Abdul Rasheed Ghaffour: Revitalising the economy via Islamic
finance
Speech by Mr Abdul Rasheed Ghaffour, Governor of the Central Bank of Malaysia
(Bank Negara Malaysia), at the 19th Kuala Lumpur Islamic Finance Forum 2024, Kuala
Lumpur, 5 November 2024.
* * *
It is an honour for me to be here at the 19th Kuala Lumpur Islamic Finance Forum. For
over nearly two decades, KLIFF has been a mainstay in the annual calendar of events -
surfacing global Islamic finance perspectives, which resonate with contemporary
developments. This year's forum, with the theme 'Revitalising the Economy via Islamic
Finance', again - fosters dialogue and collaboration among stakeholders - to cultivate
ideas and address the challenges of our time.
Islamic finance to elevate its role and impact in revitalising the
economy
Allow me to begin by drawing some reflections and lessons from our rich Islamic
history. Right from the start, the principles of ethical trade and equitable wealth
distribution - have always been foundational in Islamic society. Back then, when slavery
was prevalent, Islam called for the move away from involuntary and slave labour - to be
in favour of productive labour. As reported by Abdullah ibn Umar, Prophet Muhammad
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exhorted his people to - "pay the worker's wages, before his sweat gets dried" .
Such a progressive move was not only virtuous, but also a significant labour market
reform. In fact, we see in the history of Islam, many important developments - which
led not only to the boosting of productivity, but also the emergence of innovative
business techniques - laying the foundations for the modern economic system we have
today. These include limited partnerships or mudarabah , the earliest forms of credit (
qard ), as well as the practice of mutual aid and cooperation - through zaka t and waqf -
that enable resources to be redistributed and utilised, for the common good. These
advancements strengthened social welfare - and in turn - encouraged cooperative
enterprises and community-driven initiatives
Fast forward to today, I believe that the Islamic financial sector, must carry on this
tradition of courage and ingenuity - by continuing to challenge the status quo and to
unlock next-level frontiers in financial practices and offerings - while remaining
anchored on our fundamental values. To follow in the footsteps of our forefathers - in
pushing the envelope in bringing about change, as we work to build and develop a
more inclusive and sustainable economy.
Embodying values of Shariah, advancing innovation and promoting
global integration
Ladies and gentlemen,
Islamic finance now stands on a solid foundation having gained great traction
domestically and globally in recent decades. Within just ten years, global Islamic
finance assets grew by more than two-fold surpassing USD4.5 trillion in 2022, up from
USD1.7 trillion in 2012. In Malaysia, the Islamic banking sector accounts for nearly half
the total financing, while takaful accounts for about 25% of total net premiums or
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contributions . The Islamic interbank money market volume - covers around a third of
the entire market, and Shariah-compliant stocks account for 81% of listed stocks.
Malaysia is also home to the world's largest sukuk market, accounting for 42% of the
global outstanding sukuk.
While much has been accomplished, we must and can do more to chart our future
pathway, especially in elevating the role of Islamic finance in achieving sustainable
economic growth and social justice. This includes mobilising capital and funnelling
investments to high-impact sectors that is aligned with national priorities. Indeed, I
believe that Islamic finance is poised and has significant potential - to revitalise the
economy via three key propositions that I earlier shared at the Global Forum on Islamic
Economics and Finance in May this year. The three key propositions are:
First, embodying Maqasid Shariah in economic and sustainable reforms;
Second, advancing innovation for value-based solutions; and
Third, strengthening global integration for mutual development and shared
prosperity.
Firstly, I cannot underscore enough the importance of Islamic financial institutions'
embodiment of the Maqasid Shariah. Doing so, requires wholehearted commitment to
realise and advance the overarching objective of "prevention of harm and attainment of
benefit" in all aspects of the business. All of us must contribute towards a more
sustainable and ethical financial ecosystem by fostering Islamic financial practices and
solutions that adhere to the fundamental principles of fairness; transparency; and
inclusivity.
Wealth generation, circulation and investment should also be increasingly channelled
towards economic activities which prioritise societal and environmental well-being over
purely capitalistic goal of profit maximisation. In the long run, our sincere intention and
unwavering efforts to embody the fundamental values of Shariah will certainly allow us
to bear the fruits of the reforms. As reminded in the Quran3 , "O believers! Be steadfast,
strive to excel in steadfastness, remain firm on your belief and be mindful of Allah, so
you may be successful."
On this count, I commend the Malaysian Islamic finance industry for taking the leap
forward more than half a decade ago - to embrace Value-based Intermediation (VBI).
This strategic alignment with the Maqasid Shariah has enabled the industry to have a
leg up while the rest of the sector is still at the exploratory stage in the ethical and
sustainable journey. With the recent launch of the 3rd cohort of the VBI Financing and
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Investment Impact Assessment Framework (VBIAF) Sectoral Guides and the Maqasid
Shariah Scorecard (MSS) in October, the industry should collectively work to intensify
the implementation of VBI and measure its impact more effectively.
Moving forward, stronger implementation of VBI requires concerted efforts and holistic
alignment across all key stakeholders. In particular, shareholder stewardship is vital to
ensure the transformative impacts of value-based finance are seen and felt by many.
With louder tone from the top - shareholders have the power to drive positive changes
across the entire ecosystem - aligning business practices with the best conduct - which
can further strengthen governance and promote positive consumer outcomes. The
Islamic finance talent ecosystem must also evolve from treating Shariah requirements
as a compliance exercise to encapsulating the Shariah values in its entirety - by
demonstrating trustworthiness; fairness; transparency; social responsibility; and a
commitment to justice and shared prosperity.
Ladies and gentlemen,
The second key proposition is to advance innovation for value-based solutions. In
adapting to the changing market needs, Islamic finance must remain agile - by
structuring sophisticated instruments, using the basic building blocks; unbundling; and
repurposing different components of existing Islamic financial instruments. The industry
should actively explore the full range of Shariah contracts and instruments to drive
financial innovation to address real-world challenges.
I believe that the future of value-based innovation is certainly bright.
First, blended finance has great potential to expand access to finance for the
underserved and unserved segments. This is particularly due to its ability, to
mobilise social finance capital, such as zakat and waqf - combined with traditional
financing. An example of blended finance solution includes iTEKAD, an initiative
which has benefited over 8,000 microentrepreneurs. The Government continues
to support the initiative by allocating grants to match contributions from insurers
and takaful operators (ITOs) to scale up financial sector participation in iTEKAD
and enhance its comprehensiveness, with financial protection elements. Another
example is the Greening Halal Businesses (GHB) programme - to help halal
entrepreneurs transition to sustainable and green practices - of which the
Government has announced its support for the programme - that is expected to
roll-out in the first quarter of next year.
Second, the prospect of technology and digitalisation continues to widen,
reflecting significant opportunity for growth. On our part, the Bank will continue to
support financial innovation by adopting an activity-based approach and
proportionality in regulation. With the roll-out of the enhanced Financial
Technology Regulatory Sandbox that accords greater regulatory flexibility - more
players should explore piloting new business models - potentially in partnership
with digital banks and digital ITOs - in accelerating the development of innovative
solutions.
Third, the industry should capitalise the opportunity to maximise diverse
application of Shariah contracts by leveraging on the issuance of Broader
Application of Ta'awun Exposure Draft and the upcoming Shariah Contracts
Framework Consultation Paper. Optimal use of these tools is imperative to
advance the value-based innovation.
The recent budget allocation of RM100 million matching fund for risk-sharing structures,
also signals strong commitment by the Government to foster financial innovation. I
implore the industry to seize the opportunity to innovate through risk-sharing product
offerings, particularly to fund climate transition and food security initiatives. Malaysia's
ASEAN Chairmanship next year will also focus on deepening regional collaboration to
support the sustainability agenda of ASEAN countries - thus there will be new growth
opportunities - to integrate Islamic finance with climate change and transition finance
initiatives.
Ladies and gentlemen,
The third or final key proposition that I wish to touch today - relates to strengthening
global integration for mutual development and shared prosperity. The global Islamic
finance market is expanding rapidly, attracting a growing number of international
investors, and driving economic growth across multiple regions, including in emerging
markets - such as the Philippines, Central Asia and North Asia. Islamic finance players
can expand their footprint and global outreach, encouraging greater cross-border
investments and collaboration by capitalising on these opportunities.
To support this proposition, key strategic avenues include:
First, to foster meaningful collaborations, leveraging on the activation of business
linkages through the MIFC Leadership Council's strategic partnerships with
counterparts in other countries;
Second, to elevate the role of Centralised Shariah Authorities Forum in building
stronger connections between Shariah authorities to foster mutual respect and
knowledge sharing in addressing common Shariah issues; and
Third, future-proofing Islamic finance talent through collaborative initiatives that
enhance talent mobility. This can be achieved through the exports of Malaysia's
expertise via talent development institutions such as INCEIF University, ISRA,
IBFIM, ASAS, and the multitude of other talent or capacity-building providers we
have. These efforts will enhance Malaysia's connectivity with various markets and
reinforce Malaysia's leadership in Islamic finance at the global stage.
Ladies and gentlemen,
In conclusion, building on KLIFF's decades of experience, I look forward to the actions
that will be set in motion once the curtains close, on this year's KLIFF - bringing to life
the theme of 'Revitalising the Economy via Islamic Finance'. The discourse and
initiatives launched here are the building blocks to real, impactful changes in driving
forward the Islamic finance industry. On that note, I hereby officiate KLIFF 2024 and
wish everyone an engaging and insightful forum ahead.
Thank you.
1
Sunan Ibn Majah 2443
2
As at 1H 2024
3
Surah Ali-'Imran (3), Ayat 200
4
VBI Financing and Investment Impact Assessment Framework