This speech refers to the IFSB-IDB Task Force of Islamic Finance and Global Financial Stability Report (April 2010) that can be accessed here.
This decade has witnessed
dramatic changes in the Islamic financial landscape. As a dynamic
industry, Islamic finance is responding to the forces of change
emanating from the changing requirements of the real economy, the
changing pattern and pace of globalisation and the wide spread financial
reforms being undertaken at both the international and national levels.
This transformation of the Islamic financial system is also taking
place during the most challenging of times as the world enters the fifth
year of the global financial crisis. A central aspect of the new
Islamic financial landscape is also the increased focus on financial
stability to enhance further its potential as a form of financial
intermediation in an increasingly more challenging environment. (source)
It is my great pleasure to join this Islamic Financial Intelligence
Summit organised by 'The Banker' held this year in Kuala Lumpur, in
association with Bank Negara Malaysia to speak on the subject on the
'New Islamic Financial Landscape'. This event which is being held for
the first time outside London brings together practitioners from the
financial community from different parts of the world. While the focus
of this Summit will be on Islamic finance, it is inevitable that the
discussions today will touch on the recent developments in Europe, given
the potential impact it may have on the rest of the world and the need
to implement strategies and policies for coping with the consequences of
these developments.
While the financial solutions being implemented in managing the
crisis and the measures being introduced to mitigate the impact of the
crisis by the rest of the world is important, it can only provide
temporary relief. It is the structural policies and reforms that are
more challenging to undertake that will ensure fundamental financial
stability and a long lasting self sustaining economic recovery.
My remarks today will focus on the changes in the Islamic financial
landscape and its increased potential to contribute to sustainable
growth, increased international connectivity following the increased
pace of internationalisation of Islamic finance and new developments to
achieve financial stability in the Islamic financial system. The
changing financial landscape and the accelerated expansion in Islamic
finance have also resulted in changes in the nature of the supporting
ancillary services, including education that is being provided for the
business and financial sectors.
Islamic Finance and Fostering Sustainable Growth
As the Islamic financial system evolves to become more diversified
and more comprehensive to meet the changing requirements of the real
economy, it is increasing its potential to fostering sustainable growth.
Given that the inherent principle of Islamic finance requires that
financial transactions be accompanied by underlying economic activity,
it already ensures the close link between the expansion in financial
assets with the real economy. As the Islamic financial system
transitions from being banking centric to becoming more diversified and
comprehensive, it has been able to provide the spectrum of financial
products and services to the range of activities in the economy, as
required by small businesses to conglomerates, and by households to the
high networth individuals.
The development of intermediaries that previously was dominated by
banks now comprises the range of financial institutions that also
includes investment banking, specialised banking institutions, takaful,
capital market intermediaries and microfinancial institutions. Financial
markets, including the Islamic money and sukuk markets have been
instrumental in intermediating funds in the Islamic financial system.
The Islamic money market not only facilitates liquidity management but
also the implementation of monetary policy. The sukuk market has
facilitated the raising of funds by businesses, while providing
investors with a range of instruments for investment, thereby
facilitating the mobilisation and allocation of funds to productive
economic activity.
Accompanied by research and development, innovation has intensified.
Islamic finance however has the governance arrangements which require
the approval process by the Shariah advisories. This ensures avoidance
of the creation of financial instruments that have its origins from
other financial instruments. A further principle of profit sharing and
hence risk sharing also ensures a high degree of transparency and
disclosure, thereby a greater shared responsibility on the viability of
the products.
The rapid expansion of Islamic finance is reflected in more than 600
Islamic financial institutions operating in more than 75 countries in
centres that are now beyond Muslim jurisdictions. Indeed, Islamic
finance is increasingly becoming part of the growth strategies of an
increasing number of global financial institutions. New horizons are
also fast emerging following legislative and regulatory changes in
several non-traditional markets that have now emerged as the fastest
growing segment in the international financial system. In fact, the
Banker's latest 2011 Top 500 Islamic Financial Institutions report being
released at this Summit shows that the global Islamic finance industry
continues to experience double digit growth of 21%, with the Shariah
compliant assets now breaching the USD1 trillion mark.
The rapid expansion of Islamic finance essentially reflects its
ability to meet the changing requirements of the global financial
community and its competitiveness. The elements of checks and balances
in Islamic finance that promote accountability and transparency enhances
its potential as a stable form of financial intermediation. There is
also a growing recognition that the inherent tenets of Islamic finance
are aligned with the sustainable dimensions of ethical finance and
responsible financing.
As the new financial landscape emerges, it has also been accompanied
by the development of ancilliary support services that include legal,
accounting, taxation and Shariah advisory. In addition, there is the
development of Islamic indices, information repositories and consultancy
services. In the areas of human capital development there is a
proliferation of programmes and certifications that focus on Islamic
finance. Malaysia is committed in this pursuit and has put in place a
comprehensive talent infrastructure in Islamic finance with the aim of
meeting the increased demand for practitioners by the global Islamic
finance industry. Dedicated institutions of learning such as the
International Centre for Education in Islamic Finance (INCEIF) and the
Islamic Banking and Finance Institute (IBFIM) have been established to
focus on education in Islamic finance.
Increased International Connectivity and Islamic Finance
Despite the continued strains experienced in the economy and the
international financial system, it is important to recognise the
fundamental long-term global transformation that is taking place. In
this recent decade, the concurrent rise of the emerging economies is
resulting in a fundamental realignment in the global landscape. This
transformation is characterised by the shifting balance of global
economic strength to the emerging economies, with its significant
implications on the global economic and financial flows. The
international financial landscape will also be inevitably transformed
with the distribution of financial centres becoming more dispersed.
Increasingly, new centres of financial activities will likely to emerge.
In addition, financial system inter-linkages - particularly among the
emerging economies - will deepen, supported by the increased global
trade and investment that is already taking place. With considerable
capacity to meet large investment requirements, opportunities therein
lie in the more effective and efficient channelling of the sizeable
surplus funds towards the vast productive investment opportunities
within and across the emerging economies.
These trends are being reinforced by the rapid expansion of financial
institutions in emerging economies that have ventured beyond national
borders. Financial institutions from the emerging economies have grown
significantly in size and strength in this recent decade to now account
for almost half of worldwide financial industry market value. Eight out
of the twenty largest global banks, including the top two, are emerging
market financial institutions. As the emerging market financial
institutions continue to regionalise and internationalise, their role
and importance can be expected to further expand. Another key
development is the integration of financial markets amongst emerging
economies, driven in part by the increased economic inter-linkages and
the increased liberalisation trend in the financial sector.
The rapid internationalisation of Islamic finance is reinforcing this
trend and has enhanced the economic and financial connectivity between
the emerging economies. The high level of savings and wealth
accumulation in several of the emerging economies, including in Asia and
the Middle East, need to be effectively channelled towards productive
investments including for large infrastructure development. In this
environment, Islamic finance has emerged as a viable and attractive form
of intermediation including financing of large scale infrastructure
projects. Recent examples include the USD500 million Islamic
Infrastructure Fund established in 2009 by the Asian Development Bank
(ADB) and Islamic Development Bank (IDB) to meet the Shariah-compliant
financing needs in the member countries.
In addition, the advancements achieved in the sukuk market also
provide evidence on the ability of Islamic finance in meeting the
requirements of the differentiated demands of the modern economy. The
recent issuance of the world's first offshore RMB sukuk by Khazanah
Nasional in Malaysia reflects the growing trend of multi currency sukuk
issuances in Asia. Growing at an average annual rate of 40 percent, the
global sukuk market has demonstrated its ability to effectively
intermediate funds across borders, allocating funds efficiently in the
international financial system and fast becoming an important financing
and capital raising option.
Islamic Finance and Financial Stability
An important aspect of the new financial landscape is the increased
focus on financial stability. The more market oriented systems with
market-based finance activities, the creation of new financial
instruments and an increasing number of market participants with global
reach, and more interconnected financial systems has expanded the
potential for, and channels through which, financial shocks are
transmitted to the economy and across borders. Indeed, recent
experiences with crises have also shed new insights into the complex web
of relationships that exist between sovereign, financial and economic
risks, and underscored the critical importance of strengthening the
pillars of financial stability that can serve to contain the impact of a
crisis.
The increased focus on financial stability has several implications
for the new financial landscape. The most significant will be the
fundamental changes in the regulatory environment. These include changes
to institutional arrangements for oversight of the financial system -
both at the international level and within national borders in a number
of countries, significantly strengthened prudential standards with a
focus on building stronger capital and liquidity buffers, increased
transparency in financial transactions and exposures, and enhanced
options to resolve failed financial institutions.
Much progress has already been made by the Islamic Financial Services
Board in promulgating an extensive set of prudential standards for the
Islamic financial services industry since its establishment in 2002. The
IFSB has already introduced standards for capital adequacy, risk
management, corporate governance and Shariah governance. This important
work has been significant in promoting international uniformity of the
regulatory framework and international best practices for the Islamic
financial system in different jurisdictions. The IFSB has also
established a facilitative platform to promote overall financial
stability through the Islamic Financial Stability Forum (IFSF) that
serves as an avenue for cross-border engagement amongst regulators.
The important goal of strengthening the foundation of the global
Islamic financial system has also been reinforced further following the
recent global financial crisis, through the work of the IFSB-IDB Task Force of Islamic Finance and Global Financial Stability. In its report
that was released in 2010, eight building blocks were
identified to manage potential risks and vulnerabilities to the Islamic
system. These include steps that need to be taken for the implementation
of the prudential standards; the development of a liquidity management
infrastructure; the introduction of strong financial safety nets; the
development of an effective crisis management and resolution framework;
the development and implementation of accounting, auditing and
disclosure standards; the formulation of an effective macro prudential
framework; the development of credible credit rating institutions and
processes; and finally, to strengthen efforts for capacity building and
talent development for the Islamic financial services industry.
Following these recommendations, this year, the International Islamic
Liquidity Management Corporation (IILM) was established to strengthen
the liquidity management of Islamic financial institutions. This
initiative represented a collaboration between 10 Central Banks and 2
multilateral development institutions. Its aim is to enhance the
availability of liquid Shariah-based Islamic financial market
instruments - a crucial step in promoting more efficient cross-border
liquidity management for Islamic financial institutions to support
increased cross-border flows.
Cumulatively, these efforts will build a solid foundation for the
orderly growth and development of Islamic financial system that will
contribute to its continued resilience and the overall stability of the
global financial system in a way that better serves households and
businesses.
Going forward, it is important that the international standard
setting process allows and continues to promote the more effective
integration and exchange of perspectives between Islamic and
conventional finance to ensure a coherent global framework that is
consistent across similar risks, promotes a better understanding of risk
interactions between conventional and Islamic finance activities, and
accelerates progress towards best practices based on the sharing of
research, experiences and frameworks.
Conclusion
Conclusion
Let me conclude with a statement from this year's Per Jacobsson
Lecture given by Sir Andrew Crockett on what should guide us in our
"efforts to devise a new and stronger financial system". "It should be
global, it should be robust, it should be an effective servant of the
real market economy". This is what the new Islamic financial landscape
has evolved to achieve. With its inherent close links to the economy and
its trend towards internationalization and the robust institutional
arrangements and regulatory standards being introduced and implemented,
it will indeed enhance the potentials for Islamic finance to not only
serve the economy but to achieve sustainability in this more challenging
environment.
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