Zeti Akhtar Aziz: Internationalisation of Islamic finance - bridging
economies
Welcoming address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the
Global Islamic Finance Forum 2012, Kuala Lumpur, 19 September 2012.
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This is a decade of profound change in the global financial landscape. The world is also
being confronted by the repercussions of the ongoing global financial crisis. Despite this
more challenging global financial and economic environment, Islamic finance has continued
to remain on its growth trajectory. For Islamic finance, it has been a defining period. Its rapid
growth and the intensification of its internationalisation in this decade is now enhancing its
role in strengthening international economic linkages between different parts of the world.
It is my great pleasure and honour to welcome you this morning to this third Global Islamic
Finance Forum (GIFF) 2012. First of all, let me express our gratitude to the Honourable
Deputy Prime Minister of the Republic of Turkey, His Excellency Mr. Ali Babacan for
accepting our invitation to deliver the Public Lecture at our gathering here today. We are
most honoured by your presence and we immensely look forward to your address.
Islamic finance: fostering global linkages
In this new era, in which the international dimension of Islamic finance has gained
significance, Islamic finance has continued to demonstrate its viability and competitiveness in
this more liberalised and globalised financial environment. The total Islamic financial assets
size now has surpassed US$1 trillion - following unabated growth from the mid-1990s. There
are now more than 600 Islamic financial institutions operating in more than 75 countries.
Increasingly, existing Islamic banking institutions are expanding their operations with
presence in new jurisdictions. This is resulting in increased cross border financial flows.
There has also been increased international participation in Islamic financial markets.
Since the late 1990s the Sukuk market has emerged as an important form of intermediation
in Islamic finance. It has been instrumental in the financing structures for infrastructure
projects, investments in the utilities sectors, in particular for water and power projects, and in
the services sector, in education, healthcare and transportation. Islamic finance essentially
offers clear value propositions to both global issuers and investors. For issuers, there is
access to new sources of funds and liquidity. And in introducing a new asset class, investors
gain from portfolio diversification and new investment opportunities that are aligned to
productive investment activities.
Internationalisation of Islamic finance: mutually-reinforcing benefits
Islamic finance draws its strength from serving the real economy. An important feature of
Islamic finance is that it involves financial transactions that must be accompanied by an
underlying economic transaction. And when it is cross border, it will facilitate financial flows
that will support international trade and investment flows. It will contribute towards bridging
economies and enhancing our economic connectivity with each other.
In this current global environment in which emerging economies are demonstrating their
resilience with the ability to sustain growth despite the moderation in global expansion, there
is tremendous prospects for mutually reinforcing growth from increased economic
connectivity. Trade among the expanding emerging economies now account for more than
half of the world trade. This growing demand in emerging economies is also generating
investment opportunities. In this environment, Islamic finance has an important potential to
facilitate trade and investment flows that will be mutually reinforcing. In evolving Malaysia as
an Islamic financial hub, our aspiration is to be a hub that is linked to a network of other
financial hubs. In so doing, it will enhance our economic linkages with other parts of the
world.
The increased internationalisation of Islamic finance would thus influence the patterns of
global financial and economic integration, and in particular facilitate the revival of financial
and economic integration between the countries along the old silk road from Asia to Turkey
and the Middle East, and Africa and to the more established financial markets and developed
economies. The start of this decade has already witnessed the shifting of trade activities to
the emerging economies, which now account for 63 percent or US$37 trillion of world trade
as at end-2011, an increase of 17 percent from a decade ago.
While the Islamic banking sector has been important in intermediating cross border financial
flows, the sukuk market has become an important segment of Islamic finance that offers a
distinct platform upon which international inter-linkages are fostered. The sukuk market has
demonstrated its ability to effectively intermediate funds across borders, contributing towards
the efficient allocation of funds in the global financial system. The sukuk epitomises a truly
global product for international fund raising and investment activities. An increasing number
of multilateral agencies, sovereigns, Government agencies and corporations, including
multinational corporations have relied on the sukuk market as a source of financing. And the
diverse composition of the sukuk investors across continents has added further depth to the
international dimension of the sukuk market. In Malaysia, the sukuk market has evolved into
a multi-currency denominated sukuk market with pioneering sukuk issuances in U.S dollars,
Singapore dollar and the Renminbi.
Internationalisation of Islamic finance: key success factors
The new horizon that is emerging is the rapid internationalisation in Islamic finance which
needs to be strongly underpinned by three key factors to ensure its sustainability. Firstly, the
wide range of global supply of high-quality Islamic financial products and services that are
able to meet the requirements of international businesses. In this phase of growing
international transactions, Islamic finance needs to be dynamic and innovative, with an
emphasis on the development of diversified and comprehensive Shariah-compliant financial
solutions to meet the differentiated needs of various businesses, including the requirements
of international businesses and thus facilitate cross-border investments.
Secondly, is having diverse and dynamic intermediaries and market participants that have a
global focus. This includes having Islamic banking, takaful and capital market players that
venture beyond domestic boundaries to tap global opportunities. Global ancillary services
that are proficient in the Shariah, also have an important role in providing supportive
professional services for such intermediaries and market players to effectively embark on
such cross-border activities.
In addition, having the required talent is another imperative in steering the Islamic financial
sector towards increased internationalisation. The new financial landscape will require
world-class business talent and boards with knowledge of the risks associated with
internationalisation. Greater collaboration between the industry and education service
providers will be important in supporting the talent requirements of the industry in its new
phase of development. Today, we will witness the signing of a Memorandum of Agreement
between an industry player and an academic institution for the establishment of an Islamic
wealth management research centre. This commendable effort is dedicated to producing
applied research in the area of Islamic wealth management. It is envisaged to spur
innovation that will bring with it global benefits and that would also contribute towards setting
industry standards in this key component of the Islamic financial industry.
Thirdly, effective linkages and connections between global financial markets will be facilitated
by business enablers, particularly in the area of legislation, taxation and regulation. The new
global landscape of growing cross-border financial flows between regions that have national
and cultural differences also underscores the need for enhanced recognition and
understanding of practices in the different jurisdictions. This imperative translates into high
demands on the use of standardised documents and agreements among financial market
players, so as to increase market efficiency, transparency and uniformity, as well as to
reduce the cost of transactions as we strive towards seamless global inter-linkages.
Standardised documentation and practices for a number of products have already been
adopted between jurisdictions through bilateral and multilateral agreements. This has
facilitated issuance of financial market instruments, contributing towards enhanced liquidity in
Islamic financial markets and greater inter-market linkages. Greater understanding and
clarity on Shariah matters, will also contribute towards convergence and harmonisation of
such interpretations across jurisdictions and thus contribute towards the development of
Islamic financial products and services.
Realising cross-border potentials and bridging economies
With its international outreach and ability to provide comprehensive financial solutions,
Islamic finance beckons us with a new frontier that presents new opportunities. As we enter
into a more uncertain global environment, it also promptsus to revisit strategies to enhance
the resilience of Islamic finance.
The theme of this year's Global Islamic Finance Forum 2012, "Internationalisation of Islamic
Finance: Bridging Economies" focuses on the international prospects surrounding the Islamic
finance industry and its tremendous potential role in strengthening cross-border economic
linkages. More than 500 participants from over 50 countries across the continents gather
today in this Forum to explore this prospect. In its featured plenary and multi-track
programmes which include the Regulators Forum, the International Shariah Scholars Forum,
the Global Islamic Liquidity Management Conference and the Global Islamic Finance
Taxation Forum, a new highlight is the Bridging Economies Forum that aims to discuss the
Islamic finance prospects and opportunities across regions, and to explore possible market
linkages that can be generated through Islamic finance. Several important signings of MoUs
will also be taking place during this Forum, highlighting increased commitment and
international cooperation.
Let me now conclude with an extension of our appreciation to the panel of distinguished
speakers for their contribution to GIFF 2012. I would also like to once again, express our
gratitude to the Honourable Deputy Prime Minister of the Republic of Turkey, His Excellency
Mr. Ali Babacan for being with us today to speak at this event.