Zeti Akhtar Aziz: Growing significance of Islamic finance
Opening remarks by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the
Malaysian Islamic Finance 2008 Issuers and Investors Forum - ISSUER'S DAY (Launch of
the MIFC Global Communications campaign), Kuala Lumpur, 11 August 2008.
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Bismillahir Rahmanir Rahim
It is my pleasure to be here this morning at this third Malaysian Islamic Finance (MIF) 2008
Issuers and Investors Forum. It was at the first MIF Forum in August 2006 that the Malaysia
International Islamic Financial Centre or MIFC initiative was launched. This was part of our
efforts to strengthen further our economic and financial linkages with the rest of the world. It
is our firm conviction that as an international Islamic financial hub this will be an important
element facilitating the realisation of this aspiration. Since our launch, other traditional
financial centres such as Hong Kong, Singapore, Dubai and London have also intensified
their participation in the Islamic financial system.
As one of the fastest growing segments in the international financial system, there is a
growing number of Islamic financial institutions and an increasing range of innovative Islamic
financial products. Of importance is that this progress has been supported by a rigorous and
well developed legal, regulatory and Shariah framework, thereby ensuring its stability and
sustainability.
The operating environment for Islamic finance
With the internationalisation of Islamic finance and the rapidly changing international Islamic
financial landscape, Islamic finance is becoming increasingly integrated to the international
financial system. This development has taken place in all segments of the Islamic financial
system including the Islamic banking and takaful industry, and in the Islamic money and
capital markets.
There are now a large number of diverse players and institutions in the Islamic financial
system. There has also been a growing range of products and services being offered. The
pace of product innovation has intensified with more sophisticated Islamic financial products
including the structured and investment-linked products. These products have become
competitive both in terms of product structure and pricing. There has also been enhanced
depth of the Islamic financial markets. This has increased the attractiveness of the Islamic
financial instruments as an asset class for investment.
The Prudential standards are developed by the Islamic Financial Services Board (IFSB) to
govern the operations of Islamic financial institutions. The IFSB has, not only, an important
role in the harmonisation of prudential standards, but also contributes towards the consistent
development of Islamic finance across different jurisdictions. Several parts of the world,
including in Malaysia, have implemented the prudential standards issued by the IFSB. These
prudential standards which have been designed to take into account the unique features
specific to Islamic finance will contribute towards ensuring its soundness and stability.
Developments in the sukuk markets
The year 2007 saw an exceptional growth of the global sukuk market which expanded by
more than 70 percent during the year. New issues during the year reached a record high to
about US$47 billion and the outstanding global sukuk market has now surpassed the
US$100 billion mark. Despite the more challenging international financial environment arising
from the financial crisis that has occurred in a number of the advanced economies in the
recent twelve months, the sukuk market while also affected, it has been to a lesser extent.
Up until June 2008, it has held its ground with a total global issuance now exceeding US$10
billion. With greater recognition of the sukuk market as a competitive and attractive form of
financing, the global sukuk market is expected to continue its growth going forward.
The International Islamic financial hub evolving in Malaysia is supported by five pillars.
Pillar 1: sukuk origination
Following the first ever sukuk in the world that was issued in Malaysia in 1990, Malaysia has
now developed a deep, liquid and vibrant sukuk market. Recently, the largest sukuk ever
was raised in the Malaysian sukuk market in 2007. The magnitude was approximately RM15
billion or about USD5 billion equivalent. Despite being issued during the height of the
subprime crisis, it attracted huge demand and was oversubscribed by more than two times.
Sukuk origination has thus been identified as one of the important pillars of the Malaysian
Islamic financial system. As of the end of 2007, more than 60 percent of the outstanding
global sukuks originated from Malaysia. It has been increasing by an annual rate of about 20
percent and it accounts for about 56 percent of the outstanding bond market in Malaysia.
Several foreign multilateral development banks, quasi sovereign agencies and MNCs have
received the approval of the authorities for the issuance of sukuks in our domestic sukuk
market. The Malaysian foreign exchange administration rules have been extensively
liberalised to enable non-resident corporations to raise ringgit and foreign currency
denominated funds from our market. International issuers may thus issue multi-currency
sukuks in addition to having the flexibility to swap domestic currency funding into other
currencies.
Pillar 2: Islamic fund and wealth management
The sukuk market has been an important source of financing for productive investment
activities, while for investors it provides potential for diversification into new asset classes.
The second pillar in the Malaysia Islamic financial hub is the Islamic fund and wealth
management industry. Malaysia is centrally located in the ASEAN region that has a
population of 570 million. It is also positioned centrally between the major Asian economies
of India, China, Japan and Korea. Malaysia has always been a highly open economy in trade
and investment activities and has been a major recipient of foreign direct investment for more
than a hundred years.
As a destination for financial investment, the Malaysian capital market offers a wide range of
world class financial products. More than 85 percent of the listed companies in the equity
market are Shariah compliant, representing about 60 percent of total market capitalisation.
Other investment opportunities include in Shariah-compliant real estate investment trusts
(REIT), in unit trusts and in the Islamic exchange traded fund (ETF). The capital market
intermediaries in Malaysia, that is, the investment banks and Islamic fund management
companies have had a key role in supporting the development of this industry. Both retail
and wholesale products are being offered in ringgit and non-ringgit currencies. There is also
no restriction in investing 100 per cent of the funds abroad. The foreign exchange
administration rules now allow for the free mobility of inward and outward movement of
funds.
Pillar 3: international Islamic banking
The Islamic financial system has also been extensively liberalised to allow for the entry of
foreign Islamic financial institutions that offer both domestic and international banking
business. In addition, the foreign equity ceiling in Islamic financial institutions has been
raised to a maximum of 49 percent as part of the effort to promote strategic alliances. The
Islamic banking business in foreign currencies can be conducted by the international
currency business units (ICBUs) that may be set up within existing financial institutions and
the international Islamic banks. Such international Islamic banks may be established as
either a branch or a subsidiary. Currently, about 16 percent of total assets in the Malaysian
banking system is Shariah compliant.
Pillar 4: international takaful business
The fourth pillar is takaful and retakaful business. There are now eight takaful operators,
several of which are joint ventures with foreign shareholding that conduct both domestic and
international takaful business. In addition, licences have been granted to three reinsurance
players to undertake retakaful business in Malaysia. Several existing takaful operators have
set up international currency business units (ICBUs) and one new international takaful
company has been licensed as an international takaful operator to conduct foreign currency
takaful business.
Pillar 5: human capital and thought leadership
The fifth pillar is human capital and thought leadership. Several important human capital
development projects have been implemented to foster Islamic finance thought leadership
and to create a supply of talent for the Islamic finance industry. Having a sufficient pool of the
talent and expertise has been key to the development of the Islamic financial hub in
Malaysia. The International Centre for Education in Islamic Finance (INCEIF) which has an
international faculty and students from more than 40 countries, is focused on programmes for
Islamic finance professionals and specialists to meet the human capital requirements of the
global Islamic financial services industry. The first group of students for the Chartered Islamic
Finance Professional, or CIFP, offered by INCEIF is expected to graduate at the end of this
year after completing a three year programme that includes an internship with an Islamic
financial institution.
Strengthening the MIFC initiative
Let me turn to today's event. Malaysia's Islamic financial hub has been built on the
foundation of a comprehensive and progressive Islamic financial system that has been
developed in the recent three decades. Activity in the Islamic financial system has become
vibrant, in particular, in the sukuk market and in the other wholesale Islamic financial
transactions. Going forward, Malaysia will collaborate with other financial centres with the
aim of strengthening the international interlinkages in the global Islamic financial system.
Today, Malaysia is taking another step forward and launching a global communication
campaign to the world. The campaign is part of our efforts to strengthen our connectivity with
the rest of the world. The MIFC global communication campaign highlights the opportunities
and offerings - here in Malaysia - for investors, issuers, industries in the economic sectors
and for professionals and practitioners with interest in the Islamic financial services industry.
Malaysia presents itself as a meeting place for those with surplus funds and those who seek
to raise funds from any part of the world. As an Islamic financial hub, the Islamic financial
intermediaries are supported by institutions of learning for human capital development in
Islamic finance.
It is Malaysia's aspiration to participate in this exciting journey at the frontier of Islamic
finance as it progresses as the fastest growing segment in the global financial industry today.
In conjunction with the opening session of the MIF 2008, it gives me great pleasure to launch
the MIFC Global Communication Campaign. To all the participants, I wish you a successful
and productive conference. Thank you.