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Islamic finance to play key role in Malaysia’s ETP: Najib

Islamic finance to play key role in Malaysia’s ETP: Najib
By MUSHTAK PARKER | ARAB NEWS

Published: Oct 31, 2010 22:45 Updated: Oct 31, 2010 22:45

Malaysian Prime Minister, Mohd Najib bin Abdul Razak, has given the global Islamic finance industry a major boost by stressing that it would play an important role in the country’s economic transformation program (ETP) over the next decade, and that the globalization of Islamic finance has been instrumental in forging stronger financial ties between developed countries and the Asian and the Middle East regions.

At the same time, Islamic finance, he added, is expected to contribute to higher and more sustainable economic growth while encouraging greater financial and trade flows between the Middle East and Asia.

Najib was giving the keynote address at the Global Islamic Finance Forum (GIFF) 2010, which was themed “Islamic Finance: Opportunities for Tomorrow” and which convened between Oct. 25-28 in Kuala Lumpur, Malaysia. GIFF is the premier Islamic finance gathering in the world and comprises a regulators panel, a Shariah scholars’ discourse, issuers and investors dialogue, industry organization workshops and a media engagement program.

On the opening day of GIFF, the Malaysian premier also launched the ETP and Government Transformation Program, which will implement structural reforms in the economy and the financial and business sectors, to allow the country to meet the new challenges in the wake of the global economic and financial crisis and to transform it into a competitive and developed economy by 2020. Wawasan 2020 (Vision 2020) was launched by former Prime Minister Mahathir Mohammed whose vision was to see Malaysia develop into an industrialized economy by 2020.

GIFF did not fail to deliver. Its structure ensures a complete Chinese wall separation between the regulators’ events, those organized by industry organizations, and those aimed at market players. In this respect, the marketing hype and pomposity so evident at many other Islamic finance conferences is bereft from GIFF, which is organized every two years and takes place over four days. Not surprisingly, the turnout is very encouraging with almost 200 or so delegates attending sessions going on beyond 6 pm in the afternoon.

The event attracted the great and the good in global Islamic finance. Raja Nazrin Shah, the crown prince of Perak and the ambassador-at-large of the Malaysia International Islamic Financial Centre (MIFC), the only such plenipotentiary in the world; Zeti Akhtar Aziz, governor of Bank Negara Malaysia; Muhammad Al-Jassser, governor of the Saudi Arabian Monetary Agency (SAMA) were just three of the 2,000 or so people who attended the inaugural session.

The unusual suspects — Yves Mersch, governor of Banque Centrale du Luxembourg; Rundheersing Bheenick, governor of the Bank of Mauritius; and Sanusi Lamido Aminu Sanusi, governor of the Central Bank of Nigeria — also attended for the first time underlining Malaysia and especially Bank Negara’s role in the global spread of Islamic finance. In this respect, successive Malaysian prime ministers should be commended for sustaining a consistent policy toward Islamic finance whether at home or abroad. The final piece in this policy jigsaw is for the current and future administrations to pause and take stock as to the cost benefit of the country’s Islamic finance policy. This would primarily serve the future direction of that policy.

Malaysia is the only country that has identified Islamic finance as one of the important growth areas for the national key economic activities, which is one of the two components of the ETP responsible for driving growth. The other is the strategic reform initiatives, which, according to the government, are the enablers of growth.

“While Islamic finance may not single-handedly resolve all the issues in the global financial system,” explained Premier Najib, “I believe that it will play a significant role in fostering greater systemic stability and resilience… Islamic finance requires financial transactions to be supported by real economic activity and shielded from over-leveraging. During the recent crisis, growth in Islamic bank assets and financing doubled on average; a remarkable performance when compared to that of conventional financial institutions. Over the past decade, Islamic finance has been growing at an average rate of more than 30 percent per year. This impressive performance has greatly benefited many national economies, irrespective of faith or race, by fostering significant growth and increased employment opportunities.”

He stressed that the sector presents a viable and competitive funding option to sustain robust economic growth in Asia, whose cumulative savings are projected to reach $80 trillion over the next decade, which in turn can fuel productive economic activity in the region. Malaysia alone has a total funding requirement of over $450 billion for its economic transformation over the next decade, including for a wide variety of projects — from nuclear energy to a mass railway network. The bulk of this funding is expected to come from the private sector, with government-linked companies and the public sector contributing the rest.

“I am confident that some of these funding needs will be addressed through a sukuk-raising exercise as the global market picks up. Although global issuance of sukuk this year to date has fallen by about 16 percent from the same period last year, the sukuk market is set to improve as the global debt market recovers and supply increases. As the market continues to face a supply shortage, new issuance of sukuk may be cheaper or else met by a high take-up rate, which will also increase its attractiveness,” he declared.

The prime minister said there are numerous fund-raising opportunities through the MIFC Initiative. For instance, a foreign company can engage an internationally renowned lead arranger in Malaysia and issue a US dollar currency sukuk, with investors coming from all corners of the world. The Malaysian Islamic finance market also enjoys unique tax incentives and has the security and certainty of a well-established dispute resolution framework, which is crucial to providing the necessary assurances and strengthening confidence in the system, especially in the event of a crisis or transaction default. Malaysia has already established a dedicated High Court in Kuala Lumpur to adjudicate all Muamalat (Islamic financial transaction) cases. Similarly, the Kuala Lumpur Regional Centre for Arbitration has also been enhanced to serve as a platform to deal with cases involving Islamic finance, particularly within the Asia Pacific region. Having adopted the United Nations Commission on International Trade Law Arbitration Rules, it offers speedier settlements relative to the court’s process and freedom to choose governing laws.

Malaysia has three concerns about the global economic recovery, namely the slowing of growth in advanced economies; the large and volatile capital inflows that could potentially lead to asset price inflation; and continued volatility in global financial markets. Nevertheless, in several emerging economies — particularly those in Asia — strong macroeconomic fundamentals, flexible policies and robust financial systems have put them in a better position to navigate the uncertainties and constant change in today’s financial climate. Greater resilience requires a robust financial system, greater trade integration and a strong consumer base within domestic markets.

The Malaysian economy expanded strongly by 9.5 percent in the first half of 2010, and is expected to grow about 7 percent in 2010 and between 5 and 6 percent in 2011, which the prime minister said is eminently achievable.

Raja Nazrin Shah stressed that the challenge for the Islamic finance industry is to channel the huge liquidity in the Muslim countries beyond the financial sector into the real economy. “What is certain is that there is a growing appetite for Shariah-compliant financial products in the global financial markets today. Increasingly, conventional investors are seeking sounder alternatives. Sukuk is emerging as an established asset class among international investors. The Islamic financial system was affected by a few sukuk defaults, but the issue was one of credit risk and not because of any deficiency in the Shariah framework.”

Raja Nazrin used the metaphor of the Hijrah, the migration of the Prophet Muhammad (peace be upon him) and his followers from Makkah to Madinah, which he said had important lessons for Islamic finance. These included a change in mindset toward collaboration and cooperation; the acceptance of diversity in ideas; promoting competitiveness; and the development of human capital. The MIFC ambassador also urged sovereign wealth funds of Muslim countries to take a developmental view when determining their asset allocation.

Zeti emphasized that these are defining moments in the development of Islamic finance, which is becoming very much a part of the journey to bring the world toward a new level of stability, prosperity and international integration that is inclusive. But, whilst Islamic finance has come a long way and is set to continue its growth trajectory, new capabilities and strategies are needed to tap the immense opportunities from the growing internationalization of Islamic finance.

Innovation and the inherent resilience of Islamic finance have seen the total assets in the industry to increase to an estimated $1 trillion. Gov. Zeti in particular hailed the sukuk, which she said, epitomizes the very ingenuity in Islamic finance by providing an important avenue for international fund raising and investment activities.

The globalization of Islamic finance has also seen a growing presence of Islamic financial institutions that now operate beyond their own jurisdictions and the increased number of international foreign financial institutions that offer Islamic financial products and services. This has further been underpinned by the massive flow of knowledge, ideas, technology and people across borders, a process that fosters a greater international understanding on the practices in Islamic finance.

More recently, there has also been an increased global engagement in Shariah matters among scholars, practitioners and regulators through international platforms. This is a remarkable achievement, given that much of these developments have taken place amidst the tumultuous global financial environment.

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