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24 Nov | Tuesday
Assistant Governor Adnan Zaylani’s Keynote Address at the IFN Asia Forum 2020 - "Revitalising the Economy through Value-Based Finance"
Assalamualaikum and a good afternoon to all.
“A hopeful person sees opportunities in every difficulty”. It is in this spirit that we are gathered here today, amid this health and economic crisis, at the 2020 IFN Asia Forum. A very warm welcome to all, and thank you to the organisers for inviting me to deliver this address. 
 
Revitalising the economy is becoming an increasingly pressing imperative. Livelihoods are at stake. And as this crisis goes on, at some point, we need to replenish our capacity and buffers and rebuild our resilience. Unfortunately, we see countries experiencing a fresh spike in Covid-19 cases with the total number worldwide approaching 60 million.[1]  In addition to the human tragedy, the output losses and costs are escalating. The IMF (International Monetary Fund) estimated that the cost of the pandemic to the global economy will reach USD28 trillion by 2025, a staggering number.[2]  Nonetheless, global economic activity has shown improvements and there is hope in a vaccine. But the road remains challenging. Coupled with this is to tackle the climate risk challenge. For now, there is some respite with the economic slowdown reducing environmentally damaging activities. But we know this is not an optimal nor long-term desirable situation. Moving forward, these 2Cs (Covid-19 and climate change) will weigh on us and finding new solutions, striking a better balance will be important in striving for a sustainable economic recovery.  
 
Islamic finance has much to offer. The moral and ethical values provide a foundation of a system that considers, beyond profits, issues of public interest, transparency and good governance, inclusion and sustainability. Traditional finance, as is often after any crisis, tends to self-reflect exactly upon these issues. This has led to the embracing of aspirations such as stakeholder capitalism, sustainability, or as more recent, a proposition of a kind of reset of the economic system to deal with all the current challenges. Islamic finance already has many of these embedded. And so is our claim.
 
The question then is: how has it fared;
Has Islamic finance been part of the solution to these challenges, in particular, this crisis?
Has Islamic finance measured up to expectations in delivering value to the economy and society? 
Has the industry acted with compassion and demonstrated agility in serving its customers in times of urgent need? 
By and large, the global Islamic finance community has responded. Across many Islamic finance markets, financial relief facilities were made available. Deferment to repayments was granted, including waivers on customary charges. Restructuring facilities were also widely offered to those in need. All as part of packages to support the recovery. 
 
In Malaysia, Islamic finance also rose to the occasion, offering similar relief and working in tandem with the industry at large, both on the banking and takaful side. Besides normal financing, specific purpose funds of more than RM10 billion primarily for SMEs, including micro-enterprises was also well supported and intermediated by Islamic financial institutions. These facilities had concessionary rates and were targeted at sectors in dire need including such hard hit as tourism and retail services. The industry was also at the forefront in providing assistance to individuals and SMEs through an industry coordinated targeted repayment assistance program. This is in addition to the earlier moratorium on financing repayments that significantly eased cash flow constraints. The takaful industry also implemented several measures including providing temporary deferment on family takaful contributions and jointly establishing the COVID-19 Test Fund with the insurance industry that contributed to more testing for certificate holders.
 
But is this good enough? Our assessment thus far is that the positive contribution and impact of Islamic finance remains fairly modest. Islamic financial institutions continue to be constrained by limited operational capabilities to provide agile and “best in-kind” service to customers. Resources are being channelled, but mainly to address the short-term needs of the business. Structural issues relating to infrastructure, talent and impactful innovation continue to build up. Corporate KPIs remained misaligned to support long term objectives. Incentive structures may also not necessarily reflect the appropriate approach in an environment where many are experiencing job losses and reductions in income. So there is still work to be done.
 
To this end, I would like to offer some thoughts for Islamic finance to be part of solutions-building, particularly in three key aspects: Sustainability, Social finance and SMEs (“the 3Ss”). 
 
Ladies and gentlemen, 
 
Stewarding the transition of the economy towards sustainability
 
In Islam, we are the custodians of nature. By this principle of trusteeship, economic activities should be conducted with a view to preserving our environment and protecting societal interest at large. Finance has an important role to play in aligning economic decisions with sustainability objectives and the Value-Based Intermediation (VBI) initiative involving Islamic financial institutions in Malaysia, which was first introduced in 2017, has continued to advance forward.
 
The issuance of the VBI Financing and Investment Impact Assessment Framework in November 2019 was a concrete step towards encouraging closer alignment of financing and investment decisions with environmental, social and governance impact. In August this year, a series of Sectoral Guidance for Palm Oil, Renewable Energy and Energy Efficiency went for consultation. Led by the VBI Community of Practitioners, the sectoral guides aim to provide technical and practical steps for industry players to integrate sustainability considerations in various business decisions. Work is also underway to develop the next VBIAF Sectoral Guides on Manufacturing, Oil and Gas, Infrastructure and Construction, targeted for issuance in 2021.
 
These initiatives complement the more targeted efforts for building climate resilience within the Malaysian financial sector via the Joint Committee on Climate Change (JC3). A key priority under JC3 is the development of a principles-based taxonomy and climate risk management guidance to prepare the financial sector to support the transition to a low-carbon economy. The Discussion Paper on this was issued in December 2019 and is expected to be finalised by early 2021. JC3 is also paving the way for the adoption of the Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations in the immediate future. In all these initiatives, Islamic financial institutions have consistently played an active role. With strong stewardship by the global Islamic finance community, further progress can certainly be made towards realising the Sustainable Development Goals.  
 
Amplifying social impact through innovation and technology
 
The second aspect relates to optimising social finance to promote social resilience. In essence, finance should aim to serve the entire society. While steady progress has been made in promoting financial inclusion worldwide, 1.7 billion adults – a significant portion of which in Muslim-dominated countries – remain without access to formal financial services.[3]  Islamic finance can play a significant role in narrowing the finance gap.
 
Two levers have immense potential: digital finance and social finance. In Malaysia, there is a growing appetite to infuse social finance instruments in products and services. Over the last three years, Islamic financial institutions in Malaysia have raised more than RM20 million through incorporating waqf, sadaqah and zakat instruments to fund projects related to health care, education and business empowerment. Initiatives such as myWakaf, sadaqa houses and jariyah funds have expanded the frontiers of Islamic finance into segments that would typically be excluded from formal finance. The intermediation process is also made more efficient through digital means of payment and services. More than 10 different channels are available to mobilise social finance contributions including online and mobile banking, debit cards, QR functionalities as well as the ATM. The integration of social finance into takaful offerings has also enabled the provision of financial protection to 18,000 “hardcore poor” households in Malaysia, with RM860,000 death benefits paid in 2019.
 
This integration of social finance in mainstream Islamic financial services helps to better internalise the social costs and impact of finance provision. The values-driven approach in social finance motivates financial institutions to go beyond profit and manage more responsibly negative externalities that may arise from financial activities.
 
Embracing entrepreneurial finance through wealth and risk-sharing
 
The third aspect is empowering SMEs through embracing entrepreneurial finance and supporting trade activities. This is in line with the fundamental values of Islamic finance that profit is justified when risk is accepted or shared. In an environment where capital is in the hands of a few, this call for entrepreneurial capital is vital to deliver the intended purpose of finance.  
 
Beyond the traditional credit intermediation, the Islamic finance industry in Malaysia has gradually embraced features of entrepreneurial finance through a “test and learn” approach, premised on a sound regulatory framework that provides certainty of Shariah contracts. A wide range of Shariah contracts is available in meeting the diverse needs of businesses. SMEs can access asset-based and equity-based financial solutions offered by Islamic financial institutions that complement the provision of traditional credit. Several Islamic financial institutions are also now supporting supply chain finance via digital platforms to assist SMEs to scale-up their businesses. And the Investment Account Platform (IAP), which was established in 2016 remains available as another avenue for fund-raising. Through this, RM204 million funds were raised for 13 listed projects, generating returns for more than 300 registered investors. 
 
For micro-SMEs, in May this year, a blended finance programme called iTEKAD (which means “my determination”), was introduced by the Bank in collaboration with the Islamic finance industry and a network of implementation partners. Structured training and mentorship are part of the programme for these selected entrepreneurs from the low-income group. The blended finance programme combines social finance instruments such as zakat, waqf and donation with microfinancing. This combination of charity and financing helps reduce the cost of financing while also providing “skin in the game” in the venture, both incentivising success. More participating banks are expected to come on board in 2021 to provide a wider range of solutions and outreach for small businesses.
 
Looking ahead at the future needs of the economy, in an environment where households and firms are already highly leveraged, entrepreneurial finance needs to go further. Adding more and more debt cannot go on forever. This in itself can be a cause of future crisis. There is also the need to invest to unlock new growth areas. Frontier activities such as bio-engineering, modern farming and electrification which are anchored on innovation, new technologies and experimental business models will need more risk-absorbent capital. These are inherently high-risk activities in which deposit-backed financing may not be suitable. Expanding the breadth and depth of equity solutions and providers in the financial ecosystem is critical to realise the new economic aspirations.
 
Such new aspirations could also involve promoting countercyclical financing or investment. A perennial challenge of any crisis and its aftermath is overcoming risk aversion in extending financing to the economy. Normal credit intermediation is not well-positioned for this. Perhaps it is time to consider entrepreneurial finance, risk-reward sharing solutions of which Islamic finance has much to offer.
 
Ladies and gentlemen,
 
As concluding words, the theme of this gathering could not be more apt. A revisit to the fundamental values in Islamic finance could be a renewed opportunity for Islamic finance to be more inclusive, responsible, ethical and impactful. To achieve a sustainable economic recovery amid extraordinary uncertainties will require sound thinking and resolve. This gathering of minds, InshaAllah, will surface new ideas to take us forward. To all participants, I wish you a productive week ahead. 
 
[1] John Hopkins University of Medicine, Coronavirus Resource Center (data as at 23 November 2020)
[2] International Monetary Fund estimates; OIC Economic Outlook 2019
[3] The Global Findex Database 2017

Source: Bank Negara Malaysia

Watch the webinar here
source: Bank Negara Malaysia
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