Keynote Speech Islamic Banking & Investment: Asia/Middle East Congress 2016 Singapore

Keynote Speech

Islamic Banking & Investment: Asia/Middle East Congress 2016

Singapore

Islamic Market Unification :

Development of a Robust, Transparent & Unified Financial System

Bismillahi rahmani rahiim,

·  His Excellency: Sheikh Salman Bin Khalifa Al Khalifa

·  Prominent speakers

Excellencies, distinguished guests, ladies & gentlemen

Assalamu’ alaikum Warrahmatullahi Wabarokatuh, a very good morning

[Greeting]

1.  It is indeed a great pleasure for me to deliver this keynote speech. I would like to thank H. E. Shaikh Salman Bin Khalifa, patron of this congress, for his kind invitation. I am also thankful to Ethico Live, organizers of this event, for arranging my participation and excellent preparation of this event.

Excellencies, ladies & gentlemen

[The overview of Islamic finance in the context of global economy]

2.  As we witness, global economic landscape remains challenging as global economic growth is still in the state of weak economic recovery. Although, US as a locomotive of the world economy has demonstrated consistent signs of recovery, other economic recovery in advanced coutries such as Europe and Japan remains fragile and experiences deflation. On the backdrop of weak recovery in advanced countries, China as one of the giant of the global economy, is experiencing slower economic growth and a weakening stock market.

3.  Sooner or later, monetary policy normalisation in the US will occur. Re-pricing of risk investment appetite and financial asset valuation by global investor, followed by the increase of Fed-Fund Rate, may generate a cross-border portfolio investment out flows from emerging & developing economies to developed economies although in my opinion emerging economies will maintian their attractiveness due to their infrastructure development needs & growth potential. Islamic finance is ideal alternative to meet the requrtiements of emerging and commodity rich economies.

4.  I see more challenging economic environment in the near future partly due to lower oil and commodity prices which, in prolonged, may have adverse impact on GCC, Far Eastern and even certain African countries. Nevertheless, this situation also offers more opportunities in the context of Islamic finance development. I believe that there will be increasing need of safer and more stable instrument, including Islamic financial instrument, in time of rising uncertainty. Islamic financial market demonstrated a stronger resiliency based on the experience of previous global financial crisis. Because of that fact, I believe that Islamic finance has continued to become new frontier and offer more prospective financial model in this challenging global economic landscape. The key features of Islamic finance are lower leveraging, removing uncertainity from transactions, control over speculative activities, requriement of business activity or under lying asset etc.,

5.  Moreover, salient characteristic of Islamic finance to require a close link between real sector activities and financial markets need to positioned Islamic finance to be well-anchored in serving the real economy, manifested into broadening strong production base, unemployment reduction and greater inclusion of economic development. With pro-growth, pro-poor, and financial stability characteristics, an internationalisation of Islamic finance may unleash true economic growth potential in jurisdictions where Islamic finance is either established or finding its way.

Excellencies, ladies & gentlemen

[Islamic financial market development, Sukuk, Liquidity management & Hedging]

6.  Sukuk - In the midst of global economic slowdown, the performance of Islamic financial market is pleasing. Islamic capital and money markets, driven by sukuk grow rapidly in a number of new jurisdictions such as Oman, Hong Kong, South Africa, UK, Luxembourg and others (possible entry from North America) who are expected to enter the Sukuk market in a near future. There have been several countries as those in Europe and Asia dedicatedly reviewed their legislations and tax regime in order to offer sukuk and develop the Islamic sukuk market. As a result, some of the sukuk were issued in multi-currencies for tapping a wider investor base and to finance variety of government and private projects.

Based on IIFM Sukuk database, the global sukuk issuance has reached US$ 767 billion with Sukuk outstanding reaching US$321 billion as of Dec 2015 and the start of 2016 is encouraging. In line with that, KFH Research Report as well as Ernst & Young revealed that the global Islamic banking assets have also gone over US$2 trilion by the end of 2014.

One of the challenges with respect to Sukuk is that generally institutional investors (though investor base is widening) buy Sukuk for investment purpose as opposed to tradable instrument for a liquidity management purpose. Moreover, most of the sovereign Sukuk issuance is to finance budget deficit as opposed to finance large scale investment projects Going forward, in order to fully benefit from Sukuk potential, the focus should be infrastructure projects, social development etc. (example: Sadara Chemical, Khazanah, World Bank linked IFFIm Immunization program)

Excellencies, ladies & gentlemen

[The importance of liquidity management and risk mitigation/hedging to deepen Islamic financial market]

7.  Liquidity Management - liquidity management plays a pivotal role in assuring the operational sustainability of the Islamic financial institutions, while completing the sufficient infrastructures and comprehensing instruments available in the markets. Empirical evidences showed that severe liquidity shortfall may be able to throw illiquid but solvent banks into insolvency.

Although there is over reliance on use of commodity Murabahah for liquidity management purposes, however, in last few years alternative liquidity management tools are now more regularly used not only in the cross border market but also at jurisdictional level. IIFM liquidity management standards particularly Unrestricted Wakalah and Collateralized Murabahah are good example of widely acceptable tools for managing the liquidity. In addition, liquidity of sukuk in secondary market is though relatively low but with increase in issuances the secondary market trading activity is showing signs of improvement.

8.  Risk Mitigation in Islamic Finance

With regard to the development of Islamic hedging instruments (tahawwut), the development is now gaining momentum due to IIFM market unification standards and efforts are made to overcome regulatory and legal challenges faced by many countries. Since Islamic Hedging is for risk mitigation based on actual transaction and non-speculative activity hence Shariah acceptability is increasing such as in Pakistan, Indonesia etc.

Excellencies, Ladies & gentlemen,

[Importance of IIFM roles in Islamic financial market deepening]

9.  Given the importance of liquidity and risk management, and financial deepening for Islamic financial industry that I have been highlighting, IIFM, as one of the international Islamic standard setting bodies, is playing a leading role in an effort to standardize the Islamic capital and money market, Trade Finance & Corporate Finance documentations and products. Up until now, IIFM has been sucessful to highlight and address very essential and complicated issues related to the Islamic financial services industry such as Islamic hedging (tahawwut) master agreement along with certain Islamic hedging products, Islamic collateralisation (rahn), inter-bank unrestricted master wakalah agreement, and other instruments as liquidity management tools.

10.  IIFM also has an ongoing initiative for Islamic financial deepening through developing new Shari’ah compliant products such as FX forward, Islamic cross currency swap, market risk participation agreement in addressing market needs and risk management tools.

11.  Initiatives that have been taken by IIFM so far are very selective and based on the recommendation of the industry and tailor made practical solutions in consultation with all stakeholders. The main objective of the initiatives is to facilitate unification, shari’ah harmonisation and legal reforms in Islamic financial industry across jurisdictions.

12.  In achieving IIFM initiatives, IIFM develops strategic plans whereby IIFM addresses the very selective product and documentation standardisation needs of the Islamic financial industry based on its recommendations through a well-established procedure. Apart from that, IIFM provides universal platform by bringing regulatory bodies, financial institutions, law firms, stock exchanges, industry associations, infrastructure service providers and other market participants on a common platform through the creation of project specific global working groups and committees. We look forward greater participation in IIFM projects from Asia and other countries.

Excellencies, Ladies & gentlemen,

[Key challenges ahead for Regulatory Authorities for Islamic financial industry development]

13.  Moving forward, there are five identified major challenges ahead to be coped in order to make Islamic financial industry more competitive and continuously flourish within the right trajectory. Firstly, regulatory clarity and legal certainty whereby the standards for Islamic finance, especially for Islamic banking, are relatively fragmented across jurisdictions due to different fatwas interpretation and legal enforcement in each respective jurisdiction. For that reason, there is a need for harmonisation of perception as well as unison standard and regulation across jurisdictions, which can be achieved by cross border collaboration between key players, regulators, and international standard setting bodies.

14.  Secondly, human capacity development in the Islamic financial industry across all sectors. The central issue in this particular challenge is that a dichotomy between shari’ah and finance skills. People who are well versed in shari’ah skills do not necessarily possess finance skill, and vice versa. In light of that issue, academic institutions and Islamic financial institutions are critical to work hand-in-hand in order to pursue initiatives in fostering a set of skillful Islamic finance talent in the industry.

15.  Thirdly, there are missing gaps between Islamic finance theory and actual practices as reflected gaps between academicians and practitioners. These gaps should be bridged by more practical and pragmatic research conducted by academicians in collaboration with practitioners with the objective of bringing feasible solutions for the inherent gaps in Islamic financial industry and also shari’ah awareness for market participants.

16.  Fourthly, low technological difussion in Islamic financial market development. To accelerate Islamic financial market, the development should incorporate technology advancement such as digital mobile banking technology, big data management, IT interfaces with a third party, in order to be more competitive and to anticipate disruptive megatrends in the future.

17.  Lastly, absence of Central Clearing Counter-party and tri-party facility at national level

Excellencies, Ladies & gentlemen,

[Conclusion and closing remark]

1.  I strongly encourage all stakeholders to take an active role in IIFM efforts to promote global standardization of Islamic contract and products. I also urge all the main stakeholders to collaborate and come up with more practical shari’ah compliant solutions to cater the economic and financial needs of the ummah. I believe that all we do will be our legacy as path to promote financial stability and support sustainability in the economic development to deliver more prosperity in our economy.

2.  Finally, once again my sincere appreciation to event organizers for arranging this important event. My appreciation and sincere gratitude also to distinguished speakers for their willingness to share their expertise and knowledge for the betterment of Islamic financial industry. May Allah almighty bestow us the strength and patient to persevere in fulfilling our duty for a better future. Thank you very much and I wish you all very successful and fruitful deliberations.

Wasalamu’alaikum warahmatullahi wabarakatuh