Zeti Akhtar Aziz: Strengthening relations between Indonesia and
Malaysia
Remarks by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the Launch of
PT. Bank Muamalat Indonesia, The Malaysian Branch and First Islamic Investment Bank Ltd,
Kuala Lumpur, 5 March 2009.
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It is my pleasure to be here this morning on this occasion of the launch of the Malaysian
branch of PT. Bank Muamalat Indonesia, and its subsidiary, First Islamic Investment Bank
Ltd., established under the Malaysia International Islamic Financial Centre (MIFC) initiative to
operate foreign currency Islamic financial business in Malaysia. This is a significant
development as it represents the first Indonesian financial institution in the Malaysian
financial system. Indeed, this occasion signifies a further step forward towards strengthening
the bilateral, financial and economic relations between Indonesia and Malaysia. The
settingup of these two institutions in Kuala Lumpur would contribute towards accelerating the
financial linkages that will underpin the expanding trade and investment ties between
Indonesia and Malaysia. As the largest Islamic bank in Indonesia, we will also have the
opportunity to leverage on our respective strengths and expertise and to mutually reinforce
the benefits to be gained from this development.
Potential of Islamic finance amid slower economic growth in the region
Cumulatively, the total output of the ASEAN economies amounts to USD1.3 trillion while total
trade of the ASEAN region now amounts to USD1.4 trillion. The growth of the ASEAN
economies is no longer only export driven but for several years now has been driven by a
growing domestic economy. In this current environment, most ASEAN economies have been
adversely affected by the spill over effects of the global financial crisis. Sharp declines in
export earnings are being experienced. The economies of ASEAN and greater Asia,
however, have the potential to strengthen further their domestic economies. Indeed, in doing
so this would contribute towards reducing further the global imbalances. In addition, being
diverse economies we are also able to take advantage of the complementarities that exists in
the region. This is reflected in the increased intra-regional trade and intra-regional investment
flows. Intra-regional trade as a ratio of total trade of the region has increased from 30% in
1990 to 40% in 2007. Intra-regional investment flows now account for 12% of the region's
foreign direct investment. With a total population of 575 million, ASEAN also has greater
potential to increase its economic interface with the larger economies in greater Asia.
The current financial crisis is expected to accelerate the financial and economic integration in
Asia. This should be viewed positively, not only towards the unwinding of the global
imbalances, but also because this has the potential to contribute towards global growth. The
banking sector in ASEAN and the greater Asian region will have an important role in
facilitating this trend. Islamic banking in particular, which is a form of financial intermediation
that is directly linked to trade and investment flows, has significant potential to facilitate this
process.
Islamic finance requires all financial transactions to be supported by an underlying economic
activity. There is now a renewed focus in the global community on generating real economic
activity, generating jobs and generating overall financial stability. Following the developments
that have led to the current global financial crisis, there is a greater recognition for the need
to reduce the decoupling of the expansion of financial transactions and the growth of the real
economy. This is in fact a fundamental requirement in Islamic finance thereby resulting in a
close link between financial and real flows.
In Malaysia, the Islamic banking sector continues to progress, recording double digit growth
over the recent 8 years with an average annual growth rate of 20% in terms of assets. As at
the end of 2008, Islamic banking has increased its share of assets in the banking sector to
17.4%. The assets share of the takaful industry grew at 23% per annum in the recent five
years, with family and general takaful capturing 11% and 7% respectively, of the overall
insurance sector.
The MIFC initiative has focused on promoting Malaysia as an international Islamic financial
hub, in particular in sukuk origination, foreign currency business, takaful, research and talent
development. There has been a growing number of MIFC players with diverse business
activities that range from international Islamic banking business in foreign currency to Islamic
fund and wealth management, takaful and sukuk origination. The global sukuk market has
expanded by an annual growth rate of 40%. Despite a slowdown in the sukuk issuance in
2008, there was still an estimated USD20 billion issuance taking place, with Malaysia
remaining as the main issuer in the global market.
The prospect of Islamic finance continues to remain positive despite the more challenging
international environment. The global financial crisis has resulted in heightened calls for
more transparent forms of banking that are subject to stricter governance and risk
management practices. There are also greater demands for increased regulation. Following
the financial reform that may take place, the world may see a banking system that is
significantly different from before to the crisis. Many of the features currently being discussed
are in fact explicitly embedded in the Shariah requirements. The in-built check and balances
in Islamic banking avoids the excesses and over leveraging, a feature precipitating the
current financial crisis. Ensuring that the Shariah requirements are embraced in its entirety is
vital to ensuring the robustness and resilience of Islamic finance.
Islamic finance must also draw upon the lessons derived from the current crises. It is vital
that the regulatory regime based on the prudential standards issued by the Islamic Financial
Services Board be implemented. This will further ensure the stability and soundness of the
system. Liquidity management in the Islamic financial system and the institutional
arrangements for resolution are among the other areas that need further development. Of
critical importance is for the board and management of Islamic financial institutions to
institute higher standard of leadership and a comprehensive governance culture and
framework.
Mutual recognition in Shariah and human capital challenges
On this occasion, I would like to touch on two areas confronting Islamic finance firstly on, the
issue of and secondly the
mutual recognition in Shariah human capital development in
the industry. Malaysia takes cognisance of the diversity of Shariah views within the region
and among jurisdictions. Although Islam welcomes diversity of views, there is also a need to
promote greater harmonisation among jurisdictions on the specific issues relating to Islamic
finance. Such convergence is important for the long-term sustainability of the sector.
Malaysia has taken the initiative to organise Regional Shariah Scholars Dialogue in 2006 and
2008 as part of the efforts to foster greater engagement among the Shariah scholars in the
region. Indonesia has been active in these dialogues. Moving forward, the newly established
International Shariah Research Academy (ISRA) has been entrusted to intensify the regional
Shariah Dialogues as well as to enhance further the international engagement among
Shariah scholars in our pursuit for Shariah harmonisation. Most encouraging is the greater
appreciation and understanding that has been achieved in these deliberations of the Shariah
practices that are peculiar to the respective jurisdictions.
The demand for skills in Islamic finance throughout this region and other international
financial centres has generated further growth in Islamic finance. In this regard, Malaysia has
also embarked on several initiatives towards creating a supply of qualified human capital
both in Shariah and Islamic finance. The International Centre of Education in Islamic Finance
(INCEIF) is established to be a premier university in Islamic finance, to offer postgraduate
qualifications in Islamic finance as well as the Chartered Islamic Finance Professional (CIFP)
qualification. CIFP is the world's first Islamic professional qualification and it is accredited as
a Masters degree level equivalent. Recently, INCEIF produced its first batch of 32 CIFP
graduates from nine countries, of which three are from Indonesia.
INCEIF has also entered into strategic partnership with Universiti Airlangga in Surabaya and
Universiti Indonesia in Jakarta where the CIFP programmes are now being taught. Through
these strategic alliances, the efforts would be directed to jointly produce high-calibre talent
that have the combination of knowledge in Shariah and finance.
It is our hope that PT. Bank Muamalat Indonesia would consider Malaysia as a platform for
securing foreign currency business ventures in the region and contribute to the development
of Islamic finance in Malaysia. I am confident that the international Islamic banking segment
of Islamic finance in both countries will continue to make significant strides, in particular to
bring to the next level the development of an international money market platform that allows
for greater participation from a wider international financial community offering product suites
that are denominated in other currencies and structured in a manner that would meet a wider
range of applications and purposes. On this note, I wish to congratulate PT. Bank Muamalat
Indonesia on the official launch of PT. Bank Muamalat Indonesia of the Malaysian branch to
conduct foreign currency business as an International Islamic Bank under the MIFC initiative.
I also wish to congratulate the newly established First Islamic Investment Bank Ltd., licensed
under the Labuan Offshore Financial Services Authority.