A Special Epicentre Interview
An interview with Tan Sri Dr. Zeti Akhtar Aziz, Governor, Bank Negara Malaysia and Chairman, MIFC Executive Committee, on the resilience of Islamic finance and its role in cross-border financial stability and as a link between international financial markets and a wider range of economies.
Islamic finance has seen a significant surge in interest globally over the past decade and is becoming an actively used offering in the global financial landscape. Last year sukuk issuance marked a record high of USD131 billion globally with more issuers adopting this instrument as a source of funding. This continues to take place against a global climate of uncertainty. To what would you attribute this steady growth and the widespread adoption of Islamic finance in these recent times?
Experience from the global economic and financial system in this recent decade have accorded us to draw critical lessons towards building a global financial system that is more stable and resilient. Issues with systemic implications that have emerged compel policymakers to consider and develop new policy directions which would positively impact global growth and stability.

The recent crisis in the advanced economies has reinforced the importance that any financial system needs to serve the real economy with the main purpose to effectively intermediate savings and excess funds to generate economic growth. In this regard, the universal values inherent in Islamic finance can be appreciated by people of different faiths and used by all, with the Islamic financial system having experienced significant growth since the mid-1990s with total Islamic financial asset size now at more than USD1 trillion.

According to Standard and Poor's, this number is projected to grow by 20% over 2011-2015, doubling in size over this period, making it one of the most vibrant and fastest growing segments in the global financial industry. Islamic finance is an asset class that is becoming attractive for global investors to diversify their investment risks.

The core proposition of Islamic finance draws from its inherent principles found in Shariah such as profit-and-risk sharing, transparency, good governance and the avoidance of over- leveraged financial activities, many of which are in line with the universal values of fairness. These features, amongst others, bring to the economy the tremendous potential to support sustainable economic growth and promote financial stability, as they require financial transactions to be underpinned by real economic activities. Thus, financial innovation and intermediation are aligned to generating productive economic activities.

Innovation in Islamic finance has resulted in a wide range of products and services that are increasingly meeting the demands of an economy, for example, financing products offered include syndicated financing, equity financing and venture capital, a wide range of investment and treasury instruments, as well as fund and wealth management products.

Furthermore, Islamic finance products have grown beyond the traditional contracts to new hybrid contracts to serve the needs of a more dynamic market with new hybrid concepts such as bi al-istithmar wakalah (investment representative) and musharakah mutanaqisah (diminishing partnership) which are frequently being used today in the structuring of Islamic financial products.

The additional requirements in Islamic finance, which strongly discourage excessive risk taking and speculative business activities, provide additional safeguards for stability and resilience in the global financial system. There is also a rising demand for more ethical investment products which are not involved in the financing of prohibited activities and industries such as alcohol, tobacco, gambling and weapons, which is in line with the principles found in Islamic finance. All of these fundamental characteristics demand for financial institutions to focus on their core function of providing financial services that add value to the real economy. In particular, sukuk has been used to finance infrastructure projects and productive real sectors. Therefore, Islamic finance continues to internationalise its role and relevance in contributing to the global agenda to foster sustainable growth that is firmly anchored to the real economy.
You have spoken passionately about the development of Islamic finance with particular importance to the internationalisation of Islamic finance. What do you mean by internationalisation and why is this important?
The basis for internationalisation is the practice of mutual economic benefits between markets. Islamic finance provides a common basis for financial flows of international trade and investment, which continues to bridge and deepen cross- border economic cooperation as we progress through shared prosperity.

In this current global environment, emerging economies are experiencing sustained growth despite the moderation in global expansion, mainly through greater domestic demand as well as increased intra-regional trade, which provides tremendous prospects for mutually reinforcing growth from increased economic and financial connectivity. With trade among the expanding emerging economies accounting for more than half of the world's trade, Islamic finance has an important role to facilitate trade and investment flows that will be mutually reinforcing and serve the real economy. Today there are more than 600 Islamic financial institutions operating in 75 countries.

In evolving Malaysia as an Islamic financial marketplace, the goal is to be an open marketplace that is linked to a network of other financial hubs. The openness of Malaysia's marketplace has seen increased foreign participation both in terms of institutional presence and participation in the capital market. In doing so the increased internationalisation of Islamic finance would influence the patterns of global financial and economic integration, and intensify financial and economic connectivity between countries. The business environment that is conducive particularly in cross-border fund raising activities, as well as fund and wealth management activities, has also attracted many foreign corporates, financial institutions and investors to opt for Malaysia as their location of choice for Islamic financial business and investment.

In the sukuk segment, Malaysia offers a multi-currency platform for international fund raising and for investment activities by multinational entities. Malaysia's total sukuk issuance in 2012 was approximately USD97 billion, with total sukuk outstanding at USD144 billion as at December 2012. Our sukuk marketplace is delivered through players with global capabilities and connectivity to a wider investor base and supported by a robust regulatory and supervisory framework, an efficient price discovery platform and a deep primary and active secondary sukuk market, amongst others. This has enabled the cost effective issuance of sukuk as compared to that of a corporate bond in Malaysia.

To facilitate international trade, Malaysia's settlement system allows for the settlement and clearing of securities in RM, USD and RMB. Furthermore, Malaysia's progressive liberalisation of its financial and foreign exchange markets continues to facilitate the internationalisation of Islamic finance. This is reflected by the recently announced liberalisation measures to enhance the competitiveness of the Malaysian economy, which were, amongst others, aimed at promoting the development of the Islamic financial markets through greater flow of cross-border Islamic financial activities and greater use of Islamic financial intermediaries, where resident takaful operators are permitted to undertake investments abroad of any amount on behalf of their resident clients.
Malaysia has been a key driver in the implementation and development of Islamic finance. How do you see Malaysia's role in the future development of Islamic finance globally?
The internationalisation of Islamic finance forges strategic and collaborative partnerships where markets and society can benefit from economic and financial linkages. Opportunities come from jurisdictions having in place comprehensive frameworks that support the development and advancements in Islamic finance and shape the internationalisation of Islamic finance collectively. Tremendous opportunity will also come from the emerging markets where there is strong demand for effective financial intermediation. In supporting the real economy, Islamic finance can play a sustainable role, and in particular in emerging economies as they participate in a more internationally integrated financial system. All this will facilitate mutually reinforcing global growth and development.

For Malaysia's Islamic finance marketplace, the vision was articulated in our first ten-year Financial Sector Masterplan that was launched in 2001, in which the plans for building the foundations and for further intensifying the framework for the Islamic financial system were outlined. This included strengthening and diversifying the financial intermediaries in the financial system, building and developing the financial markets, and enhancing the regulatory, supervisory, Shariah and legal framework. In 2011, a new Financial Sector Blueprint was launched, charting the next ten-year path for Islamic finance to transition to become increasingly internationalised, and thus to become more integrated with the mainstream of the global financial system. Malaysia continues to contribute to the strengthening of international infrastructures in Islamic finance that support financial stability such as the IFSB (Islamic Financial Services Board) and IILM (International Islamic Liquidity Management Corporation.)

Malaysia has built a comprehensive and international Islamic finance marketplace that is accessible to the world. It is connected to support the mobilisation of higher volumes of cross-border Islamic financial flows from a diverse range of market participants. These financial flows will be channelled through innovative and responsible Islamic financial instruments, to meet the diversified and sophisticated needs of trade, investors, markets, corporations and individuals globally.
There are different schools of thought when it comes to the interpretation of Shariah in finance. How does this affect the industry globally and can Malaysia play a role in Shariah harmonisation in the global market?
Differing opinions promote deeper understanding and encourage innovation. While this is so, mutual recognition of Shariah interpretations across jurisdictions is imperative to ensure that the value proposition that Islamic finance brings to the global economy is sustained.

Malaysia's Islamic finance marketplace accords importance to mutual recognition, as this contributes to greater global financial integration. Our practice of mutual recognition accepts Shariah interpretations and practices from the four major Islamic schools of thought - Hanafi, Shafii, Maliki and Hanbali. This enables the various markets to drive Islamic finance as their Islamic financial institutions will develop products to the needs of their target markets. While differences in Islamic finance interpretation still exist, though small, there is now greater convergence in Shariah interpretations and thoughts due to an increase of dialogue globally that promotes deeper understanding and awareness of the Shariah resolutions and rationale from various jurisdictions.

ISRA (International Shariah Research Academy for Islamic Finance), continues to organise and lead international and regional Shariah dialogues such as the International Shariah Scholars Forum to nurture greater engagement, understanding and mutual respect towards Shariah harmonisation amongst scholars, thought leaders and markets. ISRA recently launched the Islamic Financial Knowledge Repository Portal 'i-Fikr' to provide a comprehensive knowledge database on Islamic finance.

Due to the increasing convergence of Shariah interpretations as applied to Islamic finance, the practice of mutual recognition in our marketplace supports the opportunities for the global financial community to innovate products that meet the value propositions offered by Islamic finance.
Apart from Shariah harmonisation, what would a marketplace need for Islamic finance to flourish?
For an Islamic finance marketplace to flourish, it needs to be open, progressive and vibrant with a global focus that is cognisant of the cross-border opportunities for Islamic finance. A marketplace complete with innovative and responsible products and services and supported by a comprehensive and business-friendly infrastructure to deliver clarity and certainty for market confidence and predictability for businesses, players with global capabilities and connectivity, a robust regulatory and supervisory framework, an efficient price discovery platform, and a deep primary and active secondary markets, amongst others.

A major advancement in Malaysia's Islamic finance marketplace is the recently enacted Islamic Financial Services Act 2013, which together with other financial sector laws, including the Central Bank of Malaysia Act 2009, provides for a deeper degree of market confidence to participate in a much more complex financial landscape. Another important requirement for the continued growth and resilience of the Islamic financial industry is robust liquidity management. The internationalisation of Islamic finance, with greater frequency of cross-border transactions require effective short-term liquidity management. This is a requirement not only in stressful conditions but also in normal times.

Malaysia's approach to Islamic finance is to continue to facilitate the internationalisation of products, services and expertise, through deepening cross-border linkages and partnerships to collectively shape Islamic finance for the world thereby contributing towards the stability and resilience of the world's financial markets.