The following is Sultan of Perak Sultan Nazrin Shah’s royal address at the 16th Kuala Lumpur Islamic Finance Forum, reproduced in full.
In the name of Allah, the Most Gracious, the Most Merciful.
Distinguished guests, ladies and gentlemen, Assalamualaikum warahmatullahi wabarakatuh.
1. I am grateful to Allah the Almighty for the opportunity to address you all at this, the 16th Kuala Lumpur Islamic Finance Forum. It is the first time this Forum has been held in the digital format that has, over the past year, become the “new normal” of conferencing. I would like to congratulate the organisers for putting together this impressive conference amidst the ongoing Covid-19 pandemic.
2. It is important that we continue to hold such events, despite the constraints created by the present crisis. The intellectual and practical debates about contemporary Islamic finance that take place through KLIFF are as necessary and relevant as ever. These discussions must now also address the challenges of financial and economic recovery against the backdrop of the pandemic.
3. Covid-19 has had an enormous impact on economies around the world. Manufacturing operations have cut production, tourism has ground to a halt, and jobs and incomes have disappeared across all sectors. This has resulted in a vicious cycle of contraction. The IMF forecasts that cumulative losses globally due to the pandemic could reach USD9 trillion by the end of this year.
4. Governments and central banks have introduced various measures in response. Along with financial assistance and relief packages for the worst-affected sectors, these have included the loosening of monetary policy, asset buying programmes, and targeted tax relief.
5. After expanding by a robust 13% in 2019, the Islamic Finance industry suffered a slowdown in 2020. Most of that year in pandemic was spent adapting to the new ways of doing business. Many Muslim countries were also adjusting to historically low oil prices. According to one report, total Islamic finance assets stood at USD2.88 trillion at the end of 2020, roughly the same as in 2019.
6. However, as we saw in the aftermath of the global financial crisis in 2008, Islamic finance is resilient. This, I believe, is a reflection of the nature of its products and instruments, which offer a balanced approach to channelling funds towards productive endeavours. As the global economy recovers, the sector is expected to bounce back strongly, with total Shariah-compliant assets predicted to reach USD3.69 trillion by 2024.
7. The Islamic banking industry operates now in a very different context than it did during the global financial crisis. In line with broader trends, the sector has diversified significantly across jurisdictions over the last decade. A greater number of large conventional financial institutions now service the Islamic wholesale market, meaning that access to liquidity during these difficult times has increased.
8. The retail market faces significant challenges, though, as the impacts of the economic recession caused by Covid-19 continue to be felt around the world. According to one indicator from the United Arab Emirates, Islamic banking penetration – that is, the percentage of customers who have any Islamic finance product – fell in 2020 for the first time since measurement began in 2015. Market penetration was only 47% back then, but it had risen steadily to reach 60% by 2019, before falling slightly to 58% in 2020.
9. One particular challenge faced by Islamic banks is their greater exposure to small and medium-sized enterprises, microfinancing and retail customers, as compared with conventional financial institutions. This sector has suffered excessively in the economic lockdowns required to manage the pandemic. It is where the brunt of the impact of global lockdown has truly been felt. As a result, ratings agency like Standard & Poor’s expects only low to mid-digit growth for 2021, due to both the pandemic and the uncertainty of oil prices.
10. Nevertheless, there are also some positive indicators for Islamic finance. The Islamic capital market has proved resilient during the pandemic, with global sukuk issuances growing in 2020. A total of USD172.1 billion was issued, an increase of 1.8% from 2019. There was strong momentum in key sukuk markets, especially during the first nine months of 2020.
11. These issuances helped to finance the sweeping stimulus packages introduced to alleviate the economic impact of the pandemic. This growth of fiscal deficits has resulted in rising financing requirements. The crash in oil prices was another factor. Gulf Cooperation Council governments collectively issued USD105.7 billion in debt in 2020, of which USD41.2 billion came from sovereign sukuk – a record for the GCC.
12. Sukuk issuances tailed off in the 4th quarter, with a marked reduction in GCC sovereign sukuk issuances, particularly from Saudi Arabia. This reflected the success of the capital-raising carried out in the previous quarters, as well as other measures taken to narrow deficits.
13. Malaysia has also tapped this source of financing. In August 2020, it raised RM666 million for its ‘6R’ initiative in response to the crisis. A second issuance of at least RM100 million is planned, to fund research on infectious diseases, including vaccine development, treatment and diagnostics.
14. In the midst of this acute Covid-19 crisis, it is important that we do not lose sight of serious longer-term issues. For many years now, sustainability has been an important topic of discussion in conferences around the world, as have the United Nations’ Sustainable Development Goals. I myself have spoken about this subject on many occasions. I have also highlighted the close relationship between the SDGs and Islamic finance, and emphasized the key role that Islamic finance can play in achieving these goals.1
15. Before the pandemic, we were on track to meet at least some of the desired outcomes of the SDGs. Green and social sukuk have been playing a growing role in this process, along with waqf. But in the grip of the pandemic, different responsibilities and priorities have taken precedence. Of course, this has not brought an end to sustainability initiatives. On the contrary, the financial markets continue to expand their contribution in this sphere.
16. The concern is rather about the impact of the pandemic on the most vulnerable groups of the global community. Already marginalized sections of society face deepening poverty, because economic lockdowns have reduced employment and incomes in the sectors in which they predominate. The United Nations Development Programme has declared that Covid-19 is “ruthlessly exposing the gaps between the haves and the have-nots, both within and between countries”.2 The pandemic is therefore likely to have significantly hindered progress on some of the key performance indicators of the SDGs.
17. This means that we must do more to support and re-energise SDG initiatives. I would appeal to all financial stakeholders to look at their own organizations, to see what actions they could take to boost their contributions to the SDGs. This is a worthy and important endeavour, to which we must all try to contribute in whatever way we can.
18. One issue of great relevance to both Islamic finance and the attainment of the SDGs is that of financial inclusion. An important mechanism for tackling poverty is to extend the benefits of financial intermediation to as much of society as possible. But in practice, many remain outside the formal banking sector. This is due primarily to the high costs involved in reaching out to lower-income groups to provide them with financial services.
19. One solution to this problem lies in technology – indeed, in the very same technological fixes to which we have turned during the pandemic. Over the past year, many financial institutions have ramped up their investments in smart technology. They have developed partnerships beyond the finance industry in order to access the complex algorithms that are necessary to overcome the challenges created by physical distancing. For all the ways it has set us back, there is a certain irony and hikmah, masha Allah, as to how the Covid-19 pandemic has accelerated the Fourth Industrial Revolution (IR 4.0) digital lifestyle!
20. The day-to-day operations of many financial institutions have been transformed as a result. Smart technologies have boosted the speed, accuracy, transparency and traceability of transactions, while strengthening customer profiling, predictive abilities, decision-making, and impact measurement. The new standards that have been achieved in all these areas have quickly become essential requirements in the competitive and tightly regulated world of modern finance.
21. Beyond this transformation, however, the use of technologies designed to reduce the need for physical contact has also allowed the financial industry, including Islamic finance, to bridge the long-standing communication gaps with lower income groups. This should contribute to greater financial inclusion, and through this mechanism, to poverty alleviation.
22. At the same time, these technologies have facilitated communication with small and medium sized companies, which in the past have also been difficult to access effectively. SMEs play a crucial role in terms of employment and contribution to GDP, in this country as in many others, and they have suffered disproportionately during the pandemic.
23. This sector has received crucial support from the government through the right and timely policy of moratorium – the temporary suspension of loan repayments – which was introduced here in Malaysia back in April 2020. Malaysia was the first country in the world to take this step, implementing an automatic 6-month moratorium in the first instance, which has since been extended.3 This is another area which could benefit greatly from the application of technology, for instance in the form of a smart app. Like the other technological innovations we have witnessed over the past year, an ‘e-moratorium’ could help promote more effective communication between financial institutions and recipients.
24. Islamic financial institutions are well-placed to embrace these new approaches to banking. Through the application of smart algorithms and the use of big data analytics and Artificial Intelligence (A.I.), they can serve all segments of the community more effectively and at a lower cost. In this way, they can not only fulfil their goals as businesses, but can also contribute to our shared moral imperative to help those in need.
25. I am pleased to note the many pressing issues that will be addressed during this event. These include topics such as Islamic social finance; takaful and re-takaful; the impact of international accounting standards on Shariah principles and Shariah compliance; and updates of important fatwas on the global stage.
26. I hope this event will serve as a catalyst to help drive the Islamic finance industry forward in the new landscape shaped by the pandemic. We may have been unable to anticipate or prevent this crisis, but we are capable – insha Allah – of meeting the challenges it has created. I feel strongly that KLIFF 2021 can provide us with a clear sense of direction in this regard. I would like to wish everyone a meaningful and insightful forum ahead, and hope that the discussions that take place are highly fruitful for all.
27. In the name of Allah, the Most Gracious the Most Merciful, Bismillahirrahmanirrahim, I now declare the Kuala Lumpur Islamic Finance Forum officially open."
1 Sultan Nazrin Shah, “Realizing the Sustainable Development Goals through Islamic Finance”, Royal Address at the Dinner to Celebrate the 20th Anniversary of Bank Negara Malaysia’s Shariah Advisory Council, Kuala Lumpur, Malaysia (12 December 2017).
2 UNDP, “Coronavirus vs. Inequality: How We’ll Pay Vastly Different Costs for the COVID-19 Pandemic” (accessed 25 February 2021): https://feature.undp.org/coronavirus-vs-inequality/
3 The Association of Banks in Malaysia, “Loan Deferment” (accessed 25 February 2021): https://www.abm.org.my/consumer-information/loan-deferment