Adnan Zaylani Mohamad Zahid: Resilience and stability of the Islamic
financial services industry in an evolving risk environment
Welcoming remarks by Mr Adnan Zaylani Mohamad Zahid, Assistant Governor of the
Central Bank of Malaysia (Bank Negara Malaysia), at the 22nd Islamic Financial
Stability Forum, Kuala Lumpur, 27 May 2024.
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It is my pleasure to welcome everyone to the 22nd Islamic Financial Stability Forum,
held in conjunction with the Global Forum on Islamic Economics and Finance (GFIEF). I
hope the discourses happening at GFIEF this week can serve as an action-oriented
platform to build stronger cooperation towards shaping a better future. One in which,
Islamic economics and finance play a greater role in promoting inclusive growth,
resilience and shared prosperity.
The theme of today's forum, "Resilience and Stability of the Islamic Financial Services
Industry in an Evolving Risk Environment," is indeed poignant in guiding our journey
forward amidst shifts in the operating landscape.
Current global risk landscape poses challenges and opportunities in
Islamic finance
The complexities of the financial world are ever-increasing. It becomes more evident
that traditional risk paradigms are being challenged by a multitude of factors. Ranging
from geopolitical tensions to elevated inflation, moderating global trade, as well as
technological disruptions and climate change. Against this backdrop, we witness a
growing expectation for the financial sector not only to maintain its resilience but to also
assume a greater role in supporting sustainable economic transformation. This
expectation arises from the pressing need to drive necessary changes at the scale and
the speed needed to achieve the Sustainable Development Goals (SDGs). The UN
Conference on Trade and Development and the IMF estimate that a significant funding
gap of approximately USD 4.3 trillion in global annual investments is needed to make
strides in the SDGs. While this may appear as a staggering figure, this is equivalent to
only around 1% of the USD379 trillion of the total financial assets held by banks,
institutional investors and asset managers.
The modern financial sector stands at a crossroads of unprecedented challenges and
opportunities. Against this backdrop, financial institutions must not only anticipate
emerging risks but also adapt swiftly to mitigate these risks. At the same time, there is
the expectation to progressively enhance the vibrancy of the finance industry in order to
keep meeting the needs of the society and economy.
Capitalising on emerging trends for more innovative and impactful
solutions
In Islamic finance, financial transactions are grounded in the core principles of Shariah,
which strive towards ihsan, or 'the pursuit of excellence', by upholding the highest
standard across all aspects of business. This entails conducting operations with
fairness and transparency, maintaining robust Shariah governance, and embracing
equitable practices such as risk-sharing. Embedding the value of 'inclusive and efficient
distribution of wealth' as a central business objective can profoundly motivate Islamic
financial institutions to actively recalibrate their efforts, fostering more equitable
allocation of financial resources for productive and sustainable endeavours.
The space for innovation in Islamic finance is vast, and I believe many in this room
would agree that Islamic finance has not yet been fully leveraged as a transformative
tool to address global financial needs. The challenges presented can serve as a
catalyst for Islamic financial institutions to provide alternative solutions to debt-based
instruments. With a diversity of Shariah contracts and instruments at our disposal,
tailored solutions can be crafted to cater to varying needs of different societal segments
and nature related projects. Islamic finance offers the unique capability to "blend
finance", amalgamating different capital forms like philanthropic and risk capital, thereby
broadening its intermediation function beyond mere credit provisioning and risk transfer.
In addition, waqf structure can also be harnessed to fund large-scale social projects,
showcasing the potential for impactful financing within Islamic finance.
Technological advancements will be another dimension that can unlock the
distinctiveness of Islamic finance, thereby creating unique value propositions to
financial consumers. Leveraging on blockchain technology that can enhance
transparency and security in financial transaction, the use of smart contracts can
automate Shariah-compliant agreements and ensure compliance with Islamic principles
while reducing transaction costs and settlement times. These developments necessitate
regulators, with the support of IFSB, to adopt an agile and forward-thinking approach to
ensure that the existing regulatory framework strikes the right balance between
managing potential risks and facilitating developmental initiatives.
Importance of robust ecosystem to withstand challenges and
advance innovation
Ladies and gentlemen,
Drawing from Malaysia's experience, we recognise the importance of establishing a
robust ecosystem to support Islamic financial business and operations. This entails
developing a comprehensive legal and regulatory framework alongside relevant market
instruments and infrastructures to ensure the well-functioning of Islamic financial sector
amidst dynamic market conditions. Adopting globally recognised prudential standards,
such as standards issued by the Islamic Financial Services Board (IFSB), enhances
investor confidence and futureproofs the Islamic financial system by fostering effective
risk management practices within Islamic financial institutions. Malaysia has fully
adopted IFSB standards and remains committed to advancing their implementation by
actively engaging with the IFSB and sharing our expertise in Islamic finance to enhance
regulatory capabilities of other jurisdictions. Continuously strengthening our prudential
regulations, we recently finalised the policy on capital requirements concerning
operational risk and exposure to central counterparties, and we are currently finalising
the capital requirements for credit risk. These capital and liquidity measures - which are
part of the Basel III reform package - aim to fortify the financial system against
unforeseen shocks by establishing buffers during periods of stability. We are also
engaging industry players for feedback on the new risk-based capital framework for
takaful (RBCT) to ensure its effectiveness in addressing both existing and emerging
risks in the financial landscape. However, Islamic finance should look beyond the
prevailing standards. It is crucial to ensure that prudential standards and regulatory
frameworks are pragmatic enough to support the intermediation function beyond credit
provisioning. This enables Islamic financial institutions to leverage the diverse Shariah
contracts effectively within a conducive regulatory environment. In line with this, we are
also currently reviewing our Shariah Contracts Standards to streamline the regulatory
framework and foster industry innovation.
Our efforts are concentrated not only on regulatory clarity but also on equipping the
Islamic financial system and markets with diverse market instruments and a
comprehensive infrastructure. In pursuit of this objective, recently we issued an
Exposure Draft (ED) on Islamic Collateralised Funding, aiming to enhance transparency
for market participants and further refine Islamic repo activities. Additionally, our
Shariah Advisory Council (SAC) has issued a ruling on the permissibility of anticipatory
hedging, empowering Islamic banks to engage dynamically in Islamic Profit Rate Swaps
(IPRS) and Islamic Cross Currency Swaps (ICCS) without prior underlying exposure,
albeit subject to specified conditions. Also, we witnessed the inaugural issuance of
Islamic repo via Bank Negara Malaysia's FAST, or Fully Automated System for Issuing
/Tendering in November last year.
Ladies and gentlemen,
Islamic finance has proven its resilience and sustained its performance despite the
challenges it has encountered. As of 2022, global Islamic finance assets are estimated
at USD4.5 trillion, reflecting the industry's significant growth, with approximately 60
countries now having Islamic finance regulations in place. As leaders in the Islamic
finance sector, it is incumbent upon us to collectively showcase the industry's impact
and uphold the intrinsic values of Shariah, which advocate for equitable distribution of
wealth and the practice of ihsan or doing good in the best possible manner. This is in
line with aspiration of Quranic verse 77 of Surah Al-Qasas, Allah s.w.t mentioned
"Strive for the Hereafter using the blessings Allah has granted you but remember to
also enjoy the blessings of this world. Do good deeds just as Allah has bestowed
goodness upon you. Avoid committing misdeeds on the earth, as Allah dislikes those
who do so". It is crucial for all of us-whether as regulators, industry players, or
consumers of financial solutions-to embody these principles and lead by example.
On this note, I wish you all a productive discourse ahead. To our international
delegates, I hope you enjoy your stay in Kuala Lumpur.
Thank you.