Zeti Akhtar Aziz: Into the next chapter - transformative changes to
strengthen industry linkage with the real economy
Keynote address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia (Bank
Negara Malaysia), at the Global Islamic Finance Forum 2014 "Into the Next Chapter:
Transformative Changes to Strengthen Industry Linkage with the Real Economy", Kuala
Lumpur, 2 September 2014.
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It gives me great pleasure to welcome you to this fourth Global Islamic Finance Forum. In
this new era of great transformative change in the world, the growth and evolution of Islamic
finance has continued to be very much part of the changing configuration of the global
financial system. An important part of this ongoing change, is the growing internationalisation
of Islamic finance, that has resulted in greater cross-border financial flows which has in turn
facilitated greater and more diversified economic inter linkages between countries. With this
increased pace of the internationalisation of Islamic finance, the total global financial assets
of the Islamic financial industry is now estimated to be more than US$2 trillion. The growth
has continued to gain scale with its geographical outreach now extending beyond Muslim
countries to the more established international financial centres and to other emerging
economies. Across continents, Islamic finance is therefore having an increasing role in
intermediating funds across borders and creating greater financial and economic
interlinkages.
The increasing international dimension of the global sukuk market, in particular, affirms its
offering as a distinct platform upon which international inter-linkages are fostered. The
upcoming debut sovereign issuances from established financial centres and emerging
markets and the increasing diversity of the composition of sukuk investors across continents,
in addition to the growing trend for multi-currency sukuk issuances, cumulatively contribute
towards strengthening the dynamism of the sukuk as a global product for fund raising and
investment activities in the international financial markets. Malaysia, has witnessed an
increasing trend of issuances of foreign currency denominated sukuk in our domestic sukuk
market, reinforced by an increasingly wider investor base as reflected by the increased and
more diversified foreign investor participation in such issuances.
In parallel with this rapid growth of cross-border financial flows has been the increased
attention to the development of the international financial architecture relating to financial
stability in the Islamic financial system. With the important two international institutions
already well established, that is, the accounting standards setting organisation, AAOIFI, and
the prudential standard setting body, the IFSB, concerted global efforts have been directed
towards the progressive implementation of the recommendations in the eight building blocks
identified in the Islamic Finance and Global Financial Stability Report 2010. In particular, the
efforts have been focused on the adoption and operationalisation of the prudential standards
and the development of the potential for effective liquidity management as part of the efforts
to safeguard financial stability. It is encouraging that there has been a higher adoption of the
prudential standards issued by the IFSB, with implementation by 13 regulatory and
supervisory authorities worldwide with indications that there are more in the pipeline. Taking
into account the distinct characteristics and specificities of Islamic finance, the effective
implementation of these standards will contribute towards maintaining the soundness and
stability of Islamic financial institutions.
Liquidity management in the international Islamic financial system has also been
strengthened with the establishment of the International Islamic Liquidity Management
Corporation (IILM) in 2010 that will contribute towards facilitating efficient liquidity
management and cross-border flows by Islamic financial institutions. On the domestic front,
in Malaysia, the upcoming issuance of a ringgit denominated Mudharabah Certificate for
liquidity management purposes by the central bank is the introduction of a new profit sharing
instrument that is expected to contribute towards increasing the range of instruments in the
global Islamic short term securities market. With returns that are linked to the performance of
the underlying asset and tradability in the secondary market, it is expected to draw significant
interest of international investors.
Moving forward: transformative changes to grow beyond numbers
The efforts taken to strengthen the global financial infrastructure of Islamic finance thus far
have provided a solid foundation for the growth and internationalisation of the industry that is
underpinned with soundness and stability. While the rapid growth of Islamic finance, attests
to its resilience and competitiveness, the challenge before us is also to enhance its capacity
to contribute towards inclusion and more balanced economic growth. Statistical numbers and
projections are important performance indicators and benchmarks for the industry. However,
the growth of the industry has to extend beyond the numbers to sustain its growth
momentum. This is of particular importance in today's environment of growing global
uncertainties and when considerations that prioritise the linkage of finance to the economy,
justice and fairness, and sustainability and inclusion and which have been regarded as
essential elements of a modern financial ecosystem. Islamic finance, with these inherent
features and ethical dimensions, therefore has an immense potential role as a transformative
agent in the economy, particularly in serving the requirements of the real economy and the
broader society. Of importance is thus the role of the global Islamic financial marketplace in
facilitating greater linkages with the real economy and inclusion and thus balanced growth.
In evolving into the next growth phase, it remains an imperative for the Islamic banking
industry in the global marketplace to reinforce meeting the very objective of its existence as
an effective form of financial intermediation that serves the real economy and that complies
with the requirements of the Shariah. As an extension to this, Islamic banks have the
potential to extend its role to also include the role as an investment intermediary. This would
require the diversification of banking business to expand beyond credit intermediation to
investment intermediation, in which the alternative modes of risk sharing contracts can be
applied. In performing investment intermediation, Islamic banking institutions not only
strengthen further the linkage of finance and real economic activity, but also contribute
towards more inclusive and more balanced growth.
In the Malaysian Islamic finance marketplace, the changes associated with the
modernisation of laws facilitate the maturing of the Islamic finance industry, with the
enactment of the new Act in 2013. It includes new provisions that strengthen the potential
role of Islamic financial institutions as investment intermediaries for risk-sharing to effectively
take place. Legal recognition of investment accounts provides differentiation from deposits,
which thereby opens up the avenue for Islamic financial institutions to further explore the
various modes of operationalising such investment accounts.
In advancing this quest, technological advances need to be leveraged upon to develop new
innovative platforms that can facilitate the implementation of investment accounts. Aimed to
assist Islamic financial institutions in performing this investment intermediary function more
efficiently, a multi-bank platform is currently being developed in Malaysia to effectively and
efficiently match funds from potential investors with industries and ventures in the real sector.
The platform would facilitate efficient mobilisation of private sector funds, both from
individuals and corporates to finance targeted industries and ventures that are in need of
funding. The platform would also be positioned to spur international connectivity as its
outreach will also extend to international participation from foreign Islamic financial
institutions and investors, through the offering of multi-currency financing options for foreign
projects.
The potential for Islamic banks to progressively chart into this new territory would need to be
supported by a state of readiness in terms of the capabilities of the industry to venture into a
diversification into such business offerings. In preparing for a business landscape with
different complexities, talent development in Islamic finance will need to be accorded with an
even greater priority. Existing talent needs to be equipped with the necessary skills to
support the expansion into areas of specialisation that include investment intermediation.
Stronger knowledge in the value propositions of the investment instruments require a greater
understanding on the risks associated with business ventures in the respective growth areas,
including in the non-traditional markets. This would require determining the viability of such
business and investment proposals. Additionally, at the management level, and the directors
and Shariah scholars of Islamic financial institutions need to be adequately equipped with the
necessary knowledge so as to have an understanding important for steering the business to
the new directions of the industry.
To realise the vision of a highly competent and high performing workforce in the Islamic
financial sector, of equal importance is the standards of quality of the education programmes
in Islamic finance and to raise the level of professionalism of Islamic finance practitioners.
The Finance Accreditation Agency, an international and independent quality assurance and
accreditation body for the financial services industry that was established in Malaysia in
2012, has raised the bar for Islamic finance talent and professionals. The introduction of its
Finance Qualifications Structure that will be launched today has strategic significance, as it
aims to link the various qualifications relevant to financial practitioners under a cohesive
framework which will allow for greater mutual recognition on qualifications and provide clear
and systematic learning path for financial professionals. Complementary to this initiative is
the launch of the Learning Standard to ensure more global consistency for learning contents
across the financial services industry in line with international industry benchmarks.
Technology can also be explored to remove barriers or impediments in promoting greater
interconnectedness in Islamic finance as we aim to create stronger linkage with the real
sector. As a catalyst to improve market access and enhance outreach, technology has the
potential to disseminate information more efficiently, to promote greater market transparency
and price discovery. Today, the launch of the digital application for Islamic finance is a further
pioneering platform to facilitate sharing of information and for greater engagement, including
between industry players that transcend borders. Such innovation is an impetus for raising
greater awareness on benefits of Islamic finance as a form of financial intermediation.
Realising cross-border business opportunities for greater linkages
The next frontier of Islamic finance beckons the global Islamic finance marketplace to evolve
its business models to that which would strengthen the nexus of Islamic finance with the real
economy. This is an important consideration in our strategies, in parallel with the efforts to
further increase the internationalisation of Islamic finance that can cumulatively contribute
towards strengthening economic linkages and thus enhance international economic
connectivity.
Themed "Marketplace for Global Linkages", with the presence of more than 1000 participants
from various industries across the globe, this year's Global Islamic Finance Forum brings
unique opportunities for industry players to realise cross-border business opportunities for
growth. It is our hope that this international platform would also provide the opportunity for
intellectual engagement that would generate new thinking and knowledge as the industry
ventures to new frontiers. On that note, I declare GIFF 2014 open and I wish you a
productive and successful Forum.
Thank you.