Adnan Zaylani Mohamad Zahid: Islamic finance - powering regional
prosperity
Speech by Mr Adnan Zaylani Mohamad Zahid, Deputy Governor of the Central Bank of
Malaysia (Bank Negara Malaysia), at the IFN Asia Forum 2023, Kuala Lumpur, 2
October 2023.
* * *
Distinguished speakers and delegates,
Assalamu'alaikum and good morning to all.
It is my pleasure to be here again at this year's IFN Asia Forum that brings together
Islamic finance professionals from around the world. Today, we face many challenges
but despite that, the IMF has projected Asia, as a region, to contribute around 70% of
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global growth this year . Strong domestic demand, accommodative financial conditions
and improved investment prospects are among the factors that present ample
opportunities for market players, consumers and stakeholders seeking to grow and
mainstream Islamic finance, to optimise Asia's growth potential. As a region that houses
almost a quarter share (23%) of the total Islamic finance assets worldwide, Asia
remains a dynamic region and a key contributor to global Islamic finance and economic
growth.
Against this backdrop, I wish to focus my remarks today on two important priorities for
Islamic finance to promote regional prosperity:
First, is to harness Islamic finance to play a stronger role in regional financial
intermediation; and
Second, to deepen and enhance vibrancy of Islamic financial markets as a key
component of the global Islamic financial system.
Islamic finance as a key contributor in regional financial
intermediation
Asia is increasingly becoming a focal point for global trade and investment. There are
shared goals and multiple interdependencies among Asia economies, as with the rest
of the world. I see three key prospects for the Islamic finance industry to galvanise
efforts in growing its regional intermediation capabilities:
First, in supporting halal trade and investments. The global halal supply chain has
expanded in tandem with growing consumer demand for halal products worldwide. The
halal food industry, for instance, is expected to grow exponentially to reach USD 4
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trillion by 2028 . Asia is also becoming a preferred destination for reshoring of
manufacturing hubs where halal goods including food, pharmaceuticals, cosmetics, and
more are produced. The industry can capitalise on these growth opportunities to offer a
diverse range of financial products and services. In Malaysia, the use of Islamic bank
financing by halal certified companies have doubled between 2018 and 2021 with
solutions ranging from basic trade finance products to digitally enabled supply chain
finance.
Second, in sustainable finance. Islamic finance can help bridge funding gaps estimated
at USD1.5 trillion annually until 2030, to achieve Sustainable Development Goals in
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Asian countries, equivalent to approximately 4% of the region's GDP . Closer to home,
our aspiration to achieve net zero emissions by 2050 requires an estimated total
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funding of USD100 billion . Efforts in value-based intermediation (VBI) including
implementation of the Sector Guides of VBI Impact Assessment Framework can
catalyse growth in sustainable finance.
Third, in widening the intermediation capacity of Islamic finance, we can look at
expanding the use of blended finance and accessing more diverse sources of funds.
Application of social finance instruments in banking and takaful, complemented by
partnerships with community-based stakeholders can open up new opportunities and
build greater resilience among underserved segments such as microentrepreneurs and
SMEs.
Ladies and gentlemen,
Anchored by the Financial Sector Blueprint 2022-2026 that envisions "finance for all, for
sustainability and for transformation", Malaysia is refreshing our efforts to sharpen and
strengthen our proposition and capabilities as an international gateway for Islamic
finance. Our immediate focus is on Asia and OIC economies. This vision is underpinned
by Malaysia's ecosystem strengths in Islamic finance and capabilities to provide
innovative solutions that meet regional and global Shariah-compliant finance needs.
The Malaysia International Islamic Financial Centre (MIFC) vision is not new. While the
aspiration to be an international Islamic financial hub remains much alive, there is a
need to evolve in response to global business shifts. When we started out, the focus
was on international business; international banking and finance, sukuk origination,
wealth, and fund management, retakaful and human capital development. Much has
been achieved in all these areas. Today, the MIFC aspiration is a confluence of four
dimensions - sustaining this vibrant marketplace, tapping global opportunities,
innovation-led solutions and anchoring upon expertise that can also serve regional and
global needs. With this, we see Malaysia as having a conducive ecosystem where
players can pilot and scale new solutions in the region.
Much of the establishment work has been done. With the maturing Islamic finance
ecosystem, it became timely for the industry to take the lead on MIFC. The Islamic
economy is after all, a market economy. With this in mind, the Bank and Securities
Commission Malaysia (SC) have set up the MIFC Leadership Council (MLC), an
industry platform to lead efforts to advance MIFC propositions as a global marketplace
and international gateway for Islamic finance. This includes initiatives to improve global
competitiveness of Malaysia's Islamic finance industry, deepening financial linkages,
expanding international opportunities and deliver more impactful financial innovation.
To date, the MLC has undertaken a wide series of engagements across the industry
and will be looking to coalesce these discussions into concrete focused initiatives for
the industry. On that, I would like to invite and encourage your support and participation
in these initiatives as well as the MIFC agenda now spearheaded by the MIFC
Leadership Council.
Activating and deepening Islamic financial markets
The second priority is a critical success factor for growing regional financial
intermediation. Malaysia has significantly benefitted from sustained efforts to develop its
own Islamic financial market and Islamic capital market. Our Islamic money market,
which commands close to 40% share of total money market, has grown in tandem to
support Islamic banking and finance which now forms 44.7% of total financing5. The
Government sukuk market is 49% of the total government debt market while corporate
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sukuk comprise more than 80% of the total . Efforts are now also directed towards
building a financial ecosystem that can attract broader investor base while preserving
market confidence.
Malaysian government sukuk is now tracked under global indices such as Markit iBoxx
and JPMorgan GBI-EM, secured with credit ratings from top rating agencies, and are
promoted actively during international roadshows. Malaysia also continues to expand
access to non-resident participation in domestic Ringgit-denominated sukuk and equity
markets. Additionally, enabling regulatory frameworks for active secondary trading of
Ringgit assets, with secure and reliable linkages to international settlement
infrastructures like Euroclear/Clearstream are critical in supporting foreign investor
participations in Shariah-based securities. The Bank is also working on a proposal for
anticipatory hedging as part of our effort in advancing an orderly functioning hedging
market aligned with Shariah principles. This is one of the initiatives under the Islamic
Financial Market Committee to further develop the Islamic money market in Malaysia.
Much of our own focus, thus is to further the development of ringgit Islamic financial
market. In the past, there had been much attention given to the foreign currency
business, in particular, the US dollar. However, admittedly, the fortunes of this business
are often cyclical and subject to global developments. In an era of tighter US monetary
policy going forward, we have to look elsewhere to grow our international linkages and
business. Ringgit business, in the onshore Islamic financial market, is an option.
Regional currencies are also being developed as an option and in ASEAN, this is
gathering impetus with many countries that are progressively developing the
crossborder markets, including through developments of Local Currency Settlement
Framework (LCSF) that are enabling trade and investment in each other's markets
directly. These will certainly also benefit regional Islamic players, retail, institutional and
corporate investors.
Ladies and gentlemen,
Our collective commitment anchored on these twin priorities, will solidify the regional
contribution and positive impacts from Islamic economies, financial intermediation, and
capital market ecosystem. This is paramount to effectively respond to the emerging and
evolving demands in Asia. By leveraging on our readily available ecosystem and
expertise, what we achieved in 40 years, can be a shorter journey for newer markets.
Success comes from taking many "small strategic steps". Together, we can realise the
full potential of Islamic finance in supporting Asia as a global economic powerhouse.
With that, thank you again to the organisers for inviting me today and I wish everyone a
productive forum ahead.
Thank you.
IMF, Regional Economic Outlook, Asia and Pacific, May 2023
2
A Glimpse into The Global Halal Industry [2023], The Halal Times, 24 February 2023
3
Filling the Finance Gap for a Green and Inclusive Recovery, Asian Development Blog,
10 June 2021
4
RM350b-RM450b investment needed for Malaysia to be net zero GHG emission
nation by 2050, The Edge, 9 June 2022
5
BNM, data as at July 2023