Zeti Akhtar Aziz: Potential for new linkages and opportunities between
Japan and Malaysia
Speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the
Malaysia-Japan Business Forum "Enhancing New Linkages And Opportunities", Kuala
Lumpur, 24 August 2007.
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It is my honour and great pleasure to be here to speak at this important forum which brings
together government leaders and the business community from our two countries. I would
like to take the opportunity to thank the Japan External Trade Organisation (JETRO) for
inviting me to speak at this Forum. JETRO has played an important role in fostering the
economic relations between Malaysia and Japan. While Japan and Malaysia has established
strong economic ties, the environment in which we are operating has experienced
pronounced changes. These changes present the potential for new linkages and
opportunities between Japan and Malaysia.
Enhancing interlinkages and integration in Asia
Asia today is increasingly recognised as a dynamic growth region in the global economy.
Asia's previous success was accomplished in part by strengthening its global interlinkages by
exports to the rest of the world. Today, new regional interlinkages are emerging as Asia
expands further its trade and investment within the region, a trend that has generated
mutually reinforcing regional growth.
The Asian economic integration is now already well advanced through the intensification of
intra-regional trade and investment. Trade within Asia now accounts for more than half of the
total trade of the region. This change is partly the result of the rapidly growing economies in
Asia , which has created a large and expanding cumulative export market. This economic
integration is also the result of Asia's participation in the globalization of production. These
trends have led to greater diversification of economic activity in the region and a reduction in
the over-concentration in the traditional export markets. In the area of investment, Japan has
for several decades been a major foreign direct investor in the Asian region. A more recent
phenomenon is the more widespread cross-border investment undertaken in the region to
capitalise on the growing opportunities arising from the diversity of economic strengths in the
region.
These developments have increased the potential for Asia to be an important engine of
growth in the global economy. The advancement that has been achieved in the increased
economic integration needs to be reinforced by greater financial integration. Accelerating the
regional financial integration process would serve as a powerful impetus, not only for
reinforcing the trade and investment inter linkages, but more importantly to facilitate a more
efficient international allocation of capital. In so doing it would contribute towards unlocking
Asia's full potential in the global economy. Indeed, such greater financial integration would
also play an important role in facilitating the allocation of some part of Asia's surplus funds
into productive investments within the region. The more effective and efficient recycling of
funds within the region will help reduce financing costs, stabilize financial prices, and
increase the potential for the diversification of risks. All this would cumulatively promote
stability and resilience of the financial systems in our region. The current turmoil in the global
financial markets and the uncertainties it has generated underscores the need for greater
financial stability and resilience of our financial systems.
There are several ways to enhance financial interlinkages, some of which are already in
progress. In the financial sector, we have already seen Asian financial institutions expand
beyond domestic borders, thus strengthening the regional economic linkages. The regional
authorities and regulators have also come together to develop the regional financial markets,
including the capital markets, the supporting regional financial infrastructure and
mechanisms for crisis management and resolution. These developments have paved the
way for new forms of economic partnerships and strategic alliances and advance further the
regional integration process and its inter linkages with the rest of the world.
Malaysia and Japan: interlinkages and opportunities
Malaysia is one of the most open economies in the world, with significant global trade and
investment linkages, and has become a significant profit centre for foreign direct investment
for several decades. Similarly, the volume of trade activity in Malaysia is two times the size of
our economy, among the highest in the world. Our outreach for trade has been with both
large and small economies. For several decades Malaysia has had an extensive economic
relationship with Japan, with Japanese foreign direct investment being particularly significant
since the mid 1980s. Japanese investments have also been important in making Malaysia
part of the regional production network. To this day, Japan remains a significant partner in
trade and investment for Malaysia.
While Japan's economic relationship with Malaysia through trade and investment is
wellestablished, going forward there is significant potential for strengthening the financial
linkages. In this recent decade, Malaysia has significantly transformed our financial sector.
The restructuring, consolidation and reform of the financial sector has strengthened the
capacity, flexibility and resilience of the financial system. In addition, there has been the
development of several new segments of the market, including the bond market and Islamic
finance. The Malaysian bond market is the largest in South East Asia with a vibrant private
debt securities market. Malaysia has also continued to progressively liberalise its already
open financial system to further enable free flow of funds into and out of the system. This
transformation has opened up the potential for a range of new opportunities for participation
in the financial sector in Malaysia and for facilitating greater financial flows within the region.
New linkages and opportunities offered by Islamic finance
This decade has also witnessed a rapid evolution and global expansion of the Islamic
financial services industry. Malaysia has developed a comprehensive Islamic financial
system that operates in parallel with the conventional financial system. More recently, its
international dimension has gained significance as Islamic finance is becoming an
increasingly important part of the international financial system. In doing so it is contributing
to strengthening international interlinkages between financial markets and systems that is
more widespread and inclusive. The number of Islamic financial institutions worldwide has
increased to more than 300 spanning over 75 countries. Total assets of the Islamic financial
system are estimated to exceed one trillion US dollars. It is among the fastest growing
financial segments in the world with an estimated annual growth in the region of 15 to 20
percent. There is now a growing strong demand for Islamic financial product in the global
market, far exceeding the current availability of financial products and services being
provided by the Islamic financial institutions.
The global development of the Islamic financial system has become particularly important in
this more challenging financial and economic environment. As the international financial
system becomes more diversified and as this new form of financial intermediation develops,
it has presented businesses with alternative means of raising funds while investors are
presented with new asset classes. It has contributed towards greater diversification of risks.
More importantly, the very fundamental requirement of Islamic finance is that it requires an
underlying economic transaction thereby avoiding emphasis on speculative purposes. It also
prohibits the commoditisation of risks, which leads to its proliferation through multiple layers
of leveraging and disproportionate distribution. Islamic finance as a form of financial
intermediation will also contribute towards enhancing the efficient mobilisation and allocation
of funds across regions. This will bring about strengthening of a more wide spread and
inclusive global financial integration. The greater diversification of risks also contributes
towards promoting international financial stability. The transparent nature of Islamic financial
contracts and the need for underlying economic transaction reinforces the stability of the
Islamic financial system.
Going forward, in the current liberalised and globalised environment, Islamic finance is at the
threshold of a new dimension in strengthening financial interlinkages between nations across
the globe. Just as the Old Silk Road in the 14th century offered a route that facilitated the
trade in goods from the East to the West, we can now envisage the New Silk Road that
facilitates financial flows across borders between the East and West. As regional financial
integration intensifies, it will be a route that will facilitate this process. The previous trade
linkages between the Middle East and Asian regions also has potential to strengthen, being
the two of the fastest growing regions in the global economy. While the world trade has on
the average expanded by 9 percent over the period 2002-2006, Asia's trade with the Middle
East has increased on the average by 30 percent. In 2006 alone, mega transactions
involving corporate acquisitions and real estate purchases from the Gulf to Asia, are
estimated to total more than USD18 billion. Going forward, the value of such investments are
expected to increase. Over the next five years, it is estimated that Asia will need USD1 trillion
in terms of infrastructure investment and is in search of new partnerships and strategic
investors to co-invest in these undertakings. This trend would benefit the economic regions
with high savings and surpluses such as Asia and the Middle East because it would promote
intermediation of a part of the surplus funds in the region to be channelled to productive
investments in the region.
Several financial centres in the West, Middle East and Asia are now introducing Islamic
finance as an integral part of their financial markets to offer the wide range of financial
products and services. This trend is envisaged to stretch the New Silk Road from East Asia
and Middle East and extend to Europe and the rest of the world. Indeed, we are already
seeing the participation of global investors and the international financial community.
The Malaysian experience
Let me share with you Malaysia's experience in developing on Islamic financial system in a
highly liberalised environment. Malaysia has developed a comprehensive Islamic financial
system that includes the banking and takaful industries, and the Islamic money and capital
markets - a matrix which mutually reinforces the integrity and stability of the Islamic financial
system. Significant progress has in particular, been achieved, in the development of the
Malaysian sukuk, or Islamic bond market. The Malaysian sukuk market has now evolved into
the world's largest Islamic bond market. In 2007, Malaysia accounted for about two third of
the global sukuk outstanding amounting to about USD47 billion. In 2002, the Government of
Malaysia issued the first global sovereign sukuk. With this issuance, it became an
international benchmark for the issuance of global sukuk. There have since been several
further sovereign issues in the global capital market. The sukuk market has been an
important source of financing for productive investment activities, while for investors, it
provides greater potential for diversification into new asset classes.
The development of the Malaysian sukuk market has involved wide ranging initiatives to
facilitate an efficient issuance process, the price discovery process, the broadening of the
investor base, the establishment of a benchmark yield promoting the liquidity in the
secondary market and strengthening of the regulatory framework. These initiatives have
been reinforced by the legal and Shariah framework and the supporting financial
infrastructure including the settlement system and the bond information system.
The international prudential standards for Islamic finance is set by the Islamic Financial
Services Board (IFSB), is located in Malaysia . The IFSB thus formulates the international
regulatory and supervisory standards for Islamic financial institutions aimed at achieving best
practices in order to secure soundness and stability of the Islamic financial system. With the
setting up of the Accounting and Auditing Organisation for Islamic Financial Institutions
(AAOIFI), appropriate accounting standards have also been put in place to reflect the true
and fair value of banking operations to ensure greater accountability and responsibility of the
financial institutions.
With the increased maturity of our domestic bond market, further steps have been taken by
Malaysia to allow foreign corporation, multinational corporations and multilateral agencies to
raise funds in the Malaysian bond market with no restrictions for the utilisation of these funds.
These funds maybe used to finance foreign investment activities outside the country.
Following this liberalisation, the inaugural ringgit denominated sukuk issue was in 2004 by
the International Finance Corporation (the investment arm of the IBRD World Bank), followed
by the issue by the IBRD World Bank in 2005. In November of 2006, our market was further
liberalised to allow for the raising of foreign currency sukuks from our domestic market. More
recently, a landmark issuance the 750 million dollars exchangeable sukuk Musyarakah by
Khazanah Nasional, the Government's investment arm, marked the world's first issue of its
kind, incorporating full convertibility features common to conventional equity-linked
transactions. These issues have attracted investors from outside of Malaysia, thereby
strengthening our interlinkages with other international financial markets.
I am pleased to mention that a memorandum of understanding between the Central Bank of
Malaysia and the Japan Bank for International Corporation (JBIC) has been signed this year
for us to advance relations in this area between JBIC and the central Bank of Malaysia. In
addition, a Japanese consumer credit company based in Malaysia marked another
significant milestone by issuing an Islamic commercial papers early this year.
The changes that have occurred in the economic and financial environment in our region and
the global environment have presented us with wide ranging new opportunities. The
partnership between Malaysia and Japan thus not only needs to evolve not only in the trade
in goods and direct investment but also needs to encompass growing financial ties. Islamic
finance represents a vehicle that could further deepen our financial relationship and the
regional integration process. In enhancing these new linkages and greater integration, it
would contribute towards unlocking the new potential opportunities for our mutual prosperity.
Thank you.