3 November, 2009

6th Annual Kuala Lumpur Islamic Finance Forum (KLIFF 2009)


Y.Bhg. Dato’ Seri Abdul Wahid Omar :
Group CEO, Maybank Berhad ,

Distinguished guests,

Ladies and gentlemen,

Assalamualaikum warahmatullahhi wabarakatuh, and a very good afternoon to all of you.

1. I am delighted to be given the opportunity to address this Kuala Lumpur Islamic Finance Forum this year at such an important moment for Malaysia and other nations as we manage our way through a global economic downturn. I would like to congratulate the Centre for Research and Training (CERT) for its efforts in organizing this conference. As you gather to discuss growth opportunities in the Islamic financial market, many Islamic financial institutions, issuers and investors are re-assessing their strategies, and this forum provides a timely occasion to re-evaluate business models, products, and risk strategies going forward. Your discussions will have great consequence throughout the nation and the region.

2. And today, as we look forward, let us look at how, in a post-recession world economic order, Malaysia and Islamic finance can meet the needs of growing international demand. And I want to ask you to join with us – government and private sector working together – to create an economic climate that will support the growth of the Islamic financial services sector in Malaysia. My goal is to bring the ideas and insights of the best and brightest of all Malaysians – private sector and public sector – to our government, and to create a strong Malaysian economy for the long-term.

GLOBAL CRISIS

3. We meet here at a time when the world financial system is still recovering from a global credit crisis that began with the sub-prime mortgage scandal in the U.S. and has spread rapidly to affect banks, businesses and stock markets around the world. Many have argued about the causes of the crisis, but what is beyond doubt is that a system too clouded with opacity, conflicts of interest and irresponsible risk-taking was compounded by a failure to have mechanisms in place to identify and remedy fundamental flaws.

4. So, if only one lesson were to come from these events, it must be that there is a need for a cohesive effort in strengthening financial services systems globally and that it must be a multi-lateral undertaking. After a crisis of magnitude comparable to the depression of the 1930s, all countries have a responsibility to take economic and financial measures to restore market confidence, stabilize global financial markets and promote growth. We need a coordinated approach to introduce new transparency and more effective – not simply more, but more effective – rules of the road for our financial systems. When capital, investment and trade flow more freely than ever across borders, only through closer collaboration can we truly build long term security and prosperity.

5. It is only due to the concerted and decisive efforts of many governments and regulators, that it would appear we have successfully stemmed further systemic threats to the functioning of global financial markets. The economic situation has somewhat stabilized in the two most recent quarters, and this growing stability will in time lift confidence and spending. However, there are still substantial challenges for all of us, looking ahead.

Ladies and gentlemen,

MALAYSIA’S MEDIUM-TERM ECONOMIC CHALLENGE

6. Let us be clear about what we have done over the past year. Malaysia has responded vigorously to the current challenge, as we did during the Asian Financial Crisis of 1997-1998. The RM67 billion fiscal stimulus packages developed and implemented by this government – and representing almost 10% of the GDP – have helped our economy through a global recession and generated much-needed economic activity to make up for a slowdown in the private sector demand. Already, the pace of economic contraction has been reduced to -3.9% in the 2nd quarter (1Q 09: -6.2%), and the outlook for positive growth in the 3rd quarter has brightened. These improvements in our national economic outlook have come about not by chance, but by choice. Our stimulus packages, opposed by many at first, are now seen as critical to stimulating spending. And only a few weeks ago, a new budget that will cut the deficit next year, invest in priority areas of infrastructure and services, and keep our economy on the path to recovery.

7. And with these tough choices made, and – I believe – our economy regaining its balance, we look ahead to how Malaysia must adapt to move from simply emerging from recession to become a country thriving and growing. The structural changes in the global balance of consumption and labour markets necessitate that Malaysia review and realign its growth strategy. Our future growth prospects are dependent on an ability to identify and succeed in new areas of economic activity: showing an ability to take advantage of opportunities in a challenging environment, to shift our focus from overreliance on the manufacture and export of physical goods towards a more holistic approach that captures higher value in a knowledge-driven global economy.

8. The new economic vision the government has set out for Malaysia is one aimed at shifting the country onto a high growth and high income path. It is a path built on cross-sector innovation in new, strategically important sectors such as technology and by further strengthening already robust competitiveness in a number of sectors including Islamic financial services, energy, tourism and halal industry business. How will we do this? By investing in education and a skilled workforce of the future: by seeking to adapt in areas where we are strong to capture a greater share of the value: by creating an climate for innovation and investment that recognizes the importance of private sector creativity: and through increasing the integration of our services sector with regional and global economies. Towards this end, we have already liberalized many segments of our services sector including Islamic finance, thereby re-affirming Malaysia’s commitment to seek international partnerships and to collaborate with regional and global players in mutually beneficial trade in services.

Ladies and gentlemen,

ISLAMIC FINANCE: THE WAY FORWARD

9. Islamic finance is not only a sector where Malaysia can play an important role: I believe it is a strategically vital element of the world’s recovery from a financial crisis that has shaken both our finances and our faith in banking institutions. With conventional financial institutions still reeling from huge losses, the fast growing sector of Islamic finance is attracting growing global attention. Although Islamic finance has largely escaped the ravages caused by overzealous financial innovation and imprudent lending practices which were at the heart of the global financial crisis, we cannot afford to be complacent. It is imperative for the industry to draw upon the lessons learnt to ensure that we avoid any such financial instability in the future. Further industry development must therefore be accompanied by the following key drivers for ensuring continuing resilience of Islamic finance in withstanding the impact of current and future crisis:

* Firstly, ensuring that innovation in Islamic finance remains grounded in Maqasid al Shariah (objectives of Shariah) which serve to anchor the business paradigm of Islamic finance in the realisation of benefit to the people

* Secondly, ensuring that innovation is supported by strong governance practices which hold true to the needs of Islamic financial institutions to properly discharge their duties, for example as Wakeel or Mudharib, in accordance with various Shariah contracts underpinning Islamic financial transactions
* Thirdly, ensuring that risk management systems have appropriate safeguards and keep pace with the sophistication of innovation in Islamic finance: and

Last but not least, ensuring a comprehensive and supportive infrastructure – a legal, regulatory and supervisory framework that addresses the unique elements of Islamic finance industry development. This needs to be additionally supported by institutional arrangements for expedient, effective and cost efficient resolution of troubled financial institutions and a financial safety net framework that encompasses the lender of last resort and a deposit insurance system

ISLAMIC FINANCE OPPORTUNITIES IN MALAYSIA

10. After an extensive and strategic effort to establish a viable Islamic financial system evolving in parallel with conventional systems, Malaysia has achieved significant success in Islamic finance, buy any measure. For instance, by the end of the second quarter of this year, the Islamic financial service sector accounted for close to 19% of total banking assets. Total financing now amounts to RM115 billion and constitutes 15.5% of the total financing portfolio of the banking industry. Net non-performing financing remains low at 2.4%.

11. Tremendous growth has also been experienced in the takaful sector in which the fund assets have registered an increase of 19% for the same period. This recent decade has also seen the increase in number of Islamic financial institutions including full-fledged Islamic banks, development financial institutions that engage in Islamic banking, takaful, re-takaful and capital market intermediaries. Several of these institutions have demonstrated the very sort of international entrepreneurial spirit that we endorse, creating strategic partnerships with foreign players.

12. Malaysia’s Islamic capital market is one of the most outstanding and has been growing at exponential rates – with the full complement of products, infrastructure, institutions, intermediaries and investors, all contributing to the depth and breadth of the marketplace. Today, we are one of the leading international Islamic financial markets that offer a full range of Islamic products. In particular, our Islamic capital market is the most comprehensive in the world: starting with the pioneering issue of the first sukuk in 2002, there have been a steady stream of innovations from Malaysia, culminating in the what is now the largest domestic currency sukuk market, a well established Shariah-compliant equity market where 63.7% of the equity market comprises Shariah compliant securities, and also the largest number of Islamic funds globally.

13. In term of size, Malaysia’s Islamic capital market had reached RM803 billion as at end-August 2009, representing 54% of Bursa Malaysia’s market capitalisation. Sukuk has also maintained its dominance in the Malaysian bond market, accounting for 58% of total bond market. And as we look to the future, there will be no shortage of demand for Islamic capital market products in both the domestic and international arena. The strong interest among the international financial markets to grow their Islamic finance industry will only help to expand the reach of Islamic finance and the skills of our business leaders.

14. Recently, Malaysia has also explored opportunities to facilitate the hedging of investment risks and liquidity management, through the development of transparent and prudent alternative investment strategies, such as the introduction of the Islamic Exchange Traded Funds (ETF), Islamic Real Estate Investment Trusts (REITS) and the establishment of the first commodity murabahah house in the world or namely as Bursa Suq al Sila’ by Bursa Malaysia. This is a multi-currency and multi-commodity electronic exchange traded platform to facilitate the trading and settlement of commodity using crude palm oil (CPO) for liquidity management between Islamic financial centres. Although Malaysia already has a well functioning Islamic inter-bank money market, this platform provides a further alternative for liquidity management, through which global linkages in the Islamic financial system can be further enhanced.

15. Capitalising on our domestic success and strong industry fundamentals built after more than two decades of existence, we are today able to position Islamic finance as a competitive advantage for the nation. To strengthen our strategic endeavour of positioning Malaysia as an International Islamic financial Centre (MIFC), the government set out our plans under the ‘Shaping Islamic Finance Together’ initiative. Shaping Islamic Finance Together symbolises Malaysia’s aspiration in the area of sector leadership and innovation, whilst emphasising Malaysia’s collaborative approach to enhance greater international collaboration in the development of Islamic finance. Malaysia welcomes and encourages the international financial community to work with us not only in shaping Islamic finance, but also benefiting from what it has to offer.

16. Towards this end, the 2010 Budget provided substantial tax incentives in the area of Islamic finance. In particular, the Government has announced that existing tax incentives for Islamic finance will be extended to 2015, with new measures introduced as follows:

* stamp duty exemption of 20% on Islamic financing instruments
* double deduction on expenditure in promoting Malaysia as an International Islamic financial centre
* deduction on expenditure incurred in the establishment of Islamic stock broking firms: and
* deduction on expenditure incurred on the issuance of Islamic securities approved by the Securities Commission (SC) and Labuan Offshore Financial Services Authority (LOFSA).

In addition, tax exemption will be given to profits of takaful companies derived from overseas operations. It is envisaged that with these tax incentives, the Malaysian Islamic financial services industry will play an even greater role in facilitating and catalyzing economic growth of the nation.

17. Today, Islamic finance in Malaysia has entered a new phase of global development. Our Islamic financial market already operates in a highly liberalized environment, with many incentives offered to attract global market participants and experts to our shores. We have intensified the promotion of this sector overseas and with other Islamic markets, in particular through the sharing of Shariah knowledge. Malaysia’s intermediaries have first mover advantage in many segments, particularly the Islamic capital market, and have the edge in expertise and innovation. We must capitalize on this momentum and use our Shariah-based competitive advantage to accelerate growth and development in our financial market.

18. Enhancing Malaysia’s connectivity in Islamic finance with other financial centers is another important agenda of MIFC as we seek to bring Islamic finance into the mainstream. For this purpose, Malaysia has entered into agreement via memorandum of understanding (MoU) with various jurisdictions for greater collaboration and engagement of mutual benefits in Islamic finance. Malaysia will continue to lead the way in expanding the outreach of Islamic finance, and therefore more MoUs signing with jurisdictions in other parts of the world are expected in the future. I hope that we can engage you in taking full advantage of the international agreements that the government is pursuing to enhance the development of this important sector.

CONCLUSION

19. We are indeed privileged to witness today the most exciting and dynamic phase of development of Islamic finance in Malaysia and to be at the forefront of this growth. But we cannot simply be observers: we must be activists working together, tirelessly, to improve the Islamic financial services value proposition and to build bridges between nations and peoples that are mutually beneficial. To ensure that Islamic finance will continue making headway in contributing towards the betterment of the Ummah, we must build on the progress already made. That effort starts here, today. This reminds me of verse 69 of surah al-ankabut:

“And those who strive in Our (cause), – We will
certainly guide them to our Paths: For verily
Allah is with those who do right.”

On this note, I wish all of you a productive and successful forum.

Thank you very much.

Wassalamualaikum warahmatullahhi wabarakatuh

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