Zeti Akhtar Aziz: The international dimension of Islamic finance
Keynote address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the
2007 INCEIF Global Forum "Leadership in Global Finance - The Emerging Islamic Horizon",
Kuala Lumpur, 30 August 2007.
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It is my honour and great pleasure to be here to speak at this first INCEIF Global Forum,
which has drawn together a distinguished gathering of scholars, researchers and
practitioners from the financial services industry. Let me focus on the international dimension
of Islamic finance which has continued to gain significance. Islamic finance now extends
beyond the traditional predominantly Muslim economies to become an increasingly important
part of the international financial system. Total assets of the Islamic financial system are
estimated to exceed one trillion US dollars. It is among the fastest growing financial
segments in the international financial system with an estimated annual growth of 15 to 20
percent. There is now a growing demand for Islamic financial products in the global market,
far exceeding the supply of financial products and services that is being offered by the
Islamic financial institutions.
As we advance forward, the international environment in which we are operating is also
rapidly evolving to become more complex, competitive and challenging. In the current
environment it has become more volatile and uncertain. The challenge for Islamic finance is
to evolve strategies that will ensure its competitiveness, dynamism and sustainability. An
aspect in the contemporary global Islamic finance that is fundamental is the "principled
centred" nature of Leadership in Islam, that involves "trust" (amanah), and with that comes
"responsibility" (taklif) and "accountability" (mas'-u-li-yah1). My remarks today will discuss the
positive elements that Islamic finance brings to the global financial system, its prospects for
enhancing international integration and the potential to strengthen the socio economic
aspects of Islamic finance.
Optimizing benefits of Islamic finance
In evolving the international dimension of Islamic finance an important aspect is the
optimization of the oasis of benefits and opportunities Islamic finance has the potential to
provide. Islamic finance implicitly embraces strong core values and universally beneficial
characters. The fundamental requirement of Islamic finance is that it is confines its activities
to that which is supported by an underlying economic transaction thereby avoiding emphasis
on speculative purposes. The Islamic principles require that the financial transaction be
accompanied by genuine trade and business related transactions. This provides for a high
level of disclosure and transparency. This thus prohibits the commoditisation of risks, which
effectively leads to its proliferation through multiple layers of leveraging and disproportionate
distribution. It reduces the potential for information gaps and for mispricing of risks and thus
avoids the elements that could contribute to uncertainty and disruptive market conditions.
The Islamic financial system derives its strength and stability from its faculty to uphold
Shariah principles. The Islamic financial system thus has an in-built dimension that promotes
financial soundness and stability, as it resides within a financial trajectory underpinned by the
forces of Shariah injunctions. These Shariah injunctions interweave Islamic financial
transactions with genuine productive activities and prohibit involvement in illegal and
unethical activities. This intrinsic principle of governance contributes towards insulating the
Islamic financial system from the potential risks of financial stress triggered by excessive
leverage and speculative financial activities.
Equally important is that the key components of the Islamic financial system, comprising the
financial institutions, the markets and the financial infrastructure, has demonstrated its
viability and robustness as a form of financial intermediation, with a mutually reinforcing role
in enhancing the overall stability of the financial system. Its growing role in mobilising and
channeling the funds to productive investment activities across borders brings significant
benefits to the global economy. Firstly, it has the potential to contribute global growth and
contributing towards some rebalancing of the global growth given that it brings about a more
inclusive financial integration. Secondly, the strengthened international financial linkages
allows for the potential for greater diversification of risks. The increase in the Islamic financial
products, the growing number of assets classes being offered, the increased cross
ownership of assets have all expanded the possibilities for greater diversification of risks and
the potential for return.
The intrinsic nature of Islamic finance encourages risk management and provides confidence
through explicit disclosure and transparency of the roles and responsibilities defined in the
contract. The transparent nature of the Islamic financial contracts and the need for underlying
economic transaction reinforces the stability of the Islamic financial system.
A vital challenge going forward is however to build a stronger, competitive and dynamic
Islamic financial system that better reflects the internalization of Shariah principles in
financial transactions, in its form, spirit and substance. This epitomizes the objectives of the
Shariah in promoting economic and social justice. While developing Islamic financial system
with products and services mirroring the conventional counterpart is acceptable as a
pragmatic approach, it needs to develop further on its own paths and merits so as to
maximize the potential benefits of Islamic financial system. Key to this is having an
appropriate pricing benchmark to be an indicator for Islamic securities to be efficiently priced
and credible.
In addition, the role of Shariah scholars who have the full understanding of the mechanics of
Islamic financial products and services, are key to ensuring its continued development. At the
same time, Shariah decisions, when made, needs to be disclosed. This will allow others to
appreciate the juristic reasoning, which in turn would lead to a wider acceptance of Shariah
decisions, particularly if they have implications on cross-border transactions.
As the Islamic financial system becomes increasingly more internationally-integrated, it is
important to recognize the different regional and institutional strengths and
complementarities and the need to maximize synergies. Collaboration among regional
centres and key players in Islamic finance will be an important part of the process that will
contribute towards greater international financial integration. Constructive engagement in the
form of strategic partnerships and collaboration, as well as in market access needs to be
enhanced. Allowing greater market access among players in Islamic financial centres can be
a catalyst for enhanced integration and innovative elements in the Islamic financial industry.
Malaysia's experience in strengthening the international dimension of the Islamic financial
system has shown positive results. This has commenced in 2002 with the inaugural issuance
of a global Sukuk to the liberalizing to allow for greater market access in Islamic banking and
takaful initiatives by permitting entry of foreign players.
The third area of international integration is the liberalization of our financial markets to allow
for greater foreign participation. In particular, in the sukuk market, foreign corporations,
multinationals and multilateral agencies may raise ringgit and foreign currency denominated
instruments in our market. Our private debt securities market is the largest in South East
Asia. Malaysia also has highly liberalized exchange administration system that allows for the
free inflow and outflow of funds. There is also no restriction on the utilization of the funds
raised in our market. The funds may be utilized for investments outside the country.
Finally, our own financial institutions have ventured beyond our domestic borders. These
cumulative developments have strengthened our linkages with other Islamic financial
centres.
Another area important for Islamic finance is the investment in research and development
(R&D). The promotion of international strategic alliances through smart partnerships can
create greater synergy that will bring about new approaches, new technologies and new
areas of specialization. Such collaborative efforts amongst Islamic financial institutions would
strengthen the ability to leverage on the industry's expertise. The introduction of innovative
Islamic financial products in a specific jurisdictions can be expanded to other jurisdictions,
which in turn, will contribute to broaden and deepen Islamic financial markets and thus
strengthen the overall development of the Islamic financial industry. In addition, collaboration
between academic researchers and the practitioners will enable the practical application of
such research findings.
In the area of education and training in Islamic finance, there is now a critical shortage of
talent in the Islamic financial industry. Collaboration between training institutions is vital to
developing the pool of expertise in Islamic finance that subscribes to common standards.
Establishing a network of mutual co-operation and collaboration would strengthen the efforts
among the institutions of higher learning across regions in the areas of curriculum
development, research, training, exchange of ideas and information, and resources in Islamic
finance. Such partnerships in connecting the knowledge communities between regions would
facilitate this process.
In the area of Shariah, the progressive convergence of Shariah views and rulings, the mutual
recognition of financial standards and products across jurisdictions would be major driver
towards greater international financial integration. Such a convergence and harmonisation
can only happen with greater engagement among the regulators, practitioners and scholars
in Islamic finance in the international community.
Finally this integration process also requires greater cooperation among the regulators to
ensure that the Islamic financial system is not subject to vulnerabilities and abuses and thus
ensuring its soundness and stability. In this respect, the sharing of information among the
regulators including across borders is important especially in a more globalised and
liberalised environment where financial transactions and activities have become more
complex and globalised. In this regard, there is a greater need for regulators to be
continuously connected to share information on key issues and developments faced in their
own financial jurisdictions. In this respect, the Islamic Financial Services Board has an
important role to facilitate this process.
Closer financial linkages among Islamic financial institutions from different jurisdictions is
essential to contribute towards accelerating the process and towards serving as a bridge to
strengthen the relationship of the international Islamic financial markets as well as the
investment and trade ties between regions. Such linkages within the industry could also lead
to new product offerings and to co-arranging financing. There could also be mutual
development of IT systems and other technologies including other research and
development endeavours.
Finally, let me touch on the development of the socio-economic aspects of Islamic finance.
While "profit motivated" Islamic financial institutions will continue to evolve and gain greater
significance, this trend also needs to be complemented with similar evolution in the socio
waqf
economic aspects of Islamic finance such as and zakat. A stronger zakat and waqf
system would not only complete the equation for a comprehensive Islamic financial system
that supports a more equitable distribution of wealth to ensure fairness and equity, it will also
become the user of the Islamic financial services particularly in the management and
investment of the zakat and waqf funds. In addition, access to Islamic financial services to
micro enterprises would bring such activities into the economic mainstream and improve their
level of performance.
Conclusion
As Islamic finance advances forward to become an integral component of the international
financial system, continuous efforts are needed to further develop the domestic financial
system to meet the changing requirements of a highly dynamic and rapidly evolving
environment. In our quest to build a viable and sustainable Islamic financial system, the aim
is to contribute to the channeling of capital flows to productive investments, create wealth
and promote economic activities, that conforms to the principles and values of Shariah. With
this, the Islamic financial system will ultimately bring benefit not just among Muslims but with
the rest of humanity, Insyaallah.
Thank you.