For instance, at the recent IMF/World Bank annual meetings held in Washington DC in October, Malaysian Finance Minister II Ahmad Husni Mohamad Hanadzlah, in his capacity as a governor of the International Monetary Fund (IMF) and the World Bank for Malaysia, was the only one to urge the Plenary Session of the meetings to consider using Islamic finance in its development projects.
The Malaysian minister was the only one from any country (including the 57 Muslim member countries of the Organization of Islamic Conference (OIC) to put Islamic finance at the top table of the most important annual gathering relating to global economic and financial developments, growth and stability.
In fact, in Washington at the side of the IMF-World Bank Annual Meetings, Bank Negara Malaysia, the central bank, signed a Memorandum of Understanding (MoU) with its French counterpart, Banque de France to promote greater cooperation in financial services between the two central banks, including the advancement of the Islamic finance industry in the two countries.
The MoU was signed by Zeti Akhtar Aziz, governor of Bank Negara Malaysia and Christian Noyer, governor of Banque de France under the provisions of the MoU, the two central banks respectively aim to foster long-term strategic developments in conventional and Islamic finance between Malaysia and France, focusing on three key areas: a) enhancing cooperation on capacity building and human capital development in the financial services industry; b) promoting the development of a conducive financial market infrastructure; and c) enhancing cross-border financial activities including Islamic financial transactions.
Similarly, at the 12th Asia-Europe Business Forum which was held in Brussels, Belgium in early October, it was the turn of Muhammad bin Ibrahim, deputy governor, Bank Negara Malaysia, to take the message of 'The Potential Role of Islamic Finance in Contributing to Global Financial Stability' to the heart of the European Union.
"Islamic finance," he emphatically stressed, "has a role in shaping the future of the global financial system and reinforcing ethical and moral values that are inherent in Islamic finance principles and fundamental towards promoting the stability of the global financial system. Ongoing efforts to further strengthen the resilience of Islamic financial industry would enhance the prospects for global growth and the potential of Islamic finance to contribute toward global financial stability."
Europe and Asia has traditionally had long-established historical and business relations. But in the light of the recent unprecedented global financial and economic crisis, it is always pertinent for business leaders and policymakers across the two continents to reflect on the challenges and to discuss new solutions that can contribute to the restoration of global financial stability. Not surprisingly, this year's forum was aptly themed "Financial Services Industry: Opportunities and Challenges for Asia and Europe".
Ibrahim maintained that Asia demonstrated remarkable resilience during the current crisis as most countries in the region entered the crisis period with a sound set of economic and financial fundamentals, mainly attributed to the lessons learned from the Asian financial crisis in 1998 and the necessary restructuring and reforms adopted subsequently.
In the current search for an enduring solution to ensure stability of financial systems, Islamic finance, he suggested, offers tremendous potential in shaping more resilient financial systems that enables financial intermediaries to function efficiently within national economies and across borders. The very principle of Islamic finance linking financial services to the real economy epitomizes the clarion call of today that banking should return to its basics by serving the economy in a productive way.
Today Islamic finance has evolved into a complete and competitive form of financial intermediation that serves both Muslim and non-Muslim consumers and businesses. The Islamic finance industry is currently worth more than $1 trillion and growing at a rate of 15-20 percent annually, with projected growth to reach $2 trillion in the next 3 to 5 years, as more countries around the world seek to further develop Islamic finance within their jurisdictions. The appeal of Islamic finance has led a number of established conventional players to enter the industry, thus widening the diversity of Islamic financial institutions and its product range. The impressive growth however is not confined to the Muslim world, but spans across the West and the Asia Pacific region where the growth is driven by commercial and business considerations. Such developments, added Ibrahim, would create a dynamic and competitive environment for the global Islamic finance industry.
He outlined the ethos of the Islamic financial system which are guided by Shariah principles. The intrinsic value propositions embedded in Islamic finance are universal and subscribe to the values of ethical finance and socially responsible investment.
In essence, it is a requirement for Islamic financial transactions to be supported by an underlying economic activity, with business and trade activities that generate legitimate profits. This precondition ensures that the funds are channeled into productive economic activity, thus strengthening the link between financial and productive flows. This serves to protect the Islamic financial system against the excesses, in terms of leveraging, imprudent risk taking and speculative activities that were root causes of the recent global financial crisis.
Basic elements of Islamic finance include profit and risk sharing; transparency and full disclosure; good governance; value-based innovation - all based on the principles of justice and fairness. These collectively provide implicit checks and balances in the system.
The deputy governor also highlighted the dynamism of the sukuk market which alone is worth in excess of $130 billion today and is growing at a rate of 40 percent annually. Malaysia's own achievements in Islamic finance have been impressive over the last three decades. The country's Islamic banking sector grew 20 percent annually since 2001 in terms of assets and as at the end of June 2010, the share of Islamic banking assets in the total banking sector has expanded to reach 20.9 percent as compared to 6.9 percent a decade ago.
Irahim, stressed that to support the orderly development and continued growth of Islamic finance, several new initiatives have been launched including the formation of a task force on Islamic finance and global financial stability and one on liquidity management by the Islamic Development Bank and Islamic Financial Services Board. In April this year, the task force published its report on Islamic finance and global financial stability emphasizing eight building blocks to strengthen the financial infrastructure of Islamic finance, but drawing also on important lessons learnt from the global financial crisis.
The report further recommends the establishment of an Islamic Financial Stability Forum (IFSF) as a strategic platform for productive dialogues to promote financial stability in the Islamic financial system, and to interface with the conventional system via the financial stability board at the International Monetary Fund.
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