Muhammad bin Ibrahim: Malaysia and Turkey - the new silk route in
Islamic finance - strategies for collaboration, cooperation and smart
partnership
Opening remarks by Mr Muhammad bin Ibrahim, Deputy Governor of the Central Bank of
Malaysia, at a business seminar on Islamic finance Istanbul: "Malaysia-Turkey Islamic
finance cooperation: new solution - preferred partner", Istanbul, 29 September 2011.
* * *
I have the honour today to welcome distinguished guests to the Business Seminar organised
by Bank Negara Malaysia, held in this beautiful and historic city of Istanbul. The theme
"Malaysia and Turkey: The New Silk Route in Islamic Finance - Strategies for Collaboration,
Cooperation and Smart Partnership" was chosen as a reflection of our desire to strengthen
economic and business ties for the mutual benefits of both countries. The emergence of the
"Silk Route", a term coined by Governor Dr Zeti in 2006 opens up exciting prospects for
countries and businesses. The new "Silk Route" not only carries traditional trade of goods
and services of old but also manufactured goods, technological innovation and know-how,
portfolio flows, private equity investment and mobility of human capital and knowledge.
Today, Islamic financial products and services are truly "new" additions to this trade.
Let me first express our heartfelt appreciation to His Excellency Tun Dr. Mahathir Mohamad
for accepting our invitation to speak at this event, sharing his thoughts on Islamic finance.
Tun Dr. Mahathir needs no introduction. Among his many achievements was the time he
steered the country during the 1997 - 98 Asian crisis. His unorthodox policies then have
become mainstream now. Under his leadership, Malaysia experienced modernisation and
economic prosperity, a development most profound for my generation. That modernisation
included the early development of Islamic financial system. From the seeds planted during
Tun Mahathir's time, we are now seeing the maturing of the Islamic financial system in
Malaysia that is innovative, competitive and increasingly internationalised. What was once a
novelty has become an alternative means of conducting business. We owe this very much to
Tun Dr. Mahathir's foresight and wisdom. Not many people today realised that one of the first
actions that Tun Dr. Mahathir took when he came to office in 1981 was to set up a National
Steering Committee to implement Islamic banking in Malaysia. The report of this committee
on the viability and strategy of the Islamic banking, was the impetus for the creation and
robust development of the Islamic financial industry in Malaysia. The rest they say is history.
Global economic challenges and Islamic finance
The world is transforming and its transformation is way beyond what we had seen before.
This is an era of radical change, new rules are being formulated, standards and best
practices that were in vogue hardly 5 years are now considered insufficient. It is changing at
a scale and speed we had never experienced before, that require us to accelerate our own
pace of transformation, to enable us to survive and prosper under this "new normal"
operating environment. The world is currently faced with wide-ranging challenges that
include among others - excessive indebtedness, at household businesses and at
sovereigns. Many are grappling at finding the solutions to overcome the complex issues
facing them today. Some of the problems look uncannily similar to what we had faced in the
1990s, but the solutions might be different this time. But whatever that solution might be, we
must never discount any probable answers including unorthodox measures. Experience
during the Asian Financial Crisis had shown that unconventional measures could very well
be the future best practices. But then, yesterday's solution may no longer be adequate to
address today's challenges. Therefore, we must endeavour to search for new alternatives
and embark on new ventures that could mitigate the contemporary issues and challenges
confronting us. And this is where Islamic finance can fit in and play a meaningful role.
As an objective, we need to build the foundations for a stronger and more inclusive global
economy with sustainable growth and greater shared prosperity by all. This objective is in
fact fundamentally in line with the role and relevance of Islamic finance. Islamic finance
emphasises on attainment of socio-economic goals espoused on Shariah objectives. It
emphasises on a strong linkage to productive economic activity to generate legitimate
income. It also emphasises on accountability, fairness and transparency. All these reflect the
fundamental values propagated in Islamic finance that could serve as a stable and resilient
form of financial intermediation. When Islamic finance is applied in an appropriate and
structured manner, it has a strong prospect to serve as a contributor to a sustainable global
economic growth and financial stability.
The infrastructure already established in Islamic finance today is ready to serve as an
effective intermediary for the conduct of global business including promoting greater
intraregional trade not only within Asia but between the various regions of emerging markets.
With more than 600 Islamic financial institutions that now operate in more than 75 countries,
growing at an annual rate of about 15 per cent, Islamic finance can be a platform to
strengthen economic ties between East and West Asia in trade and investments flows. The
sukuk market in particular, has evolved as an important avenue for international fund raising
and investment activities, generating significant cross-border flows. Sukuk issuances have
grown in diversity and sophistication. The diverse sukuk structures of Ijarah, Istisna,
Murabahah, Musyarakah and Mudharabah have expanded to form hybrid sukuk which
include exchangeable and subordinated sukuks, thus increasing its usability and
compatibility to fund various forms of financing. For example, huge amount of funds could be
raised, via sukuk, for the purpose of financing large infrastructure projects. It is this
substantive advancement in Islamic finance that we believe greater business and investment
ties could be built upon to enhance economic relationship between Turkey and Malaysia.
Turkey-Malaysia vast growth opportunities
For Turkey and Malaysia, a productive partnership could be created when both parties are
able to harness the strengths of each other. Turkey is Malaysia's eighth largest trading
partner among the OIC member countries, has had a significant growth in terms of its trade
with Malaysia, which has expanded at an annual average rate of 22.4 percent since 2006.
While the volume of trade and investment between the two countries is still relatively small,
where Malaysia's trade with Turkey accounts for 0.3 percent of Malaysia's total trade and
Malaysia's investment in Turkey totalled to USD56.2 million as at end-2010, the figures also
reflect the enormous opportunity for further growth. Turkey's Prime Minister The Honourable
Recep Tayyip Erdoğan, during the recent visit by the Malaysian Prime Minister to Turkey,
has suggested a leadership aspiration for trade volume between Malaysia and Turkey to
grow from USD1.3 billion to USD5 billion. With commitment and hard work, this target is
certainly not impossible to achieve. I believe with a Strategic Framework Agreement that is
planned to be signed later this year between our two Governments would further strengthen
cooperation between the two through identification of important areas where we could focus
and work on.
Opportunity to enhance trade and financial linkages between Turkey and Malaysia is
immense. Collaboration between the two countries could be in many forms; for instance
Turkish investors and financial institutions could use Malaysia as a gateway to the Asean
region. Malaysian financial community could use Turkey as a base to Central Asian region
and Europe. In the area of Islamic finance, Malaysia is committed to be a partner with Turkey
to further promote the business prospect in this country. Malaysia being an Islamic financial
hub in Asia is willing to share with Turkey our 30 years of experience in developing its Islamic
financial industry and our knowledge and insights in operating an Islamic financial system
that runs parallel with its conventional counterpart.
Potential Turkey-Malaysia partnership in Islamic finance
There are vast opportunities for Turkey-Malaysia bilateral cooperation, however let me
mention five key areas of possible cooperation that could increase cross-border activities
between our two countries. These are in the area of sukuk issuance, promoting cross-border
activities, Islamic fund management, partnership in innovation and in education and
research.
Firstly, in the area of sukuk issuance, we welcome Turkish financial and business community
to use Malaysia's comprehensive and tested infrastructure with its extensive investors
network as a platform to raise funds such as sukuk and Islamic syndication financing. The
multi-currency sukuk market in Malaysia is well developed and active with over 60% of the
outstanding sukuk in the world originating from Malaysia. There is also the opportunity to list
the sukuk on Bursa Malaysia, the Malaysian bourse, which has emerged as the largest
exchange for sukuk listing in the world. This gives the listed sukuks greater profiling, visibility
and transparency in the global bond market. Collaboration in issuance of sukuk would indeed
benefit Turkey, as Turkey's aggressive diversification of its industrial base and services
sectors will require huge financing needs that could be partially met through the Islamic
financial markets. Large infrastructure projects such as building the Bosphorus shipping
canal, the new railway lines and highways might require funding via issuing sovereign sukuk
as an alternative source of funding. The extensive privatisation in basic
industry -transportation, communication and banking - would also offer the corporates and
alternative source of financing that is competitive and innovative.
Secondly, in promoting cross-border financial activities, the Turkish financial community
could network with Malaysian-based investors, and practitioners to facilitate more business
opportunities. Malaysia has diverse domestic and international players that engage in
international currency business. There are now 150 entities in Malaysia's Islamic financial
system which offer a wide spectrum of Islamic products and services. There are also more
than 150 funds in Malaysia including real estate investment funds (REITs) and ETFs that
practise ethical investments. These entities have the capabilities to structure funds for
investment abroad, including into the emerging markets. Additionally, there are opportunities
for ethical investments as more than 80% of equities listed on the Malaysian stock exchange
are shariah compliant. As one strategy to enhance cross-border financial activities, Turkish
banks and relevant entities might wish to consider being members of Bursa Suq Al Sila' to
facilitate liquidity management in the Islamic financial market. The Bursa Suq Al-Sila' is the
world's first end-to-end Islamic multi-currency commodity trading platform to enhance
liquidity management for Islamic financial institutions. This fully-electronic platform facilitates
sukuk structuring, Islamic financing and investment transactions including inter-bank
placements and customer deposits, by applying the concept of murabaha and tawarruq.
Since its establishment in 2009, 23 Commodity Trading Participants from Malaysia, the
Middle East and Europe have been registered in Bursa Suq Al-Sila', contributing to the
growth in its trading volume where 1370 trades were recorded in Q1 2011 with a total value
of USD18 billion as compared to 728 trades in the final quarter of 2010 that totalled to an
estimated USD11 billion.
Thirdly, opportunities to collaborate in the area of Islamic fund management. Following the
launch of the first Participation Bank Index by the Istanbul Stock Exchange earlier this year,
the investment products introduced in the Turkish market have been expanded to include
Islamic equity funds and products. Through collaboration and strategic alliances between
Malaysian Islamic fund management companies and the participation banks in Turkey, the
development and distribution of Shariah compliant funds across borders could be made
possible and new investment options to divest the savings of retail clients, as well as in the
development of investment strategies to meet the needs of high net-worth individuals or
sovereign funds.
Fourthly, partnership in innovation - where the Malaysian and Turkish financial community
could jointly develop innovative products and investment instruments, provide consultation
and advisory services on complex legal, accounting, tax and Shariah matters as well as
developing human talent to support the development of Islamic finance. Joint Shariah
research could also be conducted with International Shariah Research Academy, dedicated
research in applied Islamic finance based in Kuala Lumpur.
And finally, on the education and research front, possible collaboration can be explored
between the International Centre of Education in Islamic Finance or INCEIF and Turkish
universities to give opportunities for Turkish students to enrol in professional and
postgraduate programs. Students from Turkey intending to deepen their knowledge in Islamic
financial industry are encouraged to consider learning opportunities offered by Malaysia
including possible attachments with Malaysian financial institutions. As I speak, efforts to
develop human capital are already taking place now, as a team from the Malaysian financial
community led by the Central Bank of Malaysia is conducting a capacity programme on
Islamic finance in Ankara. This programme is held in collaboration with the Islamic
Development Bank. The programme offers wide ranging topics for Islamic finance and caters
to the needs of a group of central bankers, regulators and Government officials. We wish to
thank the Central Bank of the Republic of Turkey for their support for making this training
initiative possible.
Before I end my remarks, I would like to take this opportunity to re-emphasise our
commitment to strengthen strategic collaboration with Turkey. With me is a delegation of the
Malaysian financial institutions, investment institutions and professional firms ready to
explore, engage and leverage on each other's market opportunities. There is much that can
be done by both sides to jointly explore and realise the potential for mutual benefits. I
strongly believe that today's event will end on a positive note, with both Turkish and
Malaysian delegation able to identify on the next steps. It is our fervent hope that the
business and financial community of both countries would establish regular contacts to
further strengthen collaborative network and to follow through on some of the understandings
reached today.
I take this opportunity to offer for the next follow meeting or seminar to be held in Malaysia. It
is always useful to see first-hand the opportunities and prospect that Malaysia has to offer. I
wish to thank you all for your participation in making this event a success and to His
Excellency Tun Dr. Mahathir Mohamad and the panel of speakers for the ideas, pointers and
suggestions that you would share to make this event a successful one.