Continuous development needed in Islamic finance, says Zeti

By Alfean Hardy
Bank Negara Malaysia (BNM) sees the need for further forward looking business strategies, ethical market conduct practices and continuous investment in human capital development in the local Islamic finance sector to meet the challenges of the uncertain global economic situation, its governor Tan Sri Dr Zeti Akhtar Aziz said.
In a speech at the launch of Public Bank Bhd's Islamic subsidiary, Public Islamic Bank Bhd, in Kuala Lumpur on Mar 3, Zeti said the continued progress of Islamic finance in the local financial system had demonstrated that there was still further expansion and development of the sector in spite of the on-going global financial crisis.
"Malaysia now has a total of 17 Islamic banks, of which nine are the subsidiries of the domestic banking groups. Currently, the Islamic banking system in Malaysia has successfully positioned itself as a robust and competitive component of our financial system. Islamic banking assets now account for 17.4% of total banking assets while in the bond market, the sukuk market constitutes 57% of the total market as at end 2008," she added.
Zeti said while Malaysian banks are sound and well capitalised, and that the local economy is not over leveraged and its external posit ion remains strong, Malaysia, as an open economy, has already been adversely affected by global developments.
"During this challenging period, financial institutions including Islamic financial institutions have an important role to ensure the continuous access to financing by the private sector. Key to this is the forward looking business strategies being adopted by the banking institutions, the organisational structure and the operational capability that is being put in place," she added.
Zeti said there was also the need for ethical practices and human capital development, going forward.
"Not withistanding the success of Islamic finance, the global ramifications of the crisis also calls for more concerted efforts to bring the industry to a higher level of resilience," she said. "Of importance in this process is to embrace the values of Islamic finance of justice and fairness that benefits the society and the system. It is thus important for Islamic finance to transcend beyond just the pursuit of growth and monetary performance but also to emphasise ethical market conduct practices, in line with the principles of Maqasid al-Shariah or objectives of Shariah.
"Financial innovation, as has been shown in the recent crisis, has led to adverse consequences for the economy. By learning from the lessons of the recent crisis, the process of innovation in the formulation of Islamic financial products and services must be done carefully and in accordance with Shariah in its entirety and to take into account the distinct risk characteristics of Islamic banking," she added. Zeti also called for continuous investment in human capital development in order to create a larger pool of experts and high calibre professionals.
"This involves enlarging not only the existing talent pool but also building a robust pipeline of skilled human resources for the future," she said.

(This story appeared in The Malaysian Reserve on Mar 4, 2009. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)