Zeti Akhtar Aziz: Unlocking finance, expanding impact
Keynote address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia (Bank
Negara Malaysia), at the Responsible Finance Summit "Unlocking Finance, Expanding
Impact", Sasana Kijang, Kuala Lumpur, 30 March 2016.
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It is my distinct honour and pleasure to welcome you to Malaysia and to this Responsible
Finance Summit for 2016, with the theme "Unlocking Finance, Expanding Impact". The theme
gives strong recognition to the essential role of finance in driving sustainable development and
growth in the world today.
It is now almost a decade since the eruption of the global financial crisis. Despite the
challenges, much progress has been made to forge a vision for a stronger post-crisis world.
Whilst having to strike a balance between pursuing financial stability and the potential
increased costs to financial intermediation, efforts have been made through the global financial
reforms towards more sustainable financial systems. This includes the recalibration of financial
regulations to curb tendencies for excessive leveraging, strengthened regulatory and
supervisory systems that are forward looking and responsive to risk, as well as provisioning
standards that reduce procyclicality and that restrain the build-up of risks. In addition,
advancing consumer protection, furthering financial education and literacy as well as improving
access to financial services have remained important long-term items on the agenda.
In tandem with these efforts to strengthen financial stability, the role of finance is also being
re-examined to enhance its positive impact. This entails focusing our sights on the path ahead,
towards re-building a global financial architecture that will facilitate and secure our economic
prospects. With the considerable benefit of hindsight, we now know that finance, if not
anchored to the aim of creating sustainable value in the real economy, will become inherently
unstable and destabilising to the ultimate goals of greater shared prosperity. There is thus a
compelling need for finance to have a greater role in shaping responsible behaviour that
underpins a stable and well-functioning economy, and advances the goals of a progressive
society and sustainable environment. This is the underlying objective of responsible finance.
Of significance, aligning business practices towards responsible finance entails a paradigm
shift away from the conventional thinking of finance - the most important distinction being the
need to recognise and appreciate that responsible finance delivers value by focusing on its
ultimate outcomes, rather than its immediate returns.
Responsible finance at its core strives to serve wider objectives that is consistent with, but
goes beyond, the predominant objective of enhancing shareholder value. In delivering long
term sustainable value, allocative efficiency is achieved in a manner that promotes stability
and prosperity in the broader economy and sustainability of the environment. Above all,
responsible finance aims to optimise its positive impact on society, economic wellbeing and
development.
Over the recent decade, the heightened advocacy for ethical and socially responsible
investments has also seen the proliferation of financial instruments that cater for both financial
and societal objectives. More importantly, this has moved beyond negative screening, to more
impactful approaches involving the adoption of environmental, social and corporate
governance (ESG) considerations in investment and business practices. These have served
to align risk and reward in a more sustainable manner. Indeed, some global banks and insurers
have begun to incorporate sustainability considerations, including environmental concerns in
their lending and investment decision-making processes via the adoption of international risk
management frameworks such as the Equator Principles and the UNEPFI Principles for
Sustainable Insurance. These positive forms of finance are increasingly becoming powerful
market forces, driving focus into the kind of productive activities needed for long-term growth.
Islamic finance, a well-established component of responsible finance, is similarly gaining
significant growth and prominence in the global financial system due to its inherent orientation
towards promoting societal welfare. This includes the propagation of strong ethical values that
engenders accountability and trust in its intermediation function, as well as the promotion of
risk sharing that fosters entrepreneurship and equitable distribution of wealth. By virtue of its
requirement for financial transactions to be supported by genuine productive activities, Islamic
finance is also deeply rooted to the real economy. All these are hallmarks of Islamic finance
that underpin greater market discipline and stronger focus towards building sustainable and
long term value in capital allocation. Collectively, these characteristics enable Islamic finance
to also serve as an effective model for responsible finance.
On the path to achieve stronger, more balanced and sustainable growth, the potential of
responsible finance has therefore become greater than ever. Most important is for finance to
be aligned towards its ultimate goal of serving humanity and of uplifting social wellbeing. Thus,
more than merely performing its role as a passive intermediary of funds, finance today has the
distinct potential of catalysing and shaping social outcomes. As mobilisers of funds towards
socially empowering activities in the economy, the financial sector can act as a "social
multiplier", significantly expanding the impact of positive finance.
This is what responsible finance can achieve. Infrastructure financing, with its focus on
longterm and socially impactful considerations, is an area of finance that can be instrumental in
filling the vast development needs of many emerging economies, with an estimated global
funding demand of about USD57 trillion by 2030, or about USD1 trillion a year. Recognising
this, greater attention has been focussed on infrastructure finance, both at the national and
international levels. The evolution of the sukuk market, in particular, has been an effective
avenue in bridging this financing gap. Since 2003, an estimated USD115 billion of
infrastructure sukuk has been issued by more than 10 different countries, which has been vital
in contributing towards the long-term development of these economies. In Malaysia, the sukuk
market has similarly been pivotal in supporting infrastructure financing, with
Malaysiadomiciled infrastructure sukuk accounting for 79 percent of global infrastructure sukuk
issuances in 2015. The positive response by investors of these issuances with maturities of up
to 30 years is reflected by its oversubscription of up to 10 times.
A relatively recent form of finance that has been gaining attention recently is green financing.
The market for green bonds tripled in size in from 2013 to 2014, with over USD100 billion of
issuances expected this year . Of significance, the signing of the "Paris Agreement", a global
action plan on climate change, by 195 countries in December of 2015 will serve to further
accelerate the momentum of green financing. As the principles of Islamic finance share
substantial synergies with the concept of environment-friendly and sustainable development,
there is also tremendous opportunity for Islamic finance to develop instruments that can
support the global demand for green projects. These forms of finance can be embraced and
brought together to leverage in a mutually reinforcing manner to enhance their collective
impact.
Socially responsible investments in the West began as far back as the 18th century, while
Islamic finance evolved in the Middle East and Asia since the 7th century, in which lending
based on Sharia or Islamic principles included moral directives in the conduct of business.
Reinforced by globalisation, society today is no longer defined only by national boundaries.
Finance, and indeed responsible finance has also evolved to be global. The need for
responsible and sustainable form of finance is recognised - and even deeply desired -
throughout the world. Nonetheless, while responsible finance has flourished in many local
communities, its next phase of development requires responsible finance to be brought into
the global mainstream, to become a core building block in our efforts towards forging a more
sustainable financial architecture going forward. Similarly, decisions and solutions to finance
need to also be considered on a global scale and not confined to any community or nation.
Of equal importance, the benefits of finance should be extended across all segments of
society. Despite the size and scale of our financial sectors in the global financial system, many
households and businesses still remain excluded from formal financial services. Globally, as
many as 2 billion adults do not have access to a bank account . Perhaps even more revealing
are the findings that financial exclusion is not limited solely to developing or low-income
economies. Even in advanced countries such as Japan, 3.4% of adults remained financially
excluded, while in the United States, over 8% of households are unbanked and 20% remain
underbanked . There is thus a still much important impact that finance can bring about.
Indeed, in various parts of the world, such greater access is already making a significant
impact, particularly for small and medium enterprises, with its market size estimated to double
to almost USD14 billion by 2019 from USD7 billion in 2015 . There is, however, still scope for
such access to be expanded to bring about more balanced and sustainable growth in the global
economy.
Finally, an important aspect of responsible finance requires strong and effective governance.
John Locke, one of the most prominent 17th century theorists, refers to the concept of a "social
contract" in describing the origin of society and its inherent need for governance. The erosion
of this social contract and of governance would drastically weaken the foundations of society,
setting the stage for its eventual decline in the future.
This was evident during the global financial crisis. The experience serves as a strong indication
that the own version of the "social contract" in finance should not be overlooked. This extends
not only to governance but also to trust, which has traditionally been the social bond between
finance and humanity. Central to this is the realisation that financial markets cannot operate in
the absence of trust, which in turn necessitates minimum standards for governance, ethics and
integrity. This involves not only heightened expectations on the fiduciary duty of boards, but
the alignment of compensation packages from short-term personal gains towards long-term
value creation. In addition, corporate culture also have an important role in entrenching
financial goals with ethical values, through the promotion of sound risk taking cultures and
ethical codes of conduct.
Conclusion
Allow me to conclude my remarks. Often at its most defining moments in history, the rise of
society has been intricately marked by the strength of its leadership and its people. Indeed,
the global financial crisis witnessed unprecedented levels of global cooperation as the world
came together to pursue a common interest of restoring stability and building more sustainable
financial systems. In the same manner today, the future of finance demands strong leadership
and cooperation in fostering collective will towards achieving the necessary positive
transformation.
The Responsible Finance Institute, as a think tank connecting various responsible finance
practices and expertise around the world, is in a unique position to contribute towards realising
this aspiration. But for responsible finance to gain real traction, this cannot be an undertaking
of a single institution.
Finance, with its potential to serve society, is capable of so much more. As responsible global
financial participants, the opportunity to come together again to rebuild trust and provide the
foundations of a more stable and sustainable long-term economic growth can be achieved
through our commitments to responsible finance. The call is for greater global cooperation and
leadership to unlock the future of finance and expand its positive impact in the global economy.
With that, I wish you an engaging and impactful summit.