Zeti Akhtar Aziz: Islamic finance - the new regulatory challenge
Introductory remarks by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the
book launch of "Islamic finance - the new regulatory challenge, 2nd edition", Kuala Lumpur,
22 July 2013.
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It is my pleasure to be here this afternoon to witness the launch of the second edition of
"Islamic Finance: The New Regulatory Challenge". As the Islamic financial industry
transitions into a new era of growth and development in this post-crisis world, the evolving
regulatory reforms that are taking place to strengthen the resilience of the financial industry
has presented wide ranging challenges in the implementation of the reforms and in also
ensuring a more inclusive and stainable growth. The various dimensions of these regulatory
challenges and its impact on Islamic finance are captured in the publication that is being
launching today.
It is indeed a more challenging time for financial regulators and policymakers worldwide.
Priorities for strengthening financial stability and growth are now focused on achieving global
financial systems that serve the needs of the real economy. Driven by concerns to ensure
that banking institutions are more robust against mutil-faceted and more complex dimensions
of risks going into the future, regulatory efforts are being directed at significantly
strengthening the capital and liquidity structures of banks, and ensuring that there is better
alignment between risk-taking behaviours and long-term viability as well as ethical conduct.
At the centre of the reforms have been the Basel III reform package, principles for
riskaligned compensation structures and improving the consistency of regulatory regimes across
the different parts of the financial system, including the shadow banking institutions.
Significant work is also progressing to strengthen resolution regimes and financial safety
nets, particularly in a cross-border context. Given the specificities of Islamic financial
institutions, the implementation of these reforms require a careful examination of the different
implications that they present for individual institutions and the system as a whole.
We are now witnessing wave of the internationalisation of Islamic finance as the role of
Islamic finance has expanded to become significantly more globalised. This has resulted in
domestic Islamic financial systems to become more inter connected and with the
consequence that integrated, risks are more rapidly transmitted across the financial system.
Building on the foundations that have been put in place with the adoption of prudential
standards introduced by the Islamic Financial Services Board (IFSB) in the key areas of
capital adequacy, risk management, corporate governance and Shariah governance, the
regulatory, supervisory and legal frameworks will need to reflect the growing cross-border
dimensions of Islamic finance and its increased connectivity. Of priority will be efforts to
strengthen the cross-border regulatory and supervisory cooperation arrangements in the
relevant jurisdictions and to strengthen further the international financial infrastructure for
Islamic finance. As we advance forward, this will be of great importance to promote stability
and confidence in the more challenging international environment.
A key area for cooperation that is being advanced relates to the provision of a robust liquidity
management infrastructure for Islamic finance. This is an important imperative to ensure the
resilience and stability of the Islamic financial system, as well as to reduce the cost of
intermediation. A significant regulatory challenge remains in terms of having efficient
crossborder liquidity risk management in the Islamic financial system, due to the lack of short-term
Shariah compliant instruments in international currencies. A chapter in the book describes
the regulatory response to the issue of liquidity risk facing Islamic financial institutions,
including the important role of the International Islamic Liquidity Management Corporation
(IILM) in facilitating cross-border liquidity management.
With these changes set to re-define the financial landscape going forward with far reaching
implications, the publication of this book is both timely and relevant. Six years from its first
edition in 2007 which made an important contribution to the literature on the regulation of
Islamic finance, this second edition captures the diverse range of current information and
updates arising from the regulatory issues in a post-crisis global economy. Reviews on the
various characteristics of risks faced by Islamic financial institutions will improve the
understanding and examination of the implications of current and new reform initiatives for
the regulation and supervision of Islamic finance. In view of the requirement for growth of
Islamic financial transactions to be linked to real economic sectors, salient issues on stronger
corporate governance and more efficient human resource management are discussed in a
pre-concluding chapter of the book.
Renowned industry practitioners and academicians have contributed to the book, providing
deep insights, perspectives and views that are supported by practical experiences which will
be invaluable to those who wish to understand the critical regulatory issues in Islamic
finance. Contributions by the two respected co-editors who have extensive knowledge on the
subject and are internationally recognised for their academic publications on Islamic finance,
completes the book as an indispensable reference for all.
It is hoped that in addressing the implications of the recent global financial crisis on the
regulation of Islamic financial services, this book will provide further clarity and understanding
on the multi-dimensional goals of policymakers and regulators in ensuring that the resilience
of the Islamic financial system and its core tennets are aligned with the evolving global
regulatory developments. Let me take this opportunity to congratulate the two co-editors for
their invaluable contribution in enriching the body of authoritative information on the
regulation of Islamic finance.
Thank you.