KUCHING: The growth and internationalisation of the Islamic finance industry has resulted in more cross border funds flow.
Bank Negara Malaysia (BNM) governor Tan Sri Dr Zeti Akthar Aziz said in this new era, greater transfer of funds has boosted economic activities and trade towards a more diversified economic between countries.
“In this new era of great transformative change in the world, the growth and evolution of Islamic finance has continued to be very much part of the changing configuration of the global financial system.
“An important part of this ongoing change, is the growing internationalisation of Islamic finance, that has resulted in greater cross-border financial flows which has in turn facilitated greater and more diversified economic inter linkages between countries.
“With this increased pace of the internationalisation of Islamic finance, the total global financial assets of the Islamic financial industry is now estimated to be more than US$2 trillion.
“The growth has continued to gain scale with its geographical outreach now extending beyond Muslim countries to the more established international financial centres and to other emerging economies.
“Across continents, Islamic finance is therefore having an increasing role in intermediating funds across borders and creating greater financial and economic inter-linkages,” she said in her speech during the launching of the Global Islamic Finance Forum (GIFF) 2014 at Kuala Lumpur yesterday.
Zeti revealed that the upcoming debut of sovereign issuances from established financial centres and emerging markets and the increasing diversity of the composition of sukuk investors across continents, in addition to the growing trend for multi-currency sukuk issuances, cumulatively contribute towards strengthening the dynamism of the sukuk as a global product for fund raising and investment activities in the international financial markets.
“Malaysia, has witnessed an increasing trend of issuances of foreign currency denominated sukuk in our domestic sukuk market, reinforced by an increasingly wider investor base as reflected by the increased and more diversified foreign investor participation in such issuances.
“In parallel with this, rapid growth of cross-border financial flows has been the increased attention to the development of the international financial architecture relating to financial stability in the Islamic financial system.
“With the important (of) two international institutions already well established, that is, the accounting standards setting organisation, AAOIFI (Accounting and Auditing Organisation for Islamic Financial Institutions), and the prudential standard setting body, the IFSB (Islamic Financial Services Board), concerted global efforts have been directed towards the progressive implementation of the recommendations in the eight building blocks identified in the Islamic Finance and Global Financial Stability Report 2010.
“In particular, the efforts have been focused on the adoption and operationalisation of the prudential standards and the development of the potential for effective liquidity management as part of the efforts to safeguard financial stability,” she said.
She noted that liquidity management in the international Islamic financial system has also been strengthened with the establishment of the International Islamic Liquidity Management Corporation (IILM) in 2010.
She observed that the effort will contribute towards facilitating efficient liquidity management and cross-border flows by Islamic financial institutions.
On the domestic front, in Malaysia, Zeti highlighted that the upcoming issuance of a ringgit denominated Mudharabah Certificate for liquidity management purposes by the central bank is the introduction of a new profit sharing instrument that is expected to contribute towards increasing the range of instruments in the global Islamic short term securities market.
She believed that with returns that are linked to the performance of the underlying asset and tradability in the secondary market, the financial instrument is expected to draw significant interest from international investors.
Moving forward, she said efforts taken to strengthen the global financial infrastructure of Islamic finance thus far have provided a solid foundation for the growth and internationalisation of the industry that is underpinned with soundness and stability.
“While the rapid growth of Islamic finance, attests to its resilience and competitiveness, the challenge before us is also to enhance its capacity to contribute towards inclusion and more balanced economic growth.
“Statistical numbers and projections are important performance indicators and benchmarks for the industry.
“However, the growth of the industry has to extend beyond the numbers to sustain its growth momentum.
“This is of particular importance in today fs environment of growing global uncertainties and when considerations that prioritise the linkage of finance to the economy, justice and fairness, and sustainability and inclusion and which have been regarded as essential elements of a modern financial ecosystem.
“Islamic finance, with these inherent features and ethical dimensions, therefore has an immense potential role as a transformative agent in the economy, particularly in serving the requirements of the real economy and the broader society.
“Of importance is thus the role of the global Islamic financial market place in facilitating greater linkages with the real economy and inclusion and thus balanced growth,” she noted.
In evolving into the next growth phase, she believed that Islamic banks have the potential to extend its role to include the role as an investment intermediary.
Zeti noted the initiative would require the diversification of banking business to expand beyond credit intermediation to investment intermediation, in which the alternative modes of risk sharing contracts can be applied.
In performing investment intermediation, she observed that Islamic banking institutions would not only strengthen further the linkage of finance and real economic activity, but also contribute towards more inclusive and more balanced growth.
To realise the vision of a highly competent and high performing workforce in the Islamic financial sector, Zeti believed that of equal importance is the standards of quality of the education programmes in Islamic finance and to raise the level of professionalism of Islamic finance practitioners.
She pointed out the Finance Accreditation Agency, an international and independent quality assurance and accreditation body for the financial services industry that was established in Malaysia in 2012, has raised the bar for Islamic finance talent and professionals.
“The introduction of its Finance Qualifications Structure that will be launched today (yesterday) has strategic significance, as it aims to link the various qualifications relevant to financial practitioners under a cohesive framework which will allow for greater mutual recognition on qualifications and provide clear and systematic learning path for financial professionals.
“Complementary to this initiative is the launch of the Learning Standard to ensure more global consistency for learning contents across the financial services industry in line with international industry benchmarks.
“Technology can also be explored to remove barriers or impediments in promoting greater interconnectedness in Islamic finance as we aim to create stronger linkage with the real sector.
“As a catalyst to improve market access and enhance outreach, technology has the potential to disseminate information more efficiently, to promote greater market transparency and price discovery.
“Today (yesterday), the launch of the digital application for Islamic finance is a further pioneering platform to facilitate sharing of information and for greater engagement, including between industry players that transcend borders.
“Such innovation is an impetus for raising greater awareness on benefits of Islamic finance as a form of financial intermediation,” she said.
Zeti noted that the next frontier of Islamic finance beckons the global Islamic finance marketplace to evolve its business models to that which would strengthen the nexus of Islamic finance with the real economy.
She observed that it would be an important consideration for industry players in their strategies, in parallel with the efforts to further increase the internationalisation of Islamic finance that can cumulatively contribute towards strengthening economic linkages and thus enhance international economic connectivity.
Meanwhile, GIFF 2014 with the theme entitled ‘Marketplace for Global Linkages’ has attracted more than 1000 participants from various industries across the globe to the forum.
The forum is expected to provide industry players with the opportunity for intellectual engagement that would generate new thinking and knowledge to realise cross-border business opportunities for growth.