Tharman Shanmugaratnam: Opportunities facing Islamic finance and challenges in
managing capital flows in Asia
Outline of special address by Mr Tharman Shanmugaratnam, Chairman of the Monetary
Authority of Singapore, at the 8th World Islamic Economic Forum, Johor Bahru, Malaysia,
4 December 2012.
* * *
The Prime Minister of Malaysia, His Excellency Dato' Sri Najib Tun Razak
The President of Comoros, His Excellency Ikililou Dhoinine
The President of the Islamic Development Bank, His Excellency Ahmad Mohamed Ali
Chairman of the World Islamic Economic Forum Foundation Tun Musa Hitam
Ministers and distinguished guests
Ladies and gentlemen
Introduction
It is my pleasure to be here today and have the opportunity to share some thoughts.
Let me first congratulate the WIEF on the progress it has made in establishing itself as a
leading international forum for economic leaders and opinion shapers from a broad range of
countries to discuss issues of interest in Islamic Finance and related themes in global
finance.
The theme of the Forum, "Changing Trends, New Opportunities" is particularly relevant.
Allow me to first offer a brief perspective on opportunities facing Islamic finance. I will then go
on to talk about the challenges we face in Asia in managing capital flows in the aftermath of
the Global Financial Crisis.
Islamic finance: opportunities for growth
The Islamic finance industry is estimated to have grown by some 19% per year since 2006 -
to record nearly US$1.3 trillion of total shariah compliant assets in 2012. But there is still
considerable scope for its development:
•
Islamic finance presently forms less than 1% the global financial industry.
• For a large number of countries, even in jurisdictions with substantial Muslim
populations, Islamic finance currently constitutes less than 5% of their financial
sector.1
•
And despite a record level of sukuk issuance in 2012, the industry as a whole is still
largely concentrated on the banking sector.2 There is much ahead in the journey to
develop Islamic capital markets and the takaful (Islamic insurance) industry.
I believe the next 10-15 years offer significant opportunities for the growth and diversification
of Islamic finance. Let me highlight the reasons to be optimistic about its prospects:
•
First, Islamic financial institutions have in the main escaped significant damage in
the global financial crisis. They are well-placed to grow, at a time when many of the
global banks, especially the European banks, are deleveraging or focusing on
consolidating their balance sheets.
• Second, Islamic finance has much potential to diversify into new growth areas such
as trade and infrastructure financing in Asia and the emerging markets.
- These new areas will allow Islamic banks to reduce their exposure to the real
estate sector, and to take advantage of the stronger growth potential of the
emerging market economies. There are gaps to be filled in structured trade
finance and in funding for infrastructural projects as the emerging markets
grow, and as global finance consolidates.
•
Third, Islamic finance can also seek to meet the increased demand for simpler and
more transparent products and 'back-to-basics' finance. Investors are now much
more circumspect about complex products and their risks. The crisis taught
investors worldwide not only about the damage they can face from the risks that are
known and unsurprising, but of the risks of 'what we do not know'. Islamic finance,
with its focus on transparency, price certainty and risk-sharing, can ride this wave of
demand for simpler and more basic investments.
However, Islamic finance will have to overcome a few important challenges in order to grow
its share in global finance and contribute to cross-border finance. These include the need to
reduce fragmentation in Islamic finance markets due to differences in accepted standards of
Shariah compliance between regions, jurisdictions, and in some cases even domestically
within jurisdictions. This has hampered the flow of liquidity between jurisdictions, and is in
part why there is yet no Islamic equivalents to the international money and bond markets.
There is considerable progress being made to address these challenges. Bodies such as
AAOIFI,3 IDB's Islamic Research & Training Institute, and Malaysia's International Shariah
Research Academy (ISRA) have made significant efforts to narrow the differences in
acceptability of Shariah compliance. The Islamic Financial Services Board (IFSB), in
conjunction with international standards setting bodies such as the Bank of International
Settlements (BIS), IOSCO4 and IAIS5 and various regulators from Islamic and conventional
jurisdictions, are also formulating international standards and best practices for the industry.
Islamic finance is also seeing increasing interest in Asia. We are seeing financial
institutions leveraging on the strengths and expertise that have been developed in
both Islamic and conventional financial markets. This is expanding the range of
Shariah-compliant products and allowing the Islamic finance industry to tap on broad and
deep investor pools globally and in Asia.
•
Malaysia is widely recognised as a leader in Islamic finance, in particular for the
issuance of sukuks.
•
Islamic finance is also seeing growing interest in other Asian financial centres such
as Singapore, Hong Kong and Tokyo.
•
Just recently in mid-November 2012, institutional and private investors in Singapore
and HK were the largest investors in the US$15.5 billion global sukuk issued by the
Abu Dhabi Islamic Bank (ADIB).
•
Between our two countries, we are seeing Malaysian banks collaborating with
Singapore corporates and financial players to structure S$ denominated corporate
sukuk programmes. And Singapore-listed companies are venturing out to tap the
Ringgit sukuk market in Malaysia. These are trends that we are keen to encourage.
To repeat therefore, I am optimistic that we can realise the significant growth potential for
Islamic finance in the next 10-15 years.
Managing the challenge of capital flows in the post-crisis era
Let me move on now to say a few things about the challenges that many in the emerging
world face in managing capital flows, particularly in the face of the extremely low interest
rates being set in the advanced economies (AEs).
We are in an unprecedented situation. Interest rates are expected to stay extremely low in
the US and much of the advanced world for a few years, reflecting decisions by their central
banks to keep monetary conditions highly accommodative until their economies resume
normal growth. There is debate among economists on how effective these activist monetary
policies, such as the US Fed's QE3 strategy, will be in reviving entrepreneurial spirits and
private investments. If the strategy succeeds and the US economy recovers, it will be a plus
for Asia as well.
In the meantime, however, there are significant implications for emerging market economies,
as global investors search for better returns - better than the near-zero rates they get on
cash and treasury bills.
With large amounts of liquidity now moving between markets,
short-term shifts in investor sentiment leads to volatility in capital flows. We have seen
how a shock in the European periphery can send money that was invested in emerging
markets rushing back to the US or other safe havens.
To be clear about it, there is a lot that is good about capital flows, including even short term
flows. They add liquidity to markets, by bringing more buyers and sellers together.
However, we know too that capital inflows can also be too much of a good thing. They can
lead to asset prices, or exchange rates, becoming disconnected from fundamentals.
And the sudden withdrawal of capital from emerging economies when investors switch from
'risk on' to 'risk off' in their portfolios can be destabilising.
As I mentioned, the current global condition is unprecedented. The policy responses in the
advanced countries too are without precedent. Globally therefore, we need some humility in
understanding the benefits and costs of QE3 and easy monetary policies in the advanced
countries. But it will be wise to strengthen our policy toolkits in Asia, so that we can
deal with unpredictable and often excessive capital flows.
There are some lessons that come out of our experiences in Asia and elsewhere, and policy
responses that we can learn from each other. I will mention three sets of policy responses
that will inevitably have to figure in our toolkits.
First, there is much sense in curtailing volatility in the exchange rate over the short-term. The
costs of volatile and uncertain exchange rates are high in small open economies especially -
which is what most of our ASEAN economies are. Accordingly, Malaysia, Singapore and
several other Asian countries have not felt comfortable leaving their exchange rates entirely
to market forces. Their central banks, within each of their monetary policy frameworks, have
sought to instil a focus on longer term fundamentals.
There is merit in allowing exchange rates in Asia's emerging economies to appreciate
gradually over the long term, reflecting their more rapid growth. If we resist these long term
trends, we are likely to see more inflation in our economies. But some stability in the short
term is wise.
Second, macro-prudential policies are now an important part of the policy tool kit. Many
Asian countries have introduced new macro-prudential measures to try and avoid bubbles in
their property markets over the last two years. Malaysia brought in stricter limits on
loan-to-value ratios on housing loans. Singapore and Hong Kong have done similarly, and
have introduced additional stamp duties or transaction taxes to discourage speculative
demand for residential properties.
These targeted administrative and prudential measures are not conventional
macro-economic tools. But they are likely to remain part of our policy toolkit, at least for
the foreseeable future, given the real risks to macro-economic stability that an environment
of very low global interest rates poses.
A third and more fundamental strategy has to focus on building greater depth in Asia's
capital markets, while ensuring that our banking systems remain sound. A good example of
this strategy is in fact in Malaysia. Bank Negara's Financial Sector Blueprint II (2012-2020),
released as part of the government's Economic Transformation Programme (ETP), will build
on the solid foundations of Malaysia's financial system, including developing a deep and
vibrant bond market.
The banks in several leading Asian countries, including Malaysia and Singapore, are
generally well-managed and well-capitalised. They were a source of strength for us during
the global financial crisis. However, Asia's capital markets, and especially the corporate
need much more depth.
bond markets, Broader and deeper capital markets will allow
investors to invest for the long term while hedging against risks. They will help us meet
the growing infrastructural and other long term investment needs of the region.
This is therefore a very important priority in the region, and there is in fact significant scope
for future development of Asian capital markets. Regulators are working to harmonise rules
and market practices across the region, such as issuance procedures and settlement
standards. We also need to develop the securitisation markets, with appropriate safeguards,
so that banks can recycle their capital.
More too is being done to boost linkages between our markets and economies. We have to
pool liquidity across our markets, so as to add depth to the Asian capital market. An example
is how the Malaysian stock exchange, Bursa Malaysia, the Singapore Exchange and the
Stock Exchange of Thailand recently launched an ASEAN Trading Link.
We are also cooperating to encourage financing for infrastructure projects in the region. The
ASEAN Infrastructure Fund (AIF), an initiative that was led by Malaysia, is a good example. It
will pool resources, knowledge and experience among ASEAN governments and the Asian
Development Bank (ADB) for loans to sovereign or sovereign-guaranteed infrastructure
projects. The Fund will also issue bonds, so as to bring in private sector and institutional
investors.
Another example of such cooperation in the region is the Credit Guarantee and Investment
Facility (CGIF) amongst the ASEAN+3 countries, which aims to help companies in ASEAN+3
countries raise long term financing for infrastructure investment by providing the
governments' guarantees on their corporate bonds, thereby reducing risk for bond-holders.
Projects such as Iskandar Malaysia are also a prime example of how intra-regional
investments can be encouraged, and how countries in our region can develop competitive
strengths jointly.
•
Iskandar Malaysia's performance has been impressive - poised to exceed its
targeted RM100 billion investment mark by the end of this year.
•
I am glad there is good progress on the joint venture by Temasek Holdings and
Khazanah Nasional, Pulau Indah Ventures Sdn Bhd to co-develop two separate
sites in Medini.
•
Other significant projects include a S$1.5 billion integrated eco-friendly tech-park by
Ascendas and Malaysia's UEM Land Berhad in Nusajaya (one of the five flagship
zones in Iskandar). Once completed, the park will accommodate a range of
industries including electronics and precision engineering.
• Just in the last month, we have seen other significant investment commitments in
Iskandar reported by Singapore companies.
Iskandar Malaysia will enhance the complementary space between our two economies. It is
a win-win. To ensure continued progress in Iskandar, Singapore and Malaysia will continue
to take steps to improve connectivity, cross-border trade facilitation, and immigration
processes.
Conclusion
I would like to conclude by emphasising once again that I am basically optimistic about the
prospects in our bilateral and regional cooperation. We face many challenges in this
post-Global Financial Crisis era. But the opportunities for us in Asia are intact, and our ability
to cooperate with each other to achieve our full potential as a region is an asset for all our
countries.