Governors of central banks and monetary authorities of the Organization of Islamic Cooperation (OIC) member countries, meeting at Sasana Kijang in Kuala Lumpur in November under the aegis of the Statistical, Economic and Social Research and Training Centre for Islamic Countries (SESTRIC) and hosted by Bank Negara Malaysia (BNM), could be excused for being pre-occupied with matters pertaining to the euro zone sovereign debt crisis and its impact on member countries. (source)
The two keynote addresses - one by Shaukat Aziz, former prime minister of Pakistan, who spoke on 'Accelerating Financial Sector Development for Economic Growth: Distilling Global Lessons for OIC Member Countries" - and the other by Martin Redrado, former governor of the central bank of Argentina, on “Central Banking in the 21st Century: Implications of Economic and Financial Globalization” are revealing.
The first by Shaukat Aziz, a former senior executive of Citibank, telling regulators in the OIC countries how they can promote banking for economic growth by learning presumably from the mistakes institutions such as Citibank made (and continue to make) conjures a vision of the poacher turning gamekeeper. Perhaps it was just as well that the meeting was closed doors because not much was alluded to about Islamic banking and finance in the address.
While Redrado's speech was interesting - he is also professor of International Economics at the Catholic University of Argentina - those central bankers from the OIC countries would have benefited more from his remarks outside of the meeting. Indeed, Redrado berated the Muslim countries and the Islamic finance industry for being parochial and insular and not spreading its valuable message and ethos beyond its core constituencies. These include proscription on interest and speculative gambling such as derivatives including CDOs and CDS; encouraging risk-sharing by banks; discouraging excessive and uncontrolled debt and lending; and linking banking and finance to the real economy especially in financing real business activities including small-and-medium-sized enterprises (SMEs).
"Those principles are very valuable. I see so far as Islamic finance is being concentrated in Islamic countries, these types of meetings are more to share experiences to do capacity building amongst central bankers and so on. It seems that the cooperation is more rather within Islamic countries than outside. There is very little discussing of these experiences beyond the Islamic countries to other developing countries. The Islamic finance principles could be well applied in other developing and emerging countries," explained Redrado.
OIC governors of central banks and monetary authorities already find it difficult talking meaningfully to each other about global financial matters let alone Islamic finance. This is because of their varying political governance structures and policies pertaining to Islamic finance.
Not surprisingly, any meaningful discussion on Islamic finance and its role in managing monetary, fiscal and financial policy was very limited, with the participants merely urging exploring the role of Islamic finance in achieving the objectives of a diversified, progressive and inclusive financial sector.
The governors emphasized in their final communiqué that they expect emerging economies to continue to contribute towards driving global economic recovery and growth. "The potential role of Islamic finance in supporting this endeavor should be given special attention. In this regard, we reaffirm our commitment to strengthen collaboration in capitalizing our growth potential...We will leverage on our individual strengths and cooperation in building our capacities."
One potential manifestation of this collaboration was revealed by Zeti Akhtar Aziz, governor of BNM and Erdem Basçı, governor of the central bank of Turkey, in their post-meeting joint press conference. The two countries are on the verge of signing a currency swap arrangement (CSA) to facilitate bilateral trade. "At this stage, we will focus on securing the signing of the agreement and then move toward operationalizing it. Malaysia was one of the first countries to operationalize such an agreement with China. The approval process for the currency swap does not only lie with the central bank but involves other relevant ministries," explained Zeti.
Basci concurred that "the agreement would augment economic ties to finance bilateral trade in respective local currencies of the two countries." Under a CSA agreement the two countries agree to exchange a given amount of currency at an agreed-upon exchange rate and a common maturity date for the exchange.
Malaysia already has such a currency swap arrangement in place with China amounting to RM40 billion or 80 billion renminbi; while Turkey has a similar arrangement in place with Pakistan $1 billion in equivalent local currencies of Turkish lira and Pakistani rupees. In fact, Ankara is set to sign a similar agreement with China in due course.
The central bank governors warned about the uncertainties in the global economy and added that the global financial crisis has highlighted that weaknesses in the financial sector and fiscal policies could have destabilizing effects and negative consequences on the real economy. This has reinforced the importance of an effective functioning financial sector in supporting sound and sustainable economic development.
They agreed that the financial sector has an essential role to efficiently intermediate funds toward productive economic activities and generating sustainable and balanced growth. A well-developed financial sector can improve standards of living, create high value employment, and drive the economic transformation process.
The governors stressed the "importance of building strong financial institutions to serve the economy, having the necessary financial infrastructure supported and balanced by a strong regulatory and supervisory framework, including macro and micro-prudential framework, to safeguard financial stability."
In this respect the role of central banks in collaboration with other government agencies, is crucial in facilitating a nation's development agenda toward achieving sustainable and non-inflationary economic growth. "It is imperative for central banks to continuously undertake transformation and modernization in enhancing organizational capacity and governance to effectively perform our mandate."
The next meeting of the governors of central banks and monetary authorities of the OIC member countries will be hosted by the Central bank of Turkey in Istanbul in 2012.
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