Bank Negara Malaysia Governor Stresses Three Key Factors to Ensure Sustainability of Internationalisation of Islamic Finance (By MIFC)

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Last Updated : 05 Oct 2012


Bank Negara Malaysia (BNM) Governor, Dr Zeti Akhtar Aziz laid out the three key factors that need to be met to ensure the sustainability of the continued internationalisation in the Islamic finance industry. In addition, Islamic finance has an important potential to facilitate greater trade and investment flows between markets.


In her welcome address at the Global Islamic Finance Forum (GIFF) 2012, in the presence of Ali Babacan, Deputy Prime Minister of Turkey, Dr Zeti emphasised: i) the importance of a wide range of global supply of high-quality Islamic financial products and services that are able to meet the requirements of international businesses;
ii) the presence of diverse and dynamic intermediaries and market participants that have a global focus; and
iii) effective linkages and connections between global financial markets will be facilitated by business enablers, particularly in the area of legislation, taxation and regulation.


“In this phase of growing international transactions,” she emphasised, “Islamic finance needs to be dynamic and innovative, with an emphasis on the development of diversified and comprehensive Shariah-compliant financial solutions to meet the differentiated needs of various businesses, including the requirements of international businesses and thus facilitate cross-border investments.”

More intermediaries and market participants includes having Islamic banking, Takaful and capital market players that venture beyond domestic boundaries to tap global opportunities. Global ancillary services that are proficient in the Shariah, added Dr Zeti, also have an important role in providing supportive professional services for such intermediaries and market players to effectively embark on such cross-border activities.

Governor Dr Zeti is a strong proponent of human capital and talent development in the Islamic finance industry, which is vital in steering the industry towards increased internationalisation. “The new financial landscape will require world-class business talent and boards with knowledge of the risks associated with internationalisation. Greater collaboration between the industry and education service providers will be important in supporting the talent requirements of the industry in its new phase of development,” she explained.


Indeed, Dr Zeti witnessed the latest manifestation of such collaboration during GIFF 2012 when International Centre for Education in Islamic Finance (INCEIF) signed a Memorandum of Agreement with BNP Paribas Malaysia Bhd to launch BNP Paribas-INCEIF Centre for Islamic Wealth Management. “This commendable effort is dedicated to producing applied research in the area of Islamic wealth management. It is envisaged to spur innovation that will bring with it global benefits and that would also contribute towards setting industry standards in this key component of the Islamic financial industry,” stressed Dr Zeti.

Similarly, internationalisation through growing cross-border financial flows between regions that have national and cultural differences also underscores the need for enhanced recognition and understanding of practices in the different jurisdictions. This translates into greater use of standardised documents and agreements among financial market players, so as to increase market efficiency, transparency and uniformity, as well as to reduce the cost of transactions.


The industry in fact has already seen a number of standardised documentation and practices for a number of products, which has facilitated issuance of financial market instruments, contributing towards enhanced liquidity and linkages in Islamic financial markets. At the same time, greater harmonisation of Shariah interpretations across jurisdictions will also contribute towards the development of Islamic financial products and services.

Governor Dr Zeti was optimistic about the future of Islamic finance especially in bridging economies within this globalisation paradigm, the theme of GIFF 2012. “Islamic finance beckons us with a new frontier that presents new opportunities. As we enter into a more uncertain global environment, it also prompts us to revisit strategies to enhance the resilience of Islamic finance,” she explained.

But despite this more challenging global financial and economic environment, Islamic finance has not only continued to remain on its growth trajectory, but has also continued to demonstrate its viability and competitiveness in this more liberalised and globalised financial environment. The total Islamic financial assets size has surpassed USD1 trillion with more than 600 Islamic financial institutions operating in more than 75 countries. Increasingly, existing Islamic banking institutions are expanding their operations with presence in new jurisdictions. This is resulting in increased cross border financial flows.

Sukuk especially has emerged as an important form of intermediation in Islamic finance and has been instrumental in the financing structures for infrastructure projects, investments in the utilities sectors, in particular for water and power projects, and in the services sector, in education, healthcare and transportation.

Governor Dr Zeti emphasised that Islamic finance draws its strength from serving the real economy since it involves financial transactions that must be accompanied by an underlying economic transaction. In the case of a cross border deal, it facilitates financial flows that will support international trade and investment flows. As such it contributes towards bridging economies and enhancing economic connectivity with each other.

Today, there are tremendous prospects for mutually reinforcing growth from increased economic connectivity. Trade among the expanding emerging economies now account for more than half of the world trade. This growing demand in emerging economies is also generating investment opportunities. In this environment, Islamic finance has an important potential to facilitate trade and investment flows that will be mutually reinforcing.


Increased internationalisation of Islamic finance indeed would influence the patterns of global financial and economic integration, and in particular facilitate the revival of financial and economic integration between the countries along the old silk road from Asia to Turkey and the Middle East, and Africa and to the more established financial markets and developed economies. The start of this decade has already witnessed the shifting of trade activities to the emerging economies, which now account for 63 percent or USD37 trillion of world trade as at end-2011, an increase of 17 percent from a decade ago.

The sukuk market, for example, has already demonstrated its ability to effectively intermediate funds across borders, contributing towards the efficient allocation of funds in the global financial system and has emerged as a major instrument for international fund raising by multilateral agencies, sovereigns, Government agencies and corporations.