Zeti Akhtar Aziz: Islamic finance – new frontiers in financing the economy Keynote address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the EU-Malaysia Chambers of Commerce and Industry’s (EUMCCI) Quarterly Financial Panel Discussion 2012 “Islamic finance – new frontiers in financing the economy”, Kuala Lumpur, 8 March 2012. *  *  *  In this new phase of globalisation in which economies and financial systems are increasingly becoming more interconnected, we are seeing the emergence of several new trends in trade and investment flows. While there has been a slower expansion in world trade and investment flows in the aftermath of the global financial crisis, cross-border trade and investment activities among emerging economies have been increasing significantly. Asia is very much part of this changing pattern in world trade and investment activity. In Asia, strong domestic demand, supported by resilient financial systems and well developed financial markets have well intermediated these international flows. The most pressing challenge confronting the current global economy is to generate growth and employment. It is particularly important for the crisis-affected economies that growth resumes and is sustained, while addressing fiscal imbalances, public and private sector overindebtedness and the financial sector impairment, the solutions to which will most likely result in slower growth. While supportive domestic policies will thus be necessary to support the growth, also important is the potential growth that can be gained from trade and investment with other parts of the world.

Malaysia has entered into a number of collaborative arrangements in the areas of talent development and expertise, business linkages, and infrastructure development. To date, Malaysia has signed Memorandums of Understanding in the area of Islamic finance with the UK, France and Luxembourg. The now well-developed existing Islamic financial markets, including the sukuk and Islamic money markets, have been particularly instrumental in intermediating funds in the Islamic financial system. It is fast becoming an important platform for international fund raising and investment activities that are generating increased cross-border flows. From an outstanding amount of USD33 billion in 2006, the sukuk market has expanded to USD180 billion as at end-2011. The sukuk market brings with it many attractive value propositions for both issuers and investors. A central merit of the sukuk structure is that it is based on underlying assets that have an income stream. This therefore discourages over-exposure of the financing facility beyond the value of the underlying asset, given that the issuer cannot leverage in excess of the asset value. In addition, with the requirement that the financing must be channelled towards productive purposes, the risk exposure in sukuk is therefore to the project and not to  2  BIS central bankers’ speeches  the uncertainties or activities that have no economic benefits. This element not only contributes towards financial stability, but also offers investors another asset class for investment. The demand for sukuk currently exceeds the supply, as the high level of surplus savings in Asia and the Gulf region spurs the strong demand.