Challenges in establishing digital Islamic banks in Malaysia

Islamic digital banks are the forefront of financial technology which means they can offer innovative products and services in line with Shariah. However, having only recently set foot in Malaysia has its own set of challenges. In countries where technology advances, coupled with significant Muslim audiences, such as Dubai and Kuwait, prominent Islamic digital banks paved their way. In 2022, the Central Bank of Malaysia (BNM) announced five successful digital banking licence applicants. In the spirit of financial inclusion and regulatory support, two of the applicants are establishing Islamic digital banks. The purpose of this study is to examine the Islamic digital framework in Malaysia and identify the obstacles associated with it. Qualitative case study research has been optimized by collecting data from professional experts in the Islamic finance industry from four different countries through semi-structured interviews. This chapter then finds six main challenges, namely operational risks, lack of compliance and Shariah adherence, profitability, scarcity of Islamic finance experts, technology adoption and lack of trust and regulatory compliance. This study is amongst the pioneers in Malaysia that explores the challenges in establishing Islamic digital banks. The outcomes of the study are relevant to governments, regulators, institutions, and central banks to structure the right interventions to counter the hurdles. Future regulatory enhancements are required to spearhead the development of Islamic digital banks in Malaysia.