Kuala Lumpur Islamic Finance Forum 2008 (KLIFF 2008)
“ISLAMIC FINANCE: THE ROAD AHEAD”
Assalamualaikum Warahmatullahi Wabarakatuh and very good morning,
Ladies and Gentlemen,
1. It is my honour and great pleasure to speak at this 5th Kuala Lumpur Islamic Finance Forum 2008 under the theme of “Islamic Finance – The Road Ahead”. It is my hope that KLIFF 2008 will serve as an avenue for parties to jointly participate in exploring and unlocking the potential of the Islamic finance industry as well as discussing the mechanism and ways to confront the challenges waiting ahead.
2. In the past more than 30 years, the Islamic finance sector has grown into a global industry valued between USD500bn and USD750bn having grown from USD150bn in the mid-1990s. A wide range of Shari’ah compliant products and services are now available, ranging from consumer and investment banking to wealth management and takaful. Malaysia has been at the forefront of many developments in the industry due to the government’s commitment to the sector which extends to this day as illustrated by the launch of Malaysia International Islamic Financial Centre (“MIFC”). The government is committed in making Malaysia a global leader in the sector. Considering Malaysia’s sound regulatory structure and stable track record in Islamic finance, the country should naturally attract major Islamic Financial Services players.
3. With the increased significance of the international dimension of Islamic finance, the financial landscape has been dramatically transformed with more diverse players and a more competitive environment. This in turn has been a catalyst for increased financial innovation and resulted in a wider range of Islamic financial products and services. This has ignited interest from conventional global players from Non-Muslim countries largely in the form of increased participation in Islamic financial markets and in acquisition of strategic stakes in domestic Islamic financial institutions.
4. With the opening of borders for banking institutions and other players, the Islamic financial system has become more diversified and the Islamic financial markets deepened. These developments have contributed to its rapid expansion across the globe, and Islamic finance has now emerged as among the fastest segments in the financial services industry. The scope of Islamic finance business has thus expanded beyond retail and trade financing, to more sophisticated financial products in response to the changing global customer base.
Ladies and Gentlemen,
5. The recent collapse of the sub-prime sector and its impact on the global financial sector is reflective of the need for a new financial system. Much of this collapse can, in fact, be attributed to the disjoint or bifurcation between the financial and real economies. The recent collapse of conventional finance has, in fact, created a tremendous opportunity for true, Shari’ah-based, Islamic finance, whose very essence involves deep interconnectivity between the financial and real economies.
6. With the world financial system still reeling from the unfolding global credit crisis, there’s a need for a cohesive effort in strengthening coordination and cooperation globally. All countries must take effective economic measures in a comprehensive way to restore market confidence, stabilize global financial markets and promote global economic growth. The current global system is too clouded with opacity, conflicts of interest and irresponsible risk-taking, and when problems occur, countries have tended to look inwards and deal with them in isolation when it is clear they should look outwards and join in international cooperation.
7. In the recent concluded Asia-Europe Meeting in Beijing last month, the leaders have “pledged to undertake effective and comprehensive reform of the international monetary and financial systems.” After almost 64 years, there is a general consensus among world leaders that there is a need for a Bretton Woods II; a need to chart out how to regulate the financial system and global money markets. In this respect I am happy to note that the United Nation has set up a high-level task force, chaired by Nobel Prize winner Dr aimeph Stiglitz, to examine possible reform of the global financial system, including the IMF and the World Bank. I am pleased to note that two Malaysians, Tan Sri Dr Zeti and Dr Jomo Sundaram have been appointed as members of the task force. We should be proud that our effort in calling for the global financial reform has finally been acknowledged by the world body.Ladies and Gentlemen,
8. Despite the increased volatility in the global financial markets, Malaysian financial institutions remain resilient. Several years of reforms, institutional development and capacity building, continuous efforts to enhance corporate governance and risk management standards and practices have significantly strengthened the banking system. The level of non-performing loans has also improved to 2.4%. There is also ample liquidity in Malaysia ‘s financial system to facilitate the orderly functioning of economic and financing activities.
9. In facing with the global turmoil, Malaysia has taken a few pre-emptive measures to preserve confidence in the financial systems and the real economy. Among them were:
-The RM 7 billion economic stabilisation package that was announced on November 4th;
-The guarantee of all ringgit and foreign currency deposits with commercial, Islamic and investment banks, and deposit taking development financial institutions until December 2010;
-The injection of additional RM 5 billion into Valuecap to maximise the opportunity in buying some of the undervalued blue-chip stocks in the market;
-The easing of the 30% ruling on bumiputera equity rule for the IPO market; and
-The various pre-emptive measures announced by MITI to lower the costs of doing business, particularly benefiting the SMEs.
10. The Malaysian capital market remains fundamentally sound. It has a strong regulatory framework and internationally-benchmarked standards of corporate governance and risk management in place. The Malaysian capital market also continues to attract interest in initial public offerings (IPOs) despite the global financial turmoil started by the subprime crisis later in 2007.
11. The Securities Commission’s (SC) scorecard for the third quarter of this year indicates that there is an increase in the number of IPOs already approved to be listed on the capital market. The number of new IPOs approved by the SC up to end-September 2008 increased to 29, aided by the addition of 11 new IPOs approved in the latest quarter. Comparatively, there were 26 IPOs approved in total for the whole of 2007. In total, of the 29 IPO submissions approved up to end-September 2008, 13 are Main Board companies compared to nine in 2007. Significantly, six out of the 13 approved Main Board IPOs are by big cap companies with at least RM500 million market capitalization.
12. Both Bank Negara Malaysia and Securities Commission of Malaysia as the regulatory bodies will continue to ensure that regulatory framework remains responsive to market conditions and maintains appropriate incentives for prudent risk management on the part of financial institutions to maintain the orderly functioning of the intermediation of the financial system and financial markets.
ISLAMIC FINANCE: THE ROAD AHEAD
Ladies and Gentlemen,
13. Islamic finance has, thus far, remained robust, despite the current challenging global financial environment. The strengths in Islamic finance are derived from the Shariah principles, the key pillar of Islamic finance that has contributed towards its overall stability and resilience. The Shariah injunctions require that the financial transactions be accompanied by an underlying productive activity thus giving rise to a close link between financial and productive flows. The Shariah principles also prohibit excessive leverage and speculative financial activities thus insulating the parties involved from excessive risks exposures. The intrinsic principle of profit and risk sharing thus provides an in-built check and balance to the Islamic financial transactions. Explicit in this arrangement is the element of risk management and governance practices. Hence, it is a modality in which there is strong explicit emphasis on the economic viability of the underlying assets and on good governance, ethics and transparency.
14. Islamic finance is one of the fastest growing segments in the international financial services industry. The figures are staggering – the Islamic banking industry is forecasted to grow at a rate of at least 20% between now and 2012; more than USD 600 billion of assets are held or managed by Islamic institutions, and that figure is expected to grow to USD 1 trillion over the next couple of years. This growth has also been seen in the other major components of the Islamic financial system i.e. Islamic mutual funds are estimated to be about USD 300 billion, while global takaful or Shariah-compliant insurance contributions are estimated to be about USD5 billion and are expected to triple by the end of the decade.
15. In the year 2007 for example saw an exceptional growth of the global sukuk market which expanded by more than 70 percent during the year. New issues during the year reached a record high to about US$47 billion and the outstanding global sukuk market has now surpassed the US$100 billion mark. Despite the more challenging international financial environment arising from the financial crisis that has occurred in a number of the advanced economies in the recent twelve months, the sukuk market is also affected, albeit to a lesser extent. Up until June 2008, it has held its ground with a total global issuance now exceeding US$10 billion. With greater recognition of the sukuk market as a competitive and attractive form of financing, the global sukuk market is expected to continue its growth going forward.
ISLAMIC FINANCE INITIATIVES IN MALAYSIA
Ladies and Gentlemen,
16. Malaysia today has one of the largest and comprehensive Islamic capital markets in the world. The vast majority of its listed companies, about 85%, and 38% of outstanding bonds are shariah-compliant. This is complemented with an array of innovative shariah-compliant products such as unit trust funds, ETFs, REITS, structured products and derivatives. The foundations for its status as a leading Islamic capital market was set in place through a sound securities regulatory framework which both provided strong investor protection, clarity and consistency through the SC’s Shariah Advisory Council. Not only have the SC guidelines facilitated the innovation of new products but they have also become a reference standard for other countries in developing their Islamic Capital Market.
17. The assets of the Malaysian Islamic banking system now comprise 16% of the market, while the takaful sector has garnered 7% market share. Significant progress been achieved in particular in the Islamic capital market where the outstanding amount of Islamic private securities amounted to USD79 billion or 54.3% of the total outstanding private securities in the market. The number of Shariah-based unit trust funds have also increased to 136 with a net asset value of over USD5.2 billion while 85% of the listed Malaysian stocks are Shariah-approved counters.
18. In the case of Sukuk issuances, since the first ever sukuk in the world that was issued in Malaysia in 1990, Malaysia has now developed a deep, liquid and vibrant sukuk market. Recently, the largest sukuk ever was raised in the Malaysian sukuk market in 2007. The magnitude was approximately RM15 billion or about USD5 billion equivalent. Despite being issued during the height of the sub-prime crisis, it attracted huge demand and was oversubscribed by more than two times. Sukuk origination has thus been identified as one of the important pillars of the Malaysian Islamic financial system. As of the end of 2007, more than 60 percent of the outstanding global sukuks originated from Malaysia. It has been increasing by an annual rate of about 20 percent and it accounts for about 56 percent of the outstanding bond market in Malaysia.
19. The Malaysian Islamic financial community is now working hard to expand the international dimension of our Islamic capital market which has been widely recognised as Malaysia’s key value proposition. The international participation in the fund management has been fully liberalised. In addition, the tax framework, under the MIFC initiative, is now among the most competitive in the world. This has been followed by intensive roadshows to target markets such as the Middle East and other international centres to increase cross-border participation in the areas of fund management, sukuk issuance and listings. This includes establishing mutual recognition agreements. The first of which is the signing between the SC and the Dubai Financial Services Authority (DFSA) for cross-border distribution of Islamic funds.
20. We have embarked on intensive strategies to establish Malaysia as a global centre for Islamic fund management activities. The SC has been actively involved in establishing the framework as well as engaging with international fund managers and leading financial institutions to establish their Islamic fund management operations in Malaysia. I am pleased to note that these strategies have succeeded in achieving these objectives in a short space of time and have resulted in several leading financial institutions to establish their global and regional Islamic fund management operations in Malaysia.
21. So far the SC has granted licences to several leading firms: the Principal Group of the US in its joint-venture with CIMB, DBS in joint-venture with Hwang, and Kuwait Finance House. I am pleased to announce that two additional licences have been awarded to India’s leading fund management company, Reliance Capital Asset Management and to Kuwait-based, Global Investment House.
22. In addition, leading firms based in Malaysia, such as Prudential, are using Malaysia as their regional centre for Islamic fund management activities, re-affirming their confidence in Malaysia as an international Islamic financial centre. There are also several other leading firms that are being reviewed by the SC.
PLANS TO RE-POSITION ISLAMIC FINANCE
Ladies and Gentlemen,
Allow me to elaborate, in my view, on some general work plans to position and re-position Islamic banking and finance.
23. First and foremost, the Islamic finance industry is still too small compared to the size of its potential market, with over one billion Muslims worldwide, which is yet to be fully exploited. One of the key impediments to the growth of Islamic finance is the lack of awareness among the public on Islamic alternative modes of banking, insurance and investments. The industry must continuously engage and educate the general public in order to address this problem.
24. Second, Islamic finance requires further research and study. Discourses should be carried out at all levels and should involve regulators, practitioners as well as academicians. On this note the organizers should be credited for organizing this conference, which hopefully would further enhance the understanding on the subject matter.
25. Third, investment in human capital must be further improved. The lack of knowledge in Islamic finance is strongly related to the shortage of qualified experts. Hence, this has affected the innovation of new products and services in the country. There is also an urgent need to create greater awareness on Islamic finance among market participants through research, education and training.
26. Fourth, integrity, credibility and competency are the key success factors in developing the Syariah framework and governance. Despite divergences of Shariah rulings, it should not be an impediment, as long as they are backed by sound arguments and recognised legal methodologies. Any particular areas of divergence that are of serious concerns should be revisited and reviewed in order to come up with a better and more acceptable solution.
27. Fifth, the legal and regulatory framework should also be resilient and facilitative. Dispute resolution mechanisms should also be more accommodative to the application of Islamic legal rules and methods in order to avoid embarrassment to Islamic banking cases as a result of incoherent and anomalous legal judgements.
28. And finally, other issues related to regulations and supervision should also be equally and adequately addressed so as to bring our Islamic banks and financial institutions at par with the international standards. To meet these challenges, new supervisory and regulatory procedures must be developed and modifications must be done to the existing structures or procedures. Since the banking sector is highly regulated, any modification must be made with extreme care as a failure of an Islamic bank could undermine the depositors’ and investors’ confidence, and could lead to a crisis in the whole financial system, just like we have seen happening currently in the conventional financial market.
Ladies and Gentlemen,
29. The Islamic finance industry has evolved from being faith-based to a business driven. Islamic finance as a demand driven industry which does not only steer clears of usury but also emphasising on ethical values. Given the recent development of financial world crisis, Islamic finance has continued to be viable and competitive. The future looks bright for the Islamic finance with greater participation of conventional player globally that provides security, liquidity and diversity needed for a globally accepted financial system which would be a genuine alternative to the present international financial system. Islamic finance is envisaged to contribute towards unlocking new potentials that would bring mutual benefits, and in doing so, enhance our overall prospects. However the industry needs to improve transparency and foster credibility by harmonising standards and practices.
30. In conclusion, in pursuing Islamic finance as an alternative system, the global financial community will become more selective on the geographical platforms chosen in the course of conducting their Islamic financial transactions. In doing so, they will be attracted to centres with good financial infrastructure, proven experience and strong track record as well as supported by sound research and innovation capacity. I strongly believe, this is where Malaysia has the competitive advantage vis-à-vis other Islamic financial centres.
31. I hope the intellectual discourses in this KLIF 2008 will be beneficial and instrumental in enhancing the knowledge and skills among the market players in Islamic finance. With the lafaz of Bismillahirrahmanirrahim, I now officially open this conference.
Deputy Prime Minister’s Office