Islamic Finance: The Way Forward
I am grateful to Allah Subhanahu Wata’ala for this opportunity to be here in the beautiful city of Casablanca and to address you this morning.
- I wish to record my appreciation to the Royal family of the Kingdom of Morocco for their warm welcome and hospitality. I pray for Allah’s blessings for the continued good health of His Majesty King Mohammed VI (the Sixth), Ruler of the Kingdom of Morocco. May the people of Morocco continue to prosper under His Majesty’s wise leadership.
- Malaysia and Morocco are linked in Islamic culture and history. The earliest linkage between our nations can probably be traced back to Ibn-Battuta landing in Malacca during his voyage in 1325. In modern times, our countries enjoy well-established diplomatic and economic relations and it is my hope that this business mission will pave the way for stronger ties between our two countries. In particular, I hope it will foster closer collaboration in Islamic finance, which is also known as participative finance here in Morocco.
- Morocco, located at the confluence between the Atlantic Ocean and the Mediterranean Sea, is well-placed as a gateway for trade and investment not just in Africa, but also in Europe and the Middle East. Likewise, Malaysia, being at the heart of ASEAN, is strategically located to access markets in the Asia Pacific – an advantage that Malaysia has leveraged upon to develop itself as a well-developed Islamic finance hub over the last three decades. There is no doubt that greater connectivity between our Islamic financial centres would enhance both our countries’ capacity and capability to deliver services, products and value beyond the reach of each country.
- The global Islamic finance industry has witnessed a remarkable growth trajectory in the past decade, with total assets currently estimated at $2.1 trillion, triple the amount in 2005. A large proportion of investment takes place on a cross-border basis, which reinforces the need for stronger trade and investment linkages between jurisdictions. Ernst & Young estimates that Islamic banking assets will grow by an average of 19.7% a year to 2018.
- Thus, Islamic finance is fast becoming mainstream global finance. In 2014 alone, a number of non-Muslim jurisdictions namely the United Kingdom, Hong Kong, South Africa and Luxembourg, debuted their sovereign sukuk, which was met by overwhelming demand. These sovereign issues mark a milestone and a coming-of-age of sorts for Islamic finance and asset management, providing evidence that Islamic assets can serve the purposes and be a blessing for both Muslims and non-Muslims alike. For the latter, who want less volatile and more secure assets or socially responsible and ethical investments, they can more easily access these products irrespective of their religious beliefs.
Ladies and Gentlemen:
- Whilst the track record of Islamic finance is remarkable, in our effort to keep up the growth momentum of the industry, we need to ask ourselves, “What is the way forward?” As the world is becoming more and more interlinked, it is also, in some respects, disconnected given the different geopolitical events faced by different countries and regions. Tidings of growth and progress share the same headline space as news of crisis and conflict. Couple this with widespread environmental degradation and inequitable distribution of wealth and resources, governments face tremendous challenges in formulating economic and social development policies.
- I believe that Islamic finance can and ought to offer more long-term solutions that will drive both growth and sustainability by taking into consideration the well-being of society, economic prosperity and the environment. At the very foundation of Islamic finance are its basic tenets namely the prohibition of speculation, the prohibition of uncertainty in contractual relations and the prohibition of usury. Additionally the concept of Islamic finance itself is based on the objectives of justice, fairness, cooperation, transparency and shared responsibility, ultimately to achieve rahmatan lil ‘aalamin or mercy for the whole world or universe – encompassing the whole eco-system of the present and the future. These basic tenets and objectives serve as both a compass and a clear boundary that prevents Islamic finance from growing at a trajectory that is not linked to the real economy. This has to some extent contributed to the industry’s resilience in challenging economic times.
- With this is mind, allow me to propose three areas in which the industry can play a far more significant role moving forward.
Serving underserved markets
- The first is in serving underserved markets. It is a fact that despite the pace of development of conventional finance, a significant portion of the world’s population remains excluded from or at the periphery of modern banking and finance. Without an inclusive financial system, sustainable and equitable economic growth cannot be attained. According to the IMF, people in Muslim countries have less access to financial services and make less use of them than the rest of the world. Among the global ummah of 1.6 billion people, around 650 million hover on or below the poverty line. The largest proportion of them is in the African region, which is a market that Morocco is well suited to serve.
- In this regard, Islamic finance has a crucial role to play in bringing the financially-underserved Muslims into the economic mainstream. Several studies show that access to savings accounts at the local level increases savings, investment, consumption and income levels of the population; and increased access to credit leads to increases in entrepreneurship and reductions in poverty.
- Currently Islamic banking and finance in Africa is not progressing at the same pace as market demand. Yet Islamic finance’s underlying principles of fairness, equitable distribution and risk sharing can provide a facilitative avenue for individuals and institutions of varying capacity and size to participate in and have access to the financial and capital markets. This can help create employment and alleviate poverty, thereby contributing towards more equitable economic growth and sustainable development.
- One way is to broaden the scope of Islamic microfinance that currently represents only 1% of the global microfinance outreach. There are also opportunities to incorporate Islamic principles like zakat, sadaqah and qardhul hasan, which facilitate the distribution and sharing of wealth to a wider segment of the population to help raise their financial capacity. Greater use of participatory or equity-based contracts such as mudarabah and musharakah also provide immense opportunities to leverage on the productive potential of small and medium enterprises (SMEs), thereby encouraging entrepreneurship and the creation of real wealth.
Sustainable, responsible and impact investing
- The second area for Islamic finance to play a greater role is in socially responsible investing, or what has been recently re-branded as sustainable, responsible and impact investing (SRI). It is a concept where investors choose to invest in businesses or instruments that balance financial returns with socially-responsible causes. Indeed, an increasing number of commercial enterprises are now placing non-financial outcomes as an important part of the key performance indicators for management. Bob McDonald, former Chairman, President and CEO of Procter & Gamble said, “Companies must do well to do good and must do good to do well”.
- The concept of SRI bears resemblance to the underlying principles of Islamic finance, which adheres to a set of ethical and moral standards that propagate the need to take into consideration the commercial as well as the social and environmental outcomes of a decision. A growing number of investors are considering environmental and social factors in their asset allocation. According to the US Sustainable, Responsible and Impact Investing Trends 2014 report, the total US-domiciled assets under management using SRI strategies expanded from $3.74 trillion in 2012 to $6.57 trillion in 2014.
- The growing appetite for such investments provides ample room for greater innovation in Islamic investment instruments. A few months ago, Malaysia’s Khazanah Nasional launched Sukuk Ihsan, the world’s first Ringgit-denominated SRI sukuk. This RM100 million issuance with 7-year tenure was successfully priced and fully subscribed. Proceeds from the sukuk will be used to improve accessibility to quality education in government schools through Khazanah’s Trust Schools Programme, a public-private partnership initiative with the Ministry of Education.
- Last November, the International Finance Facility for Immunisation (IFFIm), a body under the World Bank, raised $500 million from its inaugural sukuk issuance to fund a global immunisation programme for underprivileged children. The sukuk helped IFFIm diversify its investor base and secure competitive pricing, while at the same time allowing the poorest communities in countries like Mali, Yemen, Afghanistan and Indonesia greater access to vaccines against infectious diseases.
- At the moment, Islamic asset and fund management still lag far behind the scale of conventional SRI funds. However, with all the obvious benefits, it is hoped that socially responsible investment instruments will feature more prominently in the industry in the coming years.
Ladies and Gentlemen:
- Related to my last point, the third area in which I believe Islamic finance can expand its role is in humanitarian financing. We are all too aware of the number and scale of humanitarian crises facing our world today. Yet the gap in humanitarian funding is alarming. Despite humanitarian assistance rising to $24.5 billion last year, needs continue to outstrip contributions, even when the largest donor countries have all increased their contributions. The United Nations fell short of $7.5 billion in funding needs, 30 percent of what it required.
- In the devastating Syrian conflict, one of the biggest issues plaguing efforts to help the millions of refugees flowing out of Syria is the lack of funding. In September, the World Food Program (WFP) had to drop one-third of Syrian refugees from its food-voucher program, including nearly 300,000 in Jordan alone.
- In this regard, Islamic finance is surprisingly an underexplored territory. I say it is surprising because some estimates suggest that anywhere between $200 billion and $1 trillion is spent each year in the form of zakat, or Islamic charitable giving across the Muslim world. This represents a significant funding source. I strongly believe that Islamic financial jurisdictions have to work in concert to address how Islamic finance structures can be used to increase the volume of zakat and improve the management of zakat to channel it appropriately to global humanitarian needs.
- This will not be easy given the scale of coordination and harmonisation that is required. However, if done well, Islamic finance can rise to become a significant solution provider to the humanitarian financing problem. In my capacity as Co-Chair of the United Nations High-Level Panel on Humanitarian Financing, I am pleased to note that discussions are gaining momentum and Islamic finance is expected to feature prominently in the recommendations of the World Humanitarian Summit that will take place in May 2016.
- On this note, I wish to invite Moroccan financial players to leverage on the strength and expertise of the Malaysian professional ancillary services and institutions such as the International Centre for Education in Islamic Finance (INCEIF) for capacity building to further drive Morocco’s participation in this area.
Ladies and Gentlemen:
- The prospects I mentioned bode well for the growth of Islamic finance. We must continually remind ourselves that new challenges demand new mindsets and responses. At one level, we must keep endeavouring to deliver flawless financial services. At another, we must continue to innovate, especially in ways that will allow the industry to fulfil its intended and broader agenda of promoting socio-economic wellbeing and social justice.
- I would like to wish you all very fruitful exchanges at this Forum.
Wabillahi taufik, walhidayah.
Wassalamualaikum Warahmatullahi Wabarakatuh.
- International Centre for Education in Islamic Finance (INCEIF), 2015 ↑
- Ernst & Young, World Islamic Banking Competitiveness Report 2013-2014, 2013 ↑
- International Monetary Fund, Can Islamic Banking Increase Financial Inclusion in the Muslim World, 2015 ↑
- US SIF Foundation, Report on US Sustainable, Responsible and Impact Investing Trends 2014, 2014 ↑