Zeti Akhtar Aziz: Building a sound global Islamic financial system
Opening remarks by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia (Bank
Negara Malaysia), at the Islamic Financial Services Board (IFSB) - Meet the Members &
Industry Engagement Session, Kuala Lumpur, 28 January 2016.
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It is my pleasure to welcome you to this Industry Engagement Session organised by the IFSB.
Since its introduction in 2012, these sessions have drawn encouraging response from the
members and the industry. Such an interface between the regulators, industry and the IFSB
has become even more important in the current environment in which greater global attention
is being accorded to the reform of prudential regulations. The strengthening of such an
interface provides an important platform for building greater understanding on the
expectations, issues and areas of concern amongst the regulators, the industry and the IFSB.
With more than a decade since the inauguration of the IFSB in November 2002, the IFSB has
built a solid global reputation as a prudential standard-setting body for Islamic finance. Its
achievements also include initiatives to increase international regulatory cooperation, to
encourage uniformity of regulatory frameworks and the efforts to enhance the monitoring of
financial risks in the Islamic financial system. The enhanced stability and resilience of the
current global Islamic financial system is reinforced by its vibrant growth and its increasing
internationalisation and integration into the international financial system. This is a realisation
of the aspirations and vision of the IFSB Founding Members.
The IFSB has also made significant advancements in taking forward the recommendations
made in the Islamic Finance and Global Financial Stability Report 2010 towards achieving
financial stability in the national and the international Islamic financial system. The prudential
standards including that for liquidity management issued by the IFSB takes into account the
unique characteristics of Islamic finance and are also designed to not impose any regulatory
burden while upholding the financial stability agenda.
The effective implementation of the standards issued by the IFSB is key towards promoting
the soundness and stability of Islamic financial institution. To enhance this prospect, the IFSB
has strengthened its role in facilitating greater jurisdictional preparedness in the adoption of
these standards through the provision of technical assistance to its members. Malaysia is one
of the jurisdictions that has adopted and operationalised the prudential standards and the
guiding principles that have been issued for the industry. The implementation of these
standards and guiding principles support the regulatory framework that we now have in place
in our Islamic financial system. As the industry is aware, it places emphasis on the enforcement
of standards for capital adequacy, effective risk management practices, liquidity management,
greater financial disclosure and governance, reinforced by a strong Shariah and legal
framework.
Among the important initiatives of the IFSB is also the establishment of the International Islamic
Liquidity Management Corporation (IILM) in 2010 which has changed the landscape for
liquidity management in the international Islamic financial system, particularly in strengthening
the cross-border liquidity arrangements among the Islamic financial institutions. A further
initiative during the same year was the introduction of the Islamic Financial Stability Forum
(IFSF), set up in 2010 to further solidify the global efforts in areas that will contribute towards
safeguarding financial stability. Deliberations on wide ranging issues that pertain to risks to
financial stability in the Islamic financial system have taken place at this forum. Greater
awareness on issues relating to regulation and supervision of Islamic finance have also been
raised at international meetings, conferences, seminars, workshops and other dialogues that
have been organised by the IFSB in many countries across several continents.
The initiatives and milestones achieved by the IFSB have indeed paved the way for
jurisdictions across the globe to build a solid foundation for the progressive growth of Islamic
finance that is underpinned with stability.
Additionally, the early recognition by the IFSB of the increasing interconnectivity in a financial
system, the IFSB, unlike other prudential standard setting bodies, has advanced its mission
through the development of prudential standards for a broader coverage that includes the
banking, capital market and insurance or takaful sectors. The prudential standards issued by
the IFSB takes into account the specificities of Islamic finance and the dynamics of the various
Shariah contracts used in the wide ranging products offered by Islamic financial institutions. It
is within this context that Islamic financial institutions are able to perform its role more
effectively as financial intermediaries that are differentiated from its conventional counterparts.
With greater readiness, Islamic financial institutions can strategically position themselves to
further realise the true value proposition of Islamic finance, particularly as a financial regime
that places emphasis on risk-sharing and that further strengthens the link of finance to the real
economy. Of importance, industry players will be better positioned to ride the evolutionary
waves of financial innovation that is prevalent in Islamic finance in order to enable greater
offerings of risk-sharing products to customers and businesses.
In Malaysia, Islamic banks now have the potential to be better able to pursue their role as
investment intermediaries through the offering of investment accounts in addition to the
entrenched deposit products, in which various modes of risk-sharing contracts can be applied.
This is supported by the legal recognition of investment accounts in the Islamic Financial
Services Act 2013 (IFSA). It provides a differentiation between the deposit account and the
investment account which offers a new investment avenue that caters for a wider range of
investor risk-return preferences.
In contrast to the deposit account, these funds are being channelled directly to finance
entrepreneurship in productive activities. In promoting entrepreneurship and value-creating
activities, it also contributes towards generating growth and enhances the prospects for job
creation. Additionally, the Investment Account Platform (IAP) that is currently being developed
will provide a centralised multi-bank platform as a new financing option for entrepreneurs with
viable projects as well as an opportunity for the investing public to finance these projects.
It is encouraging that to date, eight Islamic banks are offering investment accounts to their
customers. More are expected to follow when the value proposition of such investment
accounts, with its unique features and the different target market become better understood.
The industry-led communication by the Association of Islamic Banking Institutions Malaysia
will contribute towards increasing the awareness of customers on the concept and on the key
features of investment account. The latest establishment of a consortium developed by four
Islamic banks to develop and operate the IAP which is to be launched next month is also
another initiative to advance this new offering.
In the development of the investment account, it will be essential for Islamic banks, investors
and entrepreneurs to embrace the different approaches in the management of the risk and
return relationships that are embedded in the variations of the Shariah contracts used in such
investment accounts. These relationships need to be well understood by the parties involved
and which are aligned with clear contractual and operational requirements. The IFSB has an
important role in not only providing guidance but also in initiating the convergence of the
different practices between IFSB members with regard to the treatment of the investment
account - also referred to as profit sharing investment account (PSIA) - in the IFSB standards.
More in-depth work can also be explored by the IFSB on the prudential requirements for the
investment account to further ensure a conducive environment for such risk-sharing offerings.
The global Islamic financial system is now operating at a time when the international economic
and financial environment has become immensely more challenging. New risks that are more
complex, with more profound systemic implications are emanating with the increasing forces
of financial liberalisation, globalisation, technological advancement, intensified competition,
financial innovation and the internationalisation of Islamic finance. Cumulatively, these
developments necessitate greater prudential regulation and supervisory oversight to ensure a
resilient and sustainable financial system.
The role of the IFSB remains instrumental and paramount as we face a time of increasing
uncertainties. Continuous and stronger support for the IFSB, particularly from its members
including in actively providing feedback on its Consultative Papers and in the participation in
IFSB related events, supported by the existing collaboration and cooperation among the
regulators would collectively strengthen the potential for the IFSB to manage its journey ahead.
Greater concerted efforts by members to consistently adopt and implement the prudential
standards issued by the IFSB will not only contribute towards preserving financial stability but
it will also enhance regulatory harmonisation across jurisdictions.
These efforts will indeed place us on a path to realising our quest and shared aspirations for a
more resilient and sound global Islamic financial system. It is also timely for the IFSB to elevate
its level of engagement and connectivity with other international standard setting bodies. This
would enable the framework for financial stability in the context of Islamic finance to interface
with the arrangements that exists for the conventional financial system, therefore avoiding any
fragmentation in the global regulatory framework. Malaysia, as the host of the IFSB will
continue to be committed to support its development and its potential as a prudential
standardsetting body in the international financial system.
On that note, I wish you a productive session today and look forward to the constructive
outcomes of this engagement.