Abdul Rasheed Ghaffour: Unlocking full potential of Islamic finance through sustainability Welcoming remarks by Mr Abdul Rasheed Ghaffour, Deputy Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the RFI Roundtable on Responsible Finance "Unlocking Full Potential of Islamic Finance through Sustainability", Kuala Lumpur, 23 September 2019. * * * It is my great pleasure to welcome all of you to the RFI Roundtable on Responsible Finance. I would like to thank the RFI foundation and Dubai Islamic Economy Development Centre (DIEDC) for organising such gathering of policymakers and captains of the financial services industry. The chosen theme “Unlocking full potential of Islamic finance through sustainability” is indeed very apt and timely. We are now in an environment where global aspirations are at risk – indebtedness is high1, inequality has widened2, effects of climate change continue to accelerate3. Doing nothing is not a responsible option! Despite the growing focus in sustainable finance, I am certain many within this room would agree that this transition in the financial system, more so the Islamic financial system, is happening not at the desired pace, scale and intensity. For the next five to ten minutes, allow me to highlight the catalytic role that Islamic finance can play in advancing sustainability agenda. Shariah embeds inherent features that make it natural for Islamic financial institutions to play such role. The three main features: i. First, impact-driven.

Intended outcome of Shariah emphasises on minimisation if not prevention of negative impact and maximising positive value creation to wider stakeholders namely people and planet. The dos and don’ts of Shariah aim to enhance people’s wellbeing by preserving five stipulated key outcomes of Shariah (maqasid) namely the wealth, faith, lives, posterity (lineage) and intellect4. In the context of financial intermediation, preserving wealth entails beyond its literal meaning – to include encouragement to generate, accumulate and distribute the wealth in a just and fair manner. ii. Secondly, real economy. Islamic financial intermediation activities must be backed by real economic activities, thus aligning innovation with the needs of productive activities. Requirement to support the real economy thereby avoids element of speculation. iii. Thirdly, partnership. Another distinct aspect of Islamic finance is the application of risksharing in financial transactions. This strengthens the incentives for both financial institutions and business clients or investors to screen and monitor transactions for commercial viability and risks. The growing momentum in global trend towards sustainability agenda does not only sharpen the focus on formulating necessary solutions to key global challenges such as poverty, food security and inequalities. Most importantly, it creates a sense of urgency for financial institutions to embrace long-term value creation mindset. Increasingly, stakeholders are setting higher expectations on financial institutions to manage the threats of climate and environmental-related risks that are real, with irreversible consequences. Failure to respond appropriately and in a timely manner may have adverse implications on the economy and direct financial consequences on financial institutions.