“New Opportunities in Islamic finance in the Wake of the Financial Crisis”
Bismillahi Rahmani Rahim.
Assalamualaikum Warahmatullahi Wabarakatuh and a very good morning.
I am indeed blessed by the Almighty S.W.T. to be given the opportunity to address the Malaysia-Bahrain Business Forum this morning. On behalf of the Malaysian delegation, I wish to thank the government of Bahrain, and in particular His Highness Shaikh Salman Bin Hamad Al-Khalifa, the Crown Prince of Bahrain, for the warm welcome that has been accorded to us since we arrived in this beautiful country. His Highness the Crown Prince is a most generous and kind host, and I would like to take this opportunity to express my deep appreciation to His Highness for receiving me and some members of my delegation at Zaher Palace on the day of our arrival. I wish also to thank His Excellency Shaikh Mohammed bin Mubarak Al-Khalifa, the Deputy Prime Minister of Bahrain for the warm reception and fruitful discussions we had yesterday.
2. We pray for the continued good health of His Majesty King Hamad Bin Isa Al-Khalifa, King of the Kingdom of Bahrain; His Highness Shaikh Khalifa Bin Salman Al-Khalifa, the Prime Minister of the Kingdom of Bahrain; and His Highness Shaikh Salman Bin Hamad Al-Khalifa, the Crown Prince of the Kingdom of Bahrain. May Allah protect them. May the people of Bahrain continue to prosper under the wise leadership of His Majesty and Their Highnesses.
3. We live in challenging times, amidst a global financial crisis which, insyallah, is gradually stabilising and entering a period of recovery. What started as turbulence in segments of the US subprime mortgage market has become a global financial crisis. It began following a prolonged period of excessive risk-talking activity in an environment of low risk premia, loosening of credit underwriting standards in housing mortgages and proliferation of complex structured financial instruments that masked excessive risk build-up. Complacency in the area of governance compounded the problem as financial institutions accumulated high levels of leverage and depended on non-traditional wholesale funding.
4. The turning point occurred in 2007 when house prices in the US fell and mortgage delinquencies by subprime borrowers rose rapidly, with large spillover effects on the financial markets. Beginning with the financial institutions and their special investment vehicles, the problem spread to other market participants. The global financial system has been severely weakened by mounting losses on impaired and illiquid assets, uncertainly regarding the availability and cost of funding, as well as unwillingness to extend new credit to the wider segments of the economy. Market confidence dwindled, leading to the collapse of key financial institutions, which in turn necessitated wide-scale public intervention and cross-border cooperation to support a more orderly deleveraging process while minimizing the potential risk to global economic growth. We are only now beginning to see glimpses of a revival in the banking industry and in the capital markets.
5. While Malaysia has not been spared the effects of the financial crisis, the effects have been felt mainly in the real sector of the economy due to the contraction in demand for our exports. Malaysia’s financial sector remains strong. Financial intermediation has not been interrupted. Credit flows have continued to support the domestic economy.
6. Since the Asian financial crisis a decade ago, Malaysia has taken steps to strengthen its financial system. The regulatory and supervisory framework of the financial system has been significantly improved with greater corporate governance and improved risk management practices. The presence of a strong Islamic finance sector alongside conventional finance has also contributed to Malaysia’s capacity to weather shocks to the financial system.
7. Malaysia remains competitive in the global business market. We are ranked 24th in the Global Competitiveness Report 2009-2010 by the World Economic Forum. Malaysia has been ranked as the third most attractive investment destination for shared services and outsourcing activities for the second consecutive year in A.T. Kearney’s Offshore Location Attractiveness Index. Malaysia is placed fifth in the list of emerging countries considered to be the next wave of priority markets according to a report commissioned by UK Trade & Investment entitled Survive and Prosper: Emerging Markets in the Global Recession.
8. The government continues to support the economy through measures and initiatives to enhance the country’s business and investment climate. A special taskforce has been established to review and improve the public sector service delivery system to improve efficiency and reduce the cost of doing business. As of 10 March 2009, Malaysia has liberalised 27 services sub-sectors including health, tourism, transport, business services, IT services and legal services with no restrictions on foreign equity ownership. The liberalisation of the legal services subsector allows for up to five international law firms with expertise in international Islamic finance to establish offices in Malaysia. In addition, there are generous tax incentives for foreign players in the five economic corridors established throughout the country.
9. Currently, trade and investment flows between Bahrain and Malaysia remain at a moderate level, although on an upward trend. This indicates tremendous opportunity for both our countries.
10. Malaysia fully appreciates the significance of Bahrain as a trading partner. It has the most liberal and progressive economy in the Middle East. It has a skilled workforce, an increasingly sophisticated services sector and excellent infrastructure. Malaysia in turn would make for a worthy partner for Bahrain. Malaysia has established a name for itself as a destination of choice for foreign direct investment in higher value-added activities, particularly in the services sector. Our strong economic and financial fundamentals, long term development plans, trade openness and pro-business policies continue to be recognised as strong points in attracting FDI. Malaysia also possesses a highly educated workforce, an efficient and diversified financial system, strong corporate governance, well-developed infrastructure and a wide range of tax incentives.
The Malaysia International Islamic Financial Centre (MIFC) initiative
11. Malaysia launched the Malaysia International Islamic Financial Centre (MIFC) in 2006 as part of our initiative to integrate Malaysia within the International Islamic financial community, and to position the country as an international Islamic financial centre. Since then, significant progress has been made. The Islamic financial system in Malaysia today comprises the Islamic banking institutions, the takaful (insurance) and re-takaful industry, and the Islamic money and capital markets. Significant progress has been achieved in particular in positioning Malaysia as a centre for the origination, distribution and trading of Islamic bonds or sukuk. The Malaysian sukuk market has now evolved into the world’s largest Islamic bond market. Malaysia is also becoming a centre for Islamic fund and wealth management services and for international Islamic banking business, as well as a centre for Islamic finance education, training, consultancy and research.
12. We in Malaysia believe there is tremendous upside potential for Islamic finance. We believe the current financial turmoil provides an opportunity for Islamic finance to position itself as a complement, if not alternative, to conventional finance by providing investors with other asset classes and markets that provide stability. The syariah principles which underlie Islamic finance have contributed towards its stability and resilience. These principles have made Islamic financial institutions less vulnerable to instability and less prone to frequent financial crises. For example, the syariah injunctions that prohibit excessive leverage and speculative financial activities have limited the exposure of Islamic funds to the meltdown of the financial system in the United States and Europe. It therefore comes as no surprise that Islamic financial institutions have weathered the global economic downturn better than their conventional counterparts.
13. We in Malaysia welcome financial institutions and investors to take advantage of the numerous opportunities offered under the MIFC initiatives. Malaysia is centrally located in the ASEAN region which comprises a potential market of about 570 million people and a combined GDP of more than USD1 trillion. Malaysia is well positioned to provide the linkages to support investment flows in the region. The MIFC can provide the gateway for you to seek investment opportunities in the ASEAN region which is one of the fastest growing regions in the world.
14. As part of the liberalisation of the services sector, there are new opportunities for foreign entry into the Malaysian Islamic financial sector. Malaysia is offering two new mega Islamic banking licences and two new family takaful licences to international Islamic financial institutions and investors. In addition, the foreign equity holding allowed in an Islamic banking institution has been raised from 49 percent to 70 percent on the condition that the capital raised is no less than 1 billion US Dollars. All of this is in line with the MIFC motto: Shaping Islamic Finance Together.
Intensifying ties with Bahrain
15. Over the last five years, there has been increasing interest among Middle Eastern investors in the Asian market. Bahraini Islamic financial services groups such as the Unicorn Group and the Solidarity Group have already made their presence felt in Malaysia. Likewise, Malaysia’s Maybank has been operating in Bahrain since 2001, and our CIMB Group has been in partnership with Bahrain’s Kanoo Group since 2006.
16. Our ties have long been cemented with the signing of a Memorandum of Understanding between the Central Bank of Bahrain and the Central Bank of Malaysia in 2001 to jointly develop Islamic finance. One of the objectives of this Malaysia-Bahrain Business Forum is to advance this collaboration. We could benefit from more collaborative efforts particularly in the areas of innovation and liquidity management. In addition, mutual recognition of our respective Islamic financial products should also be explored so that we can expand the reach of our financial products on the global market.
17. As innovation is key to the evolution of Islamic finance, there is also the need to work together to develop new financial products and services that meet the contemporary demands of businesses and consumers in the global marketplace ─ a marketplace that, in the wake of the financial crisis, is now seeking greater stability.
18. With the evolution of Islamic finance and its integration into the international financial system, it however cannot escape the effects of impeded growth and diminished liquidity that comes with a recession. Therefore, a sound liquidity management infrastructure is also required to effectively manage our risks, and this is another area of potential collaboration among the Islamic financial community.
19. In our attempt to further enhance the development of Islamic finance, a national effort was undertaken to develop a transparent and regulated commodity-trading platform dedicated to facilitate Islamic financing using the concept of Murabahah and Tawarruq. This platform BURSA SUQ AL-SILA’, was launched in August this year and is being operated by the country’s exchange BURSA MALAYSIA. I am pleased to say that within its first month of operations, BURSA SUQ AL-SILA’ successfully undertook its first cross border trade between a Malaysian and British bank. I am also pleased to learn that BURSA SUQ AL-SILA’ has also gained recognition in the GCC with recent trades being undertaken by CIMB Islamic and several GCC institutions using its platform. We hope that our efforts in developing BURSA AL-SILA’ will benefit the global Islamic banking community in both the management of liquidity as well as product development.
20. In the area of talent development, I am pleased to announce that the University of Bahrain (UoB) and Malaysia’s International Centre for Education in Islamic Finance (INCEIF) have agreed to offer the Chartered Islamic Finance Professional programme at the UoB campus. This programme is meant for professionals in the financial services industry in Bahrain and neighbouring countries who are unable to come to the INCEIF campus in Kuala Lumpur. I am also pleased to announce that two scholarships will be offered to eligible Bahrainis to take the Chartered Islamic Finance Professional course at the INCEIF campus in Kuala Lumpur for the January 2010 intake. I am also delighted to announce a special allocation of two research grants to be awarded to Bahraini researchers under the supervision of the International Shariah Research Academy for Islamic Finance (ISRA).
Conclusion
21. Among the Malaysian delegation here today are senior officials from the Central Bank of Malaysia, the Securities Commission, the Malaysian Industrial Development Authority (MIDA), Labuan Offshore Financial Services Authority (LOFSA), the Malaysian Bourse, Khazanah Malaysia (the Government’s investment arm) as well as represenatives from global and domestic financial institutions who can act as your contact point in Malaysia. They will be more than happy to share wih you Malaysia’s wide offerings of Islamic financial products. I also invite you to engage with officials from Khazanah and MIDA who will be able to elaborate on Iskandar Malaysia and the other growth areas that offer opportunities for investments.
22. It is my sincere hope that this meeting will be blessed by Allah S.W.T. and will pave the way for greater collaboration between our business and financial communities. And I thank you for your presence today.