Duli Yang Maha Mulia Paduka Seri Sultan Perak Darul Ridzuan, Sultan Nazrin Muizzuddin Shah Ibni Almarhum Sultan Azlan Muhibbuddin Shah Al-Maghfur-Lah, Penaung DiRaja bagi Inisiatif Kewangan Islam Malaysia.
Duli Yang Maha Mulia Raja Permaisuri Perak Darul Ridzuan, Tuanku Zara Salim
Yang Amat Berbahagia Tun Musa Hitam, Chairman of the Jury for the Royal Award for Islamic Finance and Yang Amat Berbahagia Toh Puan Zulaikha;
Yang Berhormat Tuan Lim Guan Eng, Minister of Finance;
Yang Berhormat Dato’ Seri Mohamed Azmin Ali, Minister of Economic Affairs;
Yang Berhormat Dato' Haji Amiruddin Hamzah, Deputy Finance Minister;
Yang Berbahagia Datuk Nor Shamsiah Mohd Yunus, Governor, Bank Negara Malaysia;
Yang Berbahagia Tan Sri Dato’ Seri Ranjit Ajit Singh, Chairman, Securities Commission Malaysia
Esteemed Guests, Members of the Media and Ladies & Gentlemen
It is my distinct honour to be the recipient of the Royal Award for Islamic Finance 2018. It has been my privilege to be part of the journey in the global development of Islamic finance. This honour represents a recognition to all those who have travelled with me on this remarkable journey and to which I now have the honour to receive this award on their behalf. Islamic finance has now gained international recognition as a form of financial intermediation that has embedded in it elements that strengthens its resilience and sustainability and its potential for bringing value to the economy and to society. This journey has brought me to many parts of the world, to the developed, emerging and developing countries, bring with it the opportunity to engage with the best minds including policy makers and regulators, practitioners in finance, shari’ah scholars, academicians, rulers, royalty, national leaders, entrepreneurs and corporate leaders, all having interest in this form of finance and sharing their perspectives on the potential development of Islamic finance.
2. While being part of the transformation of the domestic Islamic financial landscape in Malaysia was a riveting experience, the more compelling part of the journey has been in the internationalisation and globalisation of Islamic finance. The international dimension of Islamic finance has manifested itself in several directions, with national based Islamic financial institutions venturing beyond their domestic borders and the liberalisation of domestic Islamic financial markets to precipitate greater international participation in these markets. These developments have strengthened the international inter-connectivity between the Islamic financial centres that operate in the different time zones. An important and integral aspect of these developments has been the establishment of the International Organisations that have become an important part of the International Islamic Financial Architecture. Much earlier, in 1991, the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) was established in Bahrain, to facilitate the harmonisation of international Islamic financial reporting practices that is in accordance to the Shari’ah.
3. Then in just over a decade later, in 2002, the Islamic Financial Services Board (IFSB) was established. This was the culmination of a three year effort initiated by ten Central Bank Governors from different parts of the world and the Islamic Development Bank. From my own personal experience in the journey for the development of Islamic finance, this is perhaps the most challenging and the most memorable. It required achieving an international consensus to establish such an organisation. The main value proposition for its establishment was that the adoption of the existing international prudential standards for conventional finance would not be sufficient. Prudential standards for Islamic finance needed to be reinforced by standards that would take into account the risks that were unique to Islamic finance.
4. The discussions for its establishment were intense and endured a number of setbacks. At times it seemed that it would not happen. But recognising, its potential important role for Islamic finance and the great mutual respect among the Governors, the agreement for the establishment of IFSB was signed in November 2002 in Kuala Lumpur. Its mission was to formulate and set the prudential standards for the Islamic financial industry to safeguard the soundness and stability of Islamic financial institutions. Already then the inter-connectivity within the financial system was recognised. The prudential standards would not only be for the banking sector but also the takaful industry and the capital market intermediaries. More than 2000 persons that included regulators from all over the world attended the momentous ceremony for its establishment.
5. Fast forward to fifteen years later, the members of IFSB are now from 75 regulatory and supervisory authorities across the world including from developed economies and eight international multi-lateral organisations. It also includes as observer members, 95 market entities that operate in 57 jurisdictions. The IFSB has also established an Islamic Finance Financial Stability Forum to provide a platform for regulators to discuss issues relevant for preserving financial stability in the Islamic financial system. Another building block in the international Islamic financial architecture was the establishment of the International Islamic Liquidity Management (IILM) Corporation which issues short-term Islamic instruments in international reserve currencies to facilitate liquidity management for multi-currency portfolios.
6. On the domestic front, aspirations the journey for the development of the Islamic financial system was to build on the foundations that had already existed. A great senior team at the Central Bank that was highly dedicated and committed drove this agenda. Initial efforts that commenced in the year 2000 was to bring the development of Islamic finance into greater strategic focus. This led to the creation of a Department for Islamic Finance which consolidated all the efforts to develop Islamic finance from the different parts of the Bank. Additionally, it was decided there would be a dedicated chapter for Islamic finance in our ten year Masterplan for the development of the financial system that was released in 2001. The vision of what was to be achieved was clearly articulated in the plan. The efforts to develop Islamic finance also had the support of the different parts of the Government and the financial industry. What has now emerged is a comprehensive Islamic financial system that is able to meet the requirements of a highly dynamic economy while remaining competitive. It also gravitated the participation of Muslims and non-Muslims to benefit from the offerings of this form of finance.
7. As the Islamic financial institutions gained scale and as Islamic financial markets became more developed, efforts were intensified in three enabling areas. This included having a comprehensive legislation to give certainty, predictability and confidence in the Islamic financial system, having in place a rigorous and robust Shari’ah framework reinforced by its governance arrangements and having an education eco system for talent development to not only support the growth of the domestic financial industry but also to be a pipe line of talent supply for other parts of the world.
8. As the developments progressed and as milestones were achieved the aspirations became more ambitious. It was envisioned that Malaysia had the potential to build the comparative advantage in Islamic Finance and could evolve into an International Islamic Financial Centre. This was to be achieved while maintaining a conventional financial system that was focused on supporting the domestic economy and while participating in the greater Asian financial integration agenda. An important agenda for Malaysia at this stage of development of its economy was to strengthen its financial and economic inter-connectivity with other parts of the world. Islamic finance, in being strongly anchored to the real economy had an important potential role in facilitating cross border trade and investment flows. It not only represented a source for financing but also an asset class for investment.
9. While Islamic finance has demonstrated its competitiveness as a form of finance and its resilience and sustainability during challenging financial and economic conditions, the journey for its development requires some further distance to be travelled. There also still needs to be greater global awareness of the unique value proposition of Islamic finance and its potential to perform the financial intermediation process to best serve the economy, society and the environment. The opportunity should therefore be taken to intensify efforts to create a greater understanding and appreciation of the inherent elements of Islamic and its potential to contribute to global growth and stability, particularly at a time when the destabilising consequences of finance following the unprecedented 2008 financial crisis is still in our minds.
10. In taking the aspirations for Islamic finance forward there therefore needs to be the recognition that finance delivers value when it focusses on its ultimate outcomes rather than its intermediate returns. Finance needs to strive to serve the wider objectives that are consistent with but goes beyond, the predominant objective of enhancing shareholder value. In essence, finance needs to focus on its potential impact on the economy, on the well being of society and on the environment. In assessing the impact that finance has on the economy, it brings into focus the activities that generates economic growth and development. In assessing the impact on society, the focus will be on those activities that will uplift social well being and that which will generate trust and confidence in the financial system. Finally, it needs to also focus on those activities that will contribute to environmental sustainability.
11. This will require a reset of purpose for financial institutions. This will involve shifting from performing a passive role as intermediaries of funds, to passively mobilise and allocate funds towards more empowering activities in the economy, thereby to significantly expanding the impact of finance on the economy, on society and on the environment. In other forms of responsible and ethical finance that already exists in the world, primarily in the developed economies, there has been a proliferation of financial instruments that meet both financial and such societal objectives. For Islamic finance, it has tremendous potential to adopt this approach. This will involve extending the operating framework that includes the Shari’ah process to also include the assessment of the impact of finance on the economy, on society and the environment. This needs to be derived from the clarity of intent, the strategies that are being adopted and the performance of such finance to take into account not only how it contributes to profitability but also the impact it will have on the ultimate goals, on the economy, society and the environment.
12. In advancing forward in this direction, Islamic finance would benefit from greater engagement and collaboration with other forms of responsible and ethical forms of finance that have similar goals. It can represent a potential to unlock new opportunities to bring benefit to every segment of society and to the business community. The financial industry will need to build the internal capability to achieve this. This will also need to be reinforced by the governance, accountability and ethical standards. Cumulatively this will increase the potential for theses aspirations to be realised.
3 October 2018