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Laman Utama Bilik Berita Ucapan Kuala Lumpur International Islamic Finance Forum The Global Islamic Capital Market - The Road Ahead
Kuala Lumpur International Islamic Finance Forum The Global Islamic Capital Market - The Road Ahead Cetak Emel


Keynote and Opening Address
at the


The Global Islamic Capital Market - The Road Ahead





6th December (Monday) 2004, 9.00 am
Grand Ballroom, Mandarin Oriental Kuala Lumpur





Tan Sri Nor Mohamed Yakcop
Minister of Finance II




Mr Abdul Aziz Abd Jalal
Chief Executive Officer
CERT Events Sdn Bhd


Dr Saleh J Malaikah
Rusd Investment Bank Inc.


Mr A Rushdi Siddiqui
Global Director
Dow Jones Islamic Indexes, USA


Mr David Vicary
Financial Services, Deloitte Malaysia


Mr Jamaluddin Shahidan
Managing Partner
Jamal, Amin & Partners


Distinguished guests,


Assalamualaikum and Good Morning,

     I am glad to be here to today to deliver the keynote address at this seminar. I would like to congratulate the organizers CERT and their collaborators Dow Jones Islamic Indices for organizing this forum to bring together many of the leading practitioners in the Islamic Capital Market (ICM) and for the broad range of topical issues covered.

Background on the evolution of ICM

2. It was during the 1970s, on the back of soaring oil prices, that brought prosperity to the West Asian countries, that there was a strong revival of interest to develop an Islamic financial system to cater for the needs of Muslims worldwide for financial products and modes of investments compliant with Shariah principles.

3. This period saw the establishment of a number of pioneering Islamic banks as well as Takaful or Islamic insurance companies. Malaysia established its first Islamic bank, Bank Islam Malaysia in 1983 and Syarikat Takaful Malaysia in 1985.

4. The emergence of a distinct ICM was the outcome of a natural progression in the growth of the Islamic financial services industry. The pressing need to address liquidity management for Islamic banks and Takaful operators prompted several countries - including Malaysia - to introduce Islamic bonds to facilitate asset-liability management.

5. I would like to highlight a lesson here that, although is intuitive, needs emphasis.  The development of a vibrant and successful Islamic financial system is contingent on economic growth and prosperity of the Muslim community. These are tightly inter-linked variables with positive feedback linkages. While economic circumstances can bring windfall wealth to the Muslim world, this wealth can just as easily be wasted away in the absence of an efficient mechanism to recycle capital and to allocate capital efficiently to broaden the growth base.

Current state of the global ICM

6. From its humble origins, the global ICM has expanded considerably. A recent fact-finding report by the ICM Task Force of the International Organization of Securities Commission (IOSCO) noted that "the Islamic financial services industry, comprising Islamic banking, Islamic insurance (takaful) and the Islamic capital market, is an area that has grown to become an increasing and substantial segment within the global financial market and has gained considerable interest as a viable and efficient alternative mode of financial intermediation".

7. The IOSCO report estimates that there are now over:

  • 265 Islamic banks with total assets over USD262 billion and financial investments in excess of USD400 billion.
  • Global size of Takaful premium contributions from 58 Takaful operators estimated at around USD2 billion.
  • The size of global equity funds at USD3.3 billion with over 100 funds established worldwide.
  • The value of Islamic bonds issued globally at USD25.8 billion

8. The report also noted that "the strong growth of Islamic financing continues to be driven by increasing demand not only by those who invest in such instruments in order to meet their religious obligations, but also by others, including non-Muslims, who find the risk-return features attractive, or investors who subscribe to ethical investment philosophies".

Strategies to accelerate the growth of global ICM

9. The broadening acceptance and pervasiveness of ICM in global capital markets suggests that a solid foundation has been built, which can be used to stage a period of vibrant growth.

10. Within the context of an overall long-term strategy, a block-building incremental implementation approach is preferable to an immediate "big bang" approach of establishing an Islamic financial system in all aspects. We need to be pragmatic and recognize the challenges ahead and focus our efforts to attain our objectives on a sustained step-by-step basis. I would like to discuss, this morning, a number of strategies. 


Strategy 1 - Contribution of Islamic capital market to economic growth and development

11. There is undoubtedly a close relationship between economic growth and capital market evolution. In this regard, it should be noted that, while the population in Islamic countries account for one-fifth of the world's population, they account for less than 5% of world GDP. The growth of ICM would have been even more phenomenal if Islamic countries had achieved greater economic success over the last three decades.

12. The first strategy must therefore be focused on economic growth and development - where the development of the Islamic financial system is directly linked to economic development of the nation.  This is compatible with the objective of the Islamic financial system to put in place an economic system supportive of economic justice.

13. In this regard, it is not just an article of faith that the Islamic financial system is superior to the conventional system in many ways. It is a fact that the Islamic system is a just and equitable system that promotes a close relationship between financiers and users of capital based on co-operation and the equitable sharing of risks and rewards.

14. It is efficient in wealth distribution and, perhaps more importantly, the Islamic system requires that capital be channeled for productive uses and it abhors the hoarding of capital resources. All these are critical elements of an approach that can unlock the growth in an under-developed economy.

15. As we know, in most third world countries, an important reason for the lack of entrepreneurial development is the absence of capital being intermediated to the needy as they lack collateral while the banks do not always look at the viability of projects alone. With the capital market playing a more important role in the development of Islamic finance, we can start promoting greater use of equity-based instruments and hybrid instruments where the emphasis will be on project viability rather than collateral.

Strategy 2 - Expanding the pool of Islamic liquidity and building a global ICM network

16. The second strategy should focus on expanding the pool of ICM liquidity and building a global ICM network.

17. At the economic and investment level, there is a need to build greater linkages to expand intra-trade as well as cross-border investments among ICM countries. I believe that the process of forming these cross-border alliances will increase co-operation and engagement in all fields, particularly in trade and capital flows.

18. This must surely be one of the challenges to us that some Islamic nations are so overwhelmingly capital surplus, while others are so acutely capital-deficit and yet the intermediation linkages between these nations are so weak.

19. The bulk of Muslim global assets are largely managed by non-Islamic institutions, invested substantially in non-Islamic products and managed out of the global centers in located in London and New York. Many of these institutions have also expanded into the business of Islamic finance in recognition of the needs of their Muslim clientele. By itself, this is not an unwelcome phenomenon. Indeed, the participation of these global financial institutions have aided in the development of ICM and will continue to so since these institutions provide greater depth and reach for the Islamic products, based on their sheer size and network.

20. However, it is only logical that a greater proportion of Islamic savings should eventually be intermediated by Islamic financial institutions and that the high leakage of funds of Muslims into conventional products would eventually be reduced.

21. Presently, the relatively low levels of Islamic intermediation at the global levels occur partly because ICM is a relatively new phenomenon. The other factor is that the implementation of ICM is considerably easier to implement in a domestic setting. Therefore, at the global level, there is a need to galvanize greater effort and build greater cohesion among the various governments and private sector participants to achieve the vision of a truelyy global ICM.

22. Currently, only a third of OIC countries are believed to have Islamic capital market activities - the larger markets being Malaysia, Egypt, Indonesia, Iran, Saudi Arabia and Turkey. These countries must lend support to the weaker countries to help to accelerate their development.

23. There is also a need for more homegrown institutions able to operate and compete on a global scale. I believe the international Islamic financial community is now ready, after more than three decades of development, to venture into the next phase of greater cross-border co-operation. This is indeed critical since, with the continuing global trend of cross-border mergers, local Islamic financial institutions increasingly suffer from diseconomies of scale.

24. Strategic alliances by local Islamic financial institutions across several jurisdictions from the Gulf, to the sub-continent, to South East Asia and indeed to the West and other regions is one way to share product knowledge, distribution channels and other resources. Many jurisdictions, particularly Malaysia (including Labuan), now offer attractive incentives and a fertile enabling environment for innovation and alliances to take place.

25. Accompanying efforts to build domestic ICM firms into international players, should be efforts to nurture global centers for Islamic liquidity in Muslim countries. This can be complemented by initiatives that would link the various ICM centers. Different ICM centers can emerge with varying characteristics and specialization resulting in a more equitable distribution network rather than a dominant model with hubs and spokes.

Strategy 3 - The promotion of standards

26. Common standards are necessary for product homogeneity so that the products can be easily traded in the market. To some extent, the global pool of liquidity for Islamic products is fragmented by some slight differences in views on shariah standards among the Muslim community. We should be willing to respect each other’s views and not let progress and the development of ICM get bogged down by unnecessary debate. The third strategy therefore is to promote greater tolerance for slightly different Shariah interpretations by various Muslim scholars.

27. The important consideration in establishing the standards is that there is sufficient transparency and disclosure, and there is complete compliance with the requirements of Shariah, and that the market participants are assured of the reliability of the compliance process.

28. There needs to be a longer-term process that is dependent on regular interaction between Islamic scholars with ICM practitioners and academics to deepen the community’s understanding of the modern financial mechanisms. Through regular interaction, the Islamic scholars will be in a strong position to gauge, on the basis of a broader perspective, the new products proposed by financial experts. This is an important aspect of implementing global ICM, since in many countries, one of the basic obstacles has been the inability of Islamic scholars on the one side, and the Muslim capital market practitioners and academics on the other side, to communicate and discuss issues on the basis of a common understanding.

29. It is important that Shariah scholars appointed to the various supervisory boards have a deep understanding of the modern day investors' requirements and find solutions within the realm of Shariah to meet the changing needs of a dynamic economy.

Strategy 4 - Developing "plug-and-play" compatibility

30. The Islamic financial system does not exist in a vacuum and the reality is that it is impossible to entirely insulate one financial system from another. This is the reason for the need to adopt a practical and open-minded approach in developing the global ICM.

31. Malaysia has adopted a dual system, namely a full fledged Islamic system operating on a parallel basis with a full fledged conventional system utilizing, in a large measure, the same set of infrastructure. There are significant benefits in this approach in terms of cost and speed of implementing the Islamic financial system. A dual system provides a competitive and dynamic environment so that Islamic capital market intermediaries cannot afford to be complacent; resulting in greater sophistication, efficiencies and a high rate of product innovation. It can be considered a more efficient and effective way of expanding distribution coverage as it leverages on the conventional system at very little additional cost.

32. There is a growing interest of non-Muslims to invest in ICM products. This demonstrates the universal acceptability and attractiveness of Islamic financial concepts - namely that of promoting co-operation and the equitable sharing of risks and rewards. The universal acceptance underlines the fact that products with Islamic financial features are not only viable but that they can be globally competitive. This means that the mindset for the development of ICM must focus on universality. The potential growth of the ICM market must be developed not only based on the needs of Muslims but also to serve the needs of the global community for such products.

33. A universal approach will provide a base for accelerated and expanded growth of the global ICM market. The increasing returns or positive effects of an expanded network have been clearly illustrated in the world of information technology. In capital markets, broadening participation contributes to increasing market liquidity, thus setting off a virtuous cycle of increasing returns.

34. This leads to the fourth strategy, which is that the global ICM should be developed on the basis of "plug and play" compatibility with the conventional capital market. The "plug-and-play" compatibility requirement simply means that ICM products should be designed to fit seamlessly in both the Islamic and conventional world. This requires the Islamic financial products to conform the best practices already developed in the conventional system such as openness, transparency, accountability and uniform regulations.

Strategy 5 - Serving the customer

35. The challenge to innovate and adapt to meet changing customer requirements, while remaining true to Islam's core principles, is a crucial one during the current phase of development. The earlier phases of Islamic finance concentrated on a somewhat captive Muslim audience. Customers are justifiably getting more discerning. As service-oriented establishments, capital market intermediaries must remember that basic business principles such as efficiency, customer and service orientation and ease-of-use are also basic Islamic principles.

36. The fifth strategy is to ensure that ICM practitioners are, at all times, prepared to meet investor and entrepreneur demands for timely and competitive product offerings, for consistent judicial rulings and for a unified approach for accounting recognition.

Strategy 6 - Developing intellectual capital

37. The sixth strategy is to recognize the need to nurture talent as a basis for success. Homegrown Islamic financial institutions should attract first class talent to work for them, and they should pay whatever it takes to attract them.

38. It is therefore a matter of the highest priority that home-grown Islamic financial intermediaries are led and driven by individuals who possess the highest standards of intellectual fire-power and creativity, who are well versed in conventional finance but yet firmly grounded in an Islamic core; fully committed to the principles of promoting social justice and a moral economy through the promotion of Islamic-based finance. Attracting such talent may require that they be provided an opportunity to have significant equity participation in Islamic financial ventures that would allow them to concurrently monetize their ideas and their ideals.

Summary and conclusion

39. In order to fully benefit from the infinite potential of the Islamic financial system, innovation and creativity, based on the principles and values of Islam, are essential. Form may differ, but substance must be maintained. We have to continuously refine and innovate ICM products, to ensure that capital is intermediated in a manner that maximizes its social use based on Islamic values. The onus is now squarely on ICM practitioners.

40. Let me conclude by wishing you every success and I hope this conference will generate new enthusiasm, which will sustain the momentum in the development of the global ICM.

Thank you.


6th December 2004


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