Bismillahi Rahmani Rahim. In the name of Allah, the most Merciful and Benevolent.
Assalamualaikum Warahmatullahi Wabarakatuh. May peace be upon you.
Ladies and Gentlemen
- It always gives me great pleasure to be able to address the delegates of the SC-OCIS Islamic Finance Roundtable. I believe this Roundtable series has made its mark as an important platform for frank and constructive discussions and thought leadership on issues of broad significance to the global development of the Islamic finance industry. It is also very inspiring to note that some of the recommendations put forth in preceding Roundtables have resulted in the development of new initiatives or measures taken to facilitate further progress of the industry.
- The world economy and markets have gone through considerable gyrations since the last Roundtable. The sharp decline in oil prices, deepening concerns over China’s economy and heightened geopolitical tensions, among others, have affected sentiments across the globe and contributed to the volatility.
- Nonetheless I am pleased to observe that the Islamic finance industry has remained relatively resilient. Its total asset size is estimated at US$2 trillion with the potential to increase to US$3 trillion in the next few years, according to Standard & Poor. However, it remains a small niche of about one per cent of the global financial system.
- The size of the global Islamic capital market, measured by assets under management and sukuk outstanding, totalled almost US$380 billion in 2015 having grown at a compounded annual growth rate of 16.9 per cent over the past five years, reflecting the increasing significance of the market.
- Islamic capital market and Islamic banking are now becoming systemically important in more than ten jurisdictions – where the Islamic finance industry commands more than 15 per cent market share of the total financial market in those jurisdictions, with the number of such jurisdictions set to double over the next few years.
- There are significant growth opportunities for Islamic finance in a number of untapped and nascent markets and market segments. In terms of markets, many Muslim countries have yet to establish a well-developed Islamic finance industry. Furthermore some non-Muslim countries have expressed interest to enable Islamic finance activities in their jurisdictions. Such interest may be motivated by various reasons including to profile themselves as comprehensive international financial hubs, to promote bilateral trade and investment flows, and to offer stakeholders alternative choices of financial intermediation.
- Market segments that offer new growth potential include Shariah-compliant sustainable and responsible investing (SRI), Islamic wealth management and market-based fund raising such as infrastructure and SME financing, crowd funding and peer-to-peer financing – at the same time utilising delivery mechanisms ranging from the traditional to the state-of-the-art information and financial technology, or fintech. Fintech in particular may offer significant opportunity to address ‘traditional’ challenges such as market access to drive business growth.
Ladies and Gentlemen
Case for Transformational Change
- The aftermath of the devastating 2008 global financial crisis, which continues to impact economies, has brought about renewed ideas and concepts relating to transformational change in finance and society, the moral economy and the behavioural economy, with fundamental issues such as trust, public interest and equitable distribution emerging in the contemporary global discourse – issues and notions that are already entrenched in the Islamic financial system.
- Islamic finance has been the fastest growing market segment in international finance. More importantly, it has emerged as a viable alternative financial discipline that is subscribed to by both Muslims and non-Muslims. With its focus on financing the productive economy based on underlying real assets and a set of principles that are closely aligned with the principles of ethical and responsible finance, Islamic finance is well positioned to serve a broader audience and exert greater influence on achieving a balanced socio-economic development.
- It is also instructive to note that Islamic finance is increasingly recognised as a trusted ‘financial brand’ for its universal ethical values and its role in promoting inclusiveness and a just society amidst some of the speculative activities and profit-driven motive in the wider global financial system.
- Paul Polman, CEO of Unilever, commented recently that “this is a great time for brands which can provide a beacon of trust for consumers. These days, CEOs don’t just get judged by how well their share prices are doing, but by what impact they are having on society.”
Ladies and Gentlemen
Public Policy as Enabler for Islamic Finance to Progress
- In spite of the universal value proposition of Islamic finance and therefore its potential to grow, Christine Lagarde, Managing Director of the International Monetary Fund, cautioned that “there is still a long way to go to fulfil the maximum potential of Islamic finance”.
- Inadequate public policy and legislation in jurisdictions where Islamic finance is offered may be an impediment to unlocking its maximum potential and promise. Without such policy and the concomitant enabling legislation and regulatory framework, the progress of the Islamic finance industry will continue to be tentative and fragmentary – based more on a ‘rhetoric of aspirations’ rather than on the substance of policy, laws and regulations.
- It is imperative therefore that the governments and legislators in these jurisdictions have the will and commitment to undertake the necessary measures to facilitate the development and operationalisation of Islamic finance. Effective public policy and legislation are vital, especially in enabling recognition of the contracts applied to financing mechanisms, of profits as alternative to interest charges and of the legal constructs to take into consideration the Shariah needs.
- Indeed, even in non-Muslim jurisdictions that have enabled Islamic finance transactions, the governments had taken the necessary policy stance and adopted the relevant legislative measures to facilitate the development of Islamic finance in their markets. In certain cases, the governments would make appropriate pronouncement on their policy intention with some lead time, partly to gauge public reaction as well as to ensure smooth implementation. Irrespective of the approach, it is evident that strong policy commitment is a pre-requisite to having an ecosystem conducive for Islamic finance.
Ladies and Gentlemen
Public Policy Commitment and Legislative Priorities
- Malaysia’s long-established public policy commitment towards the development of Islamic finance has been instrumental in positioning the country as a vibrant international centre for Islamic finance. Coordinated execution of the policy is reflected through inter alia the formulation and implementation of facilitative legislation, regulatory and supervisory frameworks, Shariah governance framework and incentive regime for the three main segments of Islamic finance, namely Islamic capital market, Islamic banking and takaful.
- For instance, the development of the Islamic capital market in Malaysia became pronounced following the establishment by law of the Shariah Advisory Council (SAC) and the introduction of the Shariah screening methodology endorsed by the SAC for listed stocks. The resultant availability of the list of Shariah-compliant securities enabled wider investor participation in Islamic equities and contributed to the development of the Islamic unit trust and Islamic fund management industries.
- Similarly, growth of the sukuk market in Malaysia has been facilitated by amendments to the tax laws which provide tax parity between sukuk transaction and that of conventional bonds. Furthermore, in support of the public policy, government agencies and government-related entities have also prioritised the usage of Islamic financial products and services. The narrations above demonstrate the collaborative involvement of various stakeholders in Malaysia, which is necessary to ensure effective implementation of such public policy.
- Elsewhere, the UK government has led the way in being the first non-Muslim country to issue sovereign sukuk in 2014. Its commitment was reaffirmed recently by Harriet Baldwin, Economic Secretary to the Treasury, who said “Developing the UK’s Islamic finance market is a key part of our long term plan to make Britain the undisputed centre of the global financial system.”
Drivers of Transformational Change
Ladies and Gentlemen
- Having in place an effective public policy and legislation that is conducive for Islamic finance to develop and grow, sets the pathway and is a catalyst for effecting transformational changes that will take the industry to the next phase – changes that will promote financial inclusion and more efficient wealth redistribution as well as address the disconnect between finance and the real economy, hence contributing to greater economic and financial stability. The government and the legislature therefore play a key role in driving the change.
- Such transformation must also essentially involve the various change agents including the individual, the corporation, the market and the society. The individuals must exercise their purchasing power judiciously; the corporations must balance their commercial targets with appropriate social objectives; the market must adequately reward responsible and ethical players; and the society must ensure fair distribution and social equity.
- The role of Shariah scholars and advisers is also critical as they serve to ensure the transformations and changes are properly grounded in accordance with the Shariah. It is therefore incumbent upon all stakeholders to play their part in effecting the transformational change that will further drive the Islamic finance industry towards achieving the economic and social outcomes that are consistent with the Maqasid al Shariah.
Ladies and gentlemen
- Before I end, I would like to encourage everyone here to take full advantage of the excellent opportunity this weekend to deliberate extensively on the necessary and practical measures to effect a transformation within the Islamic finance industry that will in turn contribute towards promoting positive changes in finance and society.
- While the road ahead is long and arduous, with the strong commitment and involvement of all relevant stakeholders ranging from the government to the consumers, I am confident that Islamic finance can become an increasingly prominent component of the global financial system that will also promote greater stability, inclusiveness and equity. I wish all of you a fruitful and rewarding weekend.