAr.my, and WatchTower & Friends to create Khazanah NEO. The program is three months long and offers RM20k for 2% in equity.
Finnext Accelerator: This is a 10-month program with mentorship & support and includes access to a regional network of investors and entrepreneurs. It targets FinTech and IoT, which are sectors said to be the result of the fourth industrial revolution.
FinTech Supercharger: FinTech Supercharger is a FinTech-only program which is three months long. No equity is taken. FinTech Supercharger offers workspace, investor network access, mentors, workshops, publicity, and also organizes events. Notable startups include Pand.ai, MyFinB, Chekk, and Neosurance.
District Dojo: District Dojo targets startups that have raised at least $150K. About $50K worth of equity is to be given to 500 Startups.
Other Corporate Accelerators: Sunway iLabs, Tunelabs, Hong Leong Bank Startup Accelerator, DiGi, Founder Institute, and Maybank Innovation Centre.
Associations & Angel Networks
Malaysian Business Angel Network: The Malaysian Business Angel Network (MBAN) is the official trade association and governing body for angel investors and angel clubs in Malaysia. MBAN is responsible for the accreditation of angel investors, creating awareness, education, and the development of the angel investing ecosystem in Malaysia.
Key Individuals:
Dr. Sivapalan Vivekarajah (Proficeo Ventures)
En Azra’i Shu’ib (TPM)
Mr. Alan Lim (NEXEA Angels)
Lok Choon Hoong (Pintas IP Group)
Dato’ Sri Dr. Vincent Tiew (MD, Andaman Properties)
En. Shamsul Shafie (pitchIN/WTF)
Mr. Matt Van Leeuwen (Platcom Ventures)
Datin Samantha Tee (Wealth Mastery Academy)
Angels Den: The organization matches growing businesses and entrepreneurs with experienced angel investors to provide the funds and mentorship they need to grow further. The organization runs an angel-led crowdfunding platform where investors and experienced business people put money into pre-vetted small/medium-sized enterprises. Angels Den also offers business funding clinics for entrepreneurs and offline pitch events, where founders present short one-to-one elevator pitches to a variety of investors.
NEXEA Angels: NEXEA Angels is an accelerator, a venture builder, and also an angel investor network. NEXEA helps angel investors to invest based on their requirements and preferences.
Key Individuals:
B. Lim, N. Fessler
D. Lee, A. Lim
TJ Quah
A. Lim
M. Sum
J. ting
D. Tan
AngelList’s Most Active Individuals
K. Ng (500 Startups)
M. Pui (PWC)
P. Santos (Wavemaker)
B. Mason (angel investor)
N. Lim (8capita)
V. Lauria (Golden Gate Ventures)
K.Y. Lim (Monk’s Hill)
H. Loke (pitchIN)
B. Joffe (angel investor)
R. Wee (IncuVest)
R. Salesas (Medra Capital)
B. T. Lim (NEXEA)
Top Investors
500 Startups: 500 Startups is a Silicon Valley-based incubator, venture capital firm, and accelerator specialized in seed investments in small/medium-sized startups, early-stage, post-seed, pre-Series A, and late-stage FinTechs. It prefers to invest $0.05–$1 million for a 5–10% equity stake. 500 Startups has raised more than half a billion from its limited partners (LPs). The fund has participated in three FinTech funding rounds in Malaysia, which have raised over $7 million from their investors. With 3 FinTech investments out of 24 investments in total in the country, FinTech represents more than 10% of the investor portfolio allocation locally. The investor has taken part in two notable fundraisings: KFit ($15 million) and the FinTech iMoney Group ($7 million).
Cradle: Established in 2003 by the Malaysian Ministry of Finance, the firm is an early-stage startup influencer which aims to fund potential and high-caliber tech startups through its Cradle Investment Program (CIP). Cradle has participated in 3 FinTech fundraising in Malaysia out of 14 investments in total in the country, where 2 of the companies raised over $7 million from their investors. Cradle was part of the iMoney Group fundraising and is one of the top three most active FinTech investors locally.
Mavcap: Mavcap is a Malaysian private equity & venture capital firm that specializes in seed/startup, early-to-late-stage startups, mezzanine, emerging growth, and growth capital investments, with more than 30 million available in its two funds. Mavcap targets the FinTech Sector, the ICT industry, and other high-growth industries such as e-tourism, e-commerce, biotech, and the Internet of Things. The fund typically invests $0.25–$5.2 million. The firm has participated in three FinTech funding rounds in Malaysia out of 26 investments. The three companies raised less than $1 million from their investors. Besides, Mavcap has co-invested along with other investors in two of the largest cross-industry fundraisings in Malaysia: KFit ($15 million) and Sentinext Therapeutics ($14 million).
Gobi Partners: It is a Chinese early-stage & growth/expansion venture capital firm which invests in the telco, media, technology, and FinTech sectors founded in 2002 with more than $350 million raised through its different funds. It seeks to invest $0.25–$15 million. The firm has participated in two FinTech fundraising in Malaysia, where the companies raised over $8 million from their investors. With two FinTech investments out of 14 investments in total in the country, FinTech represents more than 15% of the investor portfolio allocation locally. The VC fund co-invested along with other investors in the second-largest FinTech deal in Malaysia, Jirnexu ($8 million). It has also invested in Carsome ($8.35 million) and iPrice ($5.75 million).
Rebright Partners: Rebright Partners is a Japanese venture capital firm founded in 2008. The fund has raised over $20 million from its limited partners. The firm specializes in early-stage, seed, and startup-stage investments. Rebright primarily invests in internet, consumer internet, gaming, mobile apps, e-commerce & m-commerce, digital media, and mobile services. It seeks to invest $0.1–1 million. The firm has participated in two FinTech funding rounds in Malaysia, where the two companies raised over $6 million from investors. The fund made all its investments in the country in the financial technology sector. Rebright has also co-invested in the iMoney Group.
Note: All figures in USD