Adnan Zaylani Mohamad Zahid: Keynote address - Islamic Finance
and International Action Research Conference
Keynote address by Mr Adnan Zaylani Mohamad Zahid, Deputy Governor of the
Central Bank of Malaysia (Bank Negara Malaysia), at the Islamic Finance and
International Action Research Conference, Kuala Lumpur, 27 October 2023.
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Assalamu'alaikum w.b.t and good morning.
It is a great honour to be here today. This is such an impressive gathering of minds,
academics, researchers and practitioners across economics, finance, and business
disciplines. It's not often that Bank Negara Malaysia is invited to such a prestigious
gathering. I would like to thank the organisers for giving us this opportunity to share our
perspectives today. Given the uniqueness of this gathering, this also presents us with a
great opportunity to share what I think are important questions, challenges and issues
for us and the Islamic finance community as a whole to consider on how Islamic finance
would advance further.
best of people are those that bring the
As a saying of Prophet Muhammad S.A.W., 'The
most benefit to the rest of mankind'. The theme of today's conference, 'Empowering
Change, Elevating Impacts', signals a commitment to make a difference and bring that
benefit. This, indeed, has always resonated with the evolution of Islamic finance in
Malaysia. Guided initially by the objective of financial inclusion for Muslims during the
early years of its establishment, the Islamic finance industry has expanded beyond
serving the Muslim community to achieve scale, a wide range of solutions and address
evolving finance needs. Today, Malaysia is recognised as one of the leading Islamic
financial markets globally. Our Islamic capital market commands close to 65% share of
the total capital market and has continued to grow alongside Islamic banking, which
now accounts for almost 45% of the total financing in the banking system. Takaful has
also gained a stronger presence, holding almost a quarter (24%) of the market share of
net contributions.
Our vision towards elevating the contribution and impact of Islamic finance transcends
borders and the marketplace. Global Islamic financial assets have tripled over the last
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decade to reach USD4 trillion and are expected to reach USD6 trillion by 2026 . Within
the region, Asia is home to nearly a quarter (23%) of the world's Islamic finance assets.
Malaysia has immense potential as an international gateway for Islamic finance,
building upon the ecosystem strengths we have nurtured since the introduction of the
Malaysia International Islamic Financial Centre (MIFC) in 2006. With a focus on Islamic
finance innovation, supported by a comprehensive ecosystem and diverse financial
market players, Malaysia offers a strong proposition for global stakeholders to pilot and
scale new Islamic finance solutions using our marketplace as a 'test bed'. A more
progressive and industry-driven approach, under the steer of the MIFC Leadership
Council (MLC), is envisioned to enable the industry to better capture global prospects in
tandem with the expanding halal economy and rising demand for sustainable
investments. I believe you will hear more about their role and ongoing work later at this
conference.
Ladies and gentlemen,
This year marks four decades since the enactment of the Islamic Banking Act, and the
first Islamic bank was established in Malaysia in 1983. Surah al-Ahqaf, verse 15,
mentions that the age of 40 holds a special significance in an individual's lifespan. Ibnu
Kathir, a 14th-century Islamic historian and scholar, related that at that age, a person's
intellect, understanding and patience had reached a certain level of maturity. Reflecting
on this, after 40 years of establishment, the Islamic finance industry too has matured to
a level that it can and should drive important changes that will enable the industry to
deliver an ever more meaningful impact to its stakeholders. From this vantage point, I
wish to outline two priorities for Islamic finance:
1. First, to effectively deliver value-based finance and unlock impactful innovations;
and
2. Second, to continue to build a more wholesome financial and economic system
that is aligned with Shariah virtues.
Both priorities require transformative thinking and thoughtful application of Islamic
economics and finance within the modern Islamic economic and financial system.
Effectively deliver value-based finance and unlock impactful innovation.
The Financial Sector Blueprint 2022-2026 (FSBP) envisions the Islamic financial sector
to lead efforts in developing innovative solutions and refine business practices towards
greater social, economic, and environmental resilience - underpinned by more refined
measures of value and impact. We want to develop a progressive, sustainable, and
inclusive Islamic financial system that delivers 'finance for all', 'finance for
transformation' and 'finance for sustainability', the three main goals of the FSBP. This
also translates well, consistently with the 'Halalan Thoyibban' objective that is now a
key theme of the Madani economic framework for Islamic finance.
One key avenue for this direction lies in the sound combination between Shariah
contracts and modern financial instruments. These instruments can be tailored to
engineer financial solutions that meet the unique and varied needs of different
segments of society. Islamic financial institutions also have the capacity to engage in
"blended finance" through the integration of different forms of capital, including
philanthropic and risk capital. With this, they can expand their roles beyond
conventional credit provisions and risk transfers. Blended finance is also able to attract
private sector investments into economic activities that might not be financially viable on
their own, encouraging private sector participation in sustainable development efforts.
For example, the iTEKAD programme, which generally applies blended finance, has
benefited over 3,000 microentrepreneurs by providing greater access to finance and
value-added skills to elevate their financial well-being and business resilience.
Integrating Islamic social finance mechanisms as part of Islamic finance solutions has
supported the upliftment of vulnerable groups out of the poverty and low-income trap.
The next step for us is how do we scale these up.
We will also continue to further reinforce Islamic finance's role as a viable and effective
means of intermediation, which is pivotal to the nation's economic development. Wider
adoption of digital financial services will be a crucial acceleration tool. We are
progressively working to facilitate the first Islamic digital bank to be operationally ready
by early next year. We have also set the groundwork to enable the entry of digital
takaful operators that can offer strong value propositions that could bolster financial
inclusion, intensify market competition, and improve efficiency through the application of
innovative business and operational models in providing meaningful risk protection to
consumers.
Efforts are also directed at measures that will deepen Malaysia's Islamic financial and
capital markets. Alhamdulillah, for the progress that we have made thus far, but there is
room to enhance this. One of the key efforts in this space is to enhance the vibrancy of
the Islamic money market and expand the availability of Shariah-compliant instruments
that can facilitate more effective liquidity management. The development of
Shariahcompliant hedging instruments and the industry's work around anticipatory hedging are
examples of such efforts. These initiatives are part of the broader efforts led by the
Islamic Financial Market Committee, aimed at further enhancing the efficacy of Islamic
money markets in Malaysia, which would also enhance our value proposition as an
Islamic financial marketplace.
Distinguished guests,
Building a financial, monetary, and economic system that embodies Shariah
virtues
The second priority encourages a reimagining of the financial ecosystem for Islamic
finance. The prevailing monetary system, which is deeply ingrained as the basis for
modern banking, has facilitated credit expansion and resource allocation that catalysed
decades, even centuries, of economic advancement. It is a system within which the
Islamic financial system currently operates, not just in Malaysia but worldwide. Time
and again, critiques of the current monetary system have contested the limits of such a
system as the bedrock for Islamic finance and highlighted the inherent features that
may not be compatible with the virtues of Islamic economics and Shariah. Yet,
developing a feasible alternative system is not a simple feat.
The growing significance of Islamic finance in Malaysia is already prompting us to ask
several key questions:
If we continue with the current trajectory, it is possible for the size of Islamic finance to
overtake conventional finance? How might a dominant Islamic financial system look like
and operate? Currently, both systems somewhat compete, and hence, profit rates are
influenced by interest rates. Would this be the other way around if this were to happen,
and what would be the implications for the financial markets and the sector?
How would this development shape future monetary policy mechanisms, tools, and
decisions? Some are of the view that an Islamic monetary policy, if any, should be a
quantitative monetary policy, where the central bank influences the amount of money in
circulation and money creation and leaves the determination of profit rates to the
market. This could be rather a simplistic take for a few reasons. Firstly, we know the
experience of past central banks in advanced economies of trying to manage the
money supply. It was dismal. Perhaps things have changed by now, and we have a
better understanding of the behaviour of money supply and demand. Perhaps.
Secondly, would we be as effective to achieve our outcomes on inflation and growth?
Interest rates are a blunt but direct and impactful tool. Money supply and credit creation
are not.
Thirdly, and beyond the questions surrounding efficacy, what is really the ideal financial,
monetary, and economic system?
In Islamic finance, we are quite clear on what such a system is to deliver. One that
embodies the fundamental principles of Shariah that advocates and achieves a just
economy, wealth sharing and circulation, prevention of harm and promotion of
substantive benefits to wider stakeholders. But are these the same objectives as with
the conventional or traditional economic models; to maximise economic profits and,
subsequently, social welfare? If it is, all is good.
But, Islamic economics and finance must rest on further virtues and guidance. Values
such as moderation, brotherhood, ta'awun and others guide our perspective and
behaviour. Guidance in objectives could be in achieving the Maqasid Al-Shariah -
preservations of religion, life, family, intellect, and property. These certainly encompass
more than just the broad objectives of profits and welfare, and it also does not
emphasise profits as an end goal. Consequently, if the Islamic economic and financial
system is to achieve these ideals, can it really achieve these within today's economic
and financial system? Here is where active participation of scholars and practitioners in
this room and beyond towards building knowledge and practical ideas that could
advance Islamic economics is very much welcomed.
One aspect of such knowledge prime to be delved deeper into is the function of money
from the perspectives of Shariah and Islamic economics in a contemporary context.
During the time of the Prophet (peace be upon him), money primarily existed in the form
of gold and silver, the dinar and dirham. Al-Ghazali once said: "Almighty Allah created
the dinar and dirham) for circulation and to be an equitable and just standard between
different assets. They are the means to measure the value of all other assets; they are
precious in themselves but not desired for themselves." It is interesting to note that
there are those who advocate a return to this standard as a return to an Islamic
monetary system. It should also be noted that the dinar and dirham pre-existed Islam in
the Byzantine and Persian empires. These foreign coins were adopted by the early
Islamic nation, and it wasn't until 74 After Hijrah that the Islamic dinar and dirham were
minted. Over the course of history, we have seen many adoptions of similar gold, silver
or essentially a precious metal-backed monetary system. This has subsequently
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evolved in time . This evolution has been driven by the needs of the growing economy
and the financial system. Today, we have a fiat currency system in the paper or coins
are hardly worth much, but for the value we attach to it in our respective currencies.
Even then, today, most of the money we have is just debit balances, data points with
banks. While there actually is no physical form, there is value, which we denominate in
our currency. So, what is really the true nature of money? Is it the physical
manifestation in the form of physical coins of gold and silver, dinar or dirham, or is it
more than this? In today's digital world, it is obvious we can have money without any
physical form. While we no longer require a physical form, what we do require is a
system to record these debits, credits and transfers of money, which, essentially, is the
financial system.
From this perspective, some are of the view that money is transferable credit and
another form of social technology to measure, attach value, organise and facilitate
social and economic exchanges. This runs counter to much of contemporary economic
thinking, which has its roots in money originating as a commodity that overcame barter
trade. This latter thinking also underpins much of conventional or traditional economic
theory that separates financial and real economics. At its extreme, neo-classical
economics asserts that the financial system doesn't matter. Money is irrelevant.
It gives one to think of the Shariah perspective; 'money' is not a commodity to be used
to generate surplus value or profit in and of itself. For profits to be justifiable, a person
must either bear ownership or investment risk, be liable to perform a duty or provide a
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service . It is thus understood that money and profit generation must be rooted in real
economic activities. But again, we circle to another conundrum: that if the financial
system is irrelevant to the real economy, how do we tie 'money' to the real economy,
like we must do for Islamic finance?
Ladies and Gentlemen,
I am posing a lot of questions. To me, these are relevant questions and areas of
research to pursue to truly understand the real economic and financial system. In
Islamic finance and Islamic economics, we have the alternative to pursue these based
on fundamental Islamic perspectives and move away from traditional economic
thinking. We can do away with the concept of the economic man, the greedy,
selfserving superhuman who strives to meet his unlimited wants in an environment of
resource scarcity. Instead, we should replace this with guidance: a nobleman, fairly
moderate, charitable, who can be satisfied at some point, operating in a world where he
has the resources he requires. I believe by doing this, we can develop better economic
theories and finance solutions where fundamental Shariah principles can be fully
maqasid
crystalised to achieve the objectives ( ) of Shariah.
In the recent Budget announcement, the Government has allocated RM20 million for
research and innovation relating to Islamic economics and advancing our thought
leadership. While this has been entrusted to INCEIF and the MIFC Leadership Council,
it is our hope to bring the stakeholders together and collaborate in producing impactful
and practical research that could unlock the application of economics and values in the
modern financial system.
On this note, we must continue to seek purposeful use of finance for the common good.
Albert Einstein once said, "The world as we have created it is a process of our thinking.
It cannot be changed without changing our thinking". I hope this conference will spur
deeper discussions about fundamental aspects of Islamic finance so that we can jointly
empower change and elevate the impact of Islamic finance to much greater heights.
Lastly, what is true is from Allah S.W.T. What is false, I humbly beg your forgiveness, is
from me. With that, I wish all of you a productive discourse ahead. Wallahu a'lam.
Thank you.
Source: Islamic Finance Development Indicator Report 2022
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As time has passed, the form of money has naturally evolved to adapt to the changing
economic landscape - from hard money (e.g. metal coins), to claims on hard money (e.
g. promissory notes), to fiat money as per in present days.
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This is based on a Hadith by Prophet (PBUH), "It is not permissible to sell something
that is not with you nor to profit from what you do not bear the risks (associated with an
asset)" (Narrated by Ibnu Majah).