Assalamualaikum Warahmatullahi Wabarakatuh.
A very good morning, ladies and gentlemen.
I am delighted to once again be part of this important event for the third consecutive year and I am glad for the opportunity to say a few words to this distinguished group today. This collaboration between the Securities Commission Malaysia and the Oxford Centre for Islamic Studies has become a highly respected international platform for intellectual discourse on critical and topical issues relating to Islamic finance. And in light of the current global economic turmoil, it is even more crucial for Islamic finance to play a greater role in the rebalancing of the global financial marketplace.
- The banking crisis and market turmoil in mid-2007, have shown us how quickly liquidity can evaporate and how market illiquidity, when present, is not only difficult to overcome, but can stretch over an extended period. The Eurozone crisis is one glaring example of this.
- International financial organisations have resolved to take significant steps to create the foundations for a more stable international financial system. The intent is to reform and strengthen the financial system to allow for sustainable growth and greater shared prosperity. In order to be sustainable, the continued role of Islamic finance must be in line with this global resolve.
- Among the many challenges impacting liquidity in Islamic finance is the lack of secondary trading in the global sukuk market. Sukuk issuances have no doubt been successful, and, at times, oversubscribed, but the lack of trading – due perhaps to the scarcity of supply; lack of infrastructure; trading mechanisms that are not globally accepted; or unresolved issues over valuation – have all led to investors holding on to the buy – and – hold attitude of the intruments until maturity.
- Notwithstanding this, sukuk has become an effective tool in allowing corporations and governments to meet their capital and expenditure requirements, especially in markets with a robust Islamic financial architecture in place. However, there remains a stark imbalance in sukuk infrastructure development between jurisdictions, thus curtailing cross-border transactions. As a result, sukuk trading takes place largely at the country and regional levels. This limits the ability of sukuk to be at par with conventional fixed income securities, which are traded extensively on a global scale.
- To allow sukuk to grow as an important liquidity management tool, its secondary market needs to develop more depth and breath. A dynamic cross-border framework in liquidity management would enable the expansion of markets and allow Shariah-compliant financial products to reach communities that currently have limited access to them. To realise this, however, there needs to be greater integration among the various Islamic financial centres – a global community of investors and issuers that will make up a vibrant secondary market.
- Illiquidity has put the global banking system under severe stress, requiring central banks to support the functioning of some institutions and markets. Regional strategies have been initiated to formulate plans to safeguard financial market stability in the event of a future crisis.
- As an example, the Islamic Development Bank (IDB) and the Islamic Financial Services Board (IFSB) established the Joint Task Force on Global Financial Stability and Liquidity Management in 2008. The findings of this Task Force were published in a report released in April 2010[1]. Out of the report’s findings came the establishment of the International Islamic Liquidity Management Corporation (IILM). The IILM now has a membership comprising twelve central banks and monetary authorities and two multilateral institutions. This is a unique multi-jurisdictional collaboration established with the common goal of creating a strong Islamic liquidity management system with a global reach.
Ladies and Gentlemen:
- As profit-seeking entities, Islamic finance institutions have to be organised and managed in keeping with the best corporate and commercial practices, even though they adhere to a different code and set of rules from conventional finance. Islamic finance must be able to improve on its asset and liability management, while offering a wide and comprehensive array of products to a larger global market. If they are really to be a different model of financial intermediation, Islamic financial institutions must have presence, and for that, they must stand out. In a world where even the strongest conventional banks have suffered a great loss of reputation, Islamic financial institutions must be models of excellence in every respect.
- As new Islamic financial instruments enter global markets, it is important that innovation in turn does not dilute the authenticity of Shariah. Newcomers to the industry have bearing upon the reputation of the entire industry. It is imperative that only the scrupulous are welcomed as participants, and that the true essence of Islamic finance is at all times upheld.
- The evolution of today’s financial transactions requires innovation based on classical Shariah applications and on the need to ensure that transactions are safe and secure and not left un-hedged. The issue on whether hedging is Shariah-compliant or not has been debated at length amongst scholars. The general view is that, as long as the underlying economic activities are themselves permissible from an Islamic point of view, hedging is not only compliant but also in line with the Maqasid Shariah. Hedging as a financial tool, however, sometimes requires transactions to be within organised structures. The permissibility of organised or munazzam structures remains a much-debated issue today. In liquidity management, tawarruq is perceived by some to be an artificial arrangement that resembles the interest-based lending denounced by the Shariah. Others see tawarruq as enabling illiquid institutions to solve their asset-liability management needs and avoid some of the circumstances that have led to the financial crisis.
- In my view, open debate is healthy. What is clear, however, is how imperative it is for the designing of financial instruments and practices to come from intimate knowledge of Islamic jurisprudence as well as the inner workings of banking and finance. Only then can stakeholders find the happy medium between Shariah-compliance and market demands.
Ladies and Gentlemen:
- Discourse sessions such as this are invaluable contributors to knowledge generation and exchange. The Roundtable sessions today and tomorrow will delve deep into the liquidity management issues surrounding Islamic finance. I am confident they will generate meaningful discussions and put forth feasible recommendations on how to reinforce the international Islamic finance sector, ensuring it is sustainable, that it promotes productive economic activity, thereby, creating real value for society.
Thank you.
Wabillahi taufik walhidayah.
Wassalamualaikum warahmatullahi wabarakatuh.
- “Islamic Finance: Global Financial Stability” ↑