Two reasons for Islamic finance’s move into world financial system

The accelerated development of Islamic financial markets and increased liberalisation are the two important trends which have increased the integration of Islamic finance into the international financial system, according to Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz.

In her keynote address entitled “Islamic Finance: A Central Bank’s Perspective” at a seminar on Islamic finance in Rome on Wednesday night, she said: “The development in the Islamic financial markets has contributed to the availability of a wide spectrum of Islamic financial instruments that ranged from instruments to manage liquidity, to structures for financing of mega investments.”

Her speech text was released to news organisations yesterday.

“The higher level of foreign participation in the Islamic financial markets has resulted in the increase in cross border flows in the international Islamic financial system thereby, enhancing international financial linkages between financial systems,” she said.

Liberalisation, Zeti added, had also brought greater foreign institutional presence in Islamic financial systems, resulting in greater diversity of players and strengthening further international financial linkages.

Malaysia had very much been part of this process, she noted.

In 2003, the Islamic financial system was liberalised to allow for increased foreign presence. In 2007, the sukuk market was liberalised to allow the raising of funds by eligible corporates from any part of the world in any currency.

This year, the first foreign currency sukuk of US$1.5bil was successfully issued by Petronas, which was significantly oversubscribed by investors from Europe, the Middle East and Asia.

As part of an international collaborative effort, Zeti said a Task Force on Liquidity Management was set up by the the Islamic Financial Services Board and the Islamic Development Bank early this year to develop solutions to enhance the efficiency of Islamic financial institutions in managing liquidity at both the national and international levels.

Another area of international collaboration is in the promotion of value-added investments in human capital to ensure the sustainable growth of the Islamic financial industry.

The International Centre for Education in Islamic Finance (INCEIF) in Malaysia was set up by the central bank with programmes for practitioners and post-graduate studies to ensure the continuous supply of talent in Islamic finance.

At present, INCEIF students come from more than 60 countries, including Britian, Canada, France and Japan, South Korea and the Middle East.

“Equally important to innovative development is a deeper understanding of syariah and knowledge of Islamic finance and for a greater convergence in the theoretical understanding and practical considerations in resolving the contemporary issues faced by Islamic financial industry players,” Zeti said
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