Y.Bhg. Tan Sri Mohd Sheriff Kassim
Standard Chartered Bank Malaysia
Mr. Shayne Nelson
Chief Executive Officer
Standard Chartered Bank Malaysia
Mr. Afaq Khan
Head of Islamic Banking
Middle East and South Asia
Standard Chartered Bank Malaysia
Dr. Mohd Daud Bakar
President & Chief Executive Officer
International Institute of Islamic Finance
Ladies and Gentlemen.
Assalamualaikum warahmatullahi wabarakatu and good morning.
I am honoured to be here today to deliver the keynote address on the occasion of the Standard Chartered Bank's Seminar and Product Launch of Islamic Financial Engineering and Innovation. Let me take this opportunity to congratulate and commend Standard Chartered for taking the initiative to introduce the first commodity Murabahah Financing. Indeed, such initiative is another stride towards promoting Malaysia as a key player in Islamic finance.
2. I understand that for this auspicious launch, Standard Chartered has also gathered two distinguished speakers to share their views on Islamic banking this morning. I believe sharing knowledge is important in our endeavour to develop a vibrant and competitive Islamic financial system that will contribute towards achieving our growth aspirations.
3. Alhamdulillah, it is heartening to note that Islamic financing has witnessed a significant and profound growth. It has evolved not only in terms of size and efficiency but more importantly, in terms of segments and the range of products offered. The efforts at broadening and deepening of our Islamic financial market has taken a comprehensive approach, including the three pillars, namely banking, takaful and the capital market. While banking and takaful have had a longer history of development, Islamic capital market has witnessed a significant growth since the 1990s.
4. Growth of the Islamic capital market has been an anchor component and an integral part of the overall development of our capital market. In fact, it complements the conventional capital market by providing value added services that meet the needs of the market for a broad range of instruments and have effectively mobilized and channeled funds to finance the nation's economic growth and development. Its development has also contributed towards reducing the dependence on Islamic banking for long term financing needs of corporates, thus reducing the mismatches between short term financing and long term project gestations.
5. Syariah compliant instruments have been developed which have led to greater depth and breadth of the Islamic capital market. As at the end of June 2005, the outstanding Islamic bonds represented more than a third of the total outstanding bonds in our domestic capital market, reflecting the strong response both from conventional and Islamic investors. In addition, since the first global sukuk was launched by the Government in 2002, several similar issues by Malaysian corporates have been undertaken. Another significant development was the recent issuance of ringgit denominated Islamic bonds by multilateral financial institutions, namely the IFC and World Bank, reflecting international confidence in our Islamic financial system. The Government had also issued the world's first rated Islamic mortgaged-based securitization of its staff housing loans this year.
6. Apart from promoting the development of a broad and diversified range of Islamic financial products and services, the Government has also put in place an efficient regulatory framework to ensure a more conducive environment for a dynamic and vibrant Islamic financial services industry. In addition, we have provided a comprehensive tax treatment to the issuances of Islamic securities with the view to reducing the cost to issuers and bond holders and thus, further promoting Islamic capital market instruments and investment products.
7. In the equity market, significant progress has also been made, with more than two thirds of stocks listed in Bursa Malaysia being Syariah compliant. This has also paved the way for the development of Islamic funds management industry. Currently, there are 81 Islamic unit trusts funds with a net asset value of 7.7 billion ringgit. The Islamic unit trust funds have grown by almost 25 percent per year during the last 10 years compared with the industry growth of about 8 percent.
8. The potential for further growth of our Islamic capital market remains significant, particularly in the context of the large size of the global market capitalization, estimated at more than 30 trillion US dollars. In addition, Islamic bonds remain small, accounting less than one percent of the global market estimated at more than 30 billion US dollars. Investible wealth in the Middle East alone in search of Islamic investments globally is also large, estimated at some one trillion US dollars, thus representing a vast opportunity for growth. Currently, these funds are largely being managed by intermediaries in the west. It is, therefore, crucial for us to further accelerate the development and promotional efforts to attract these funds to invest in Malaysia.
9. In the banking sector, our initiatives to restructure and strengthen the domestic financial system have led to greater efficiency and resilience of the sector. In response to the financial crisis of the late 1990s, the Government averted a banking crisis by setting up 3 agencies in 1998, Danaharta as a pre-emptive move to address the NPL problem, Dana modal to recapitalise needy banks and CDRC as a mediating body between large borrowers and their creditors. Danaharta acquired NPLs at adiscount reflecting the underlying recoverable value. Since bank managements and shareholders were explicitly "punished" for their pasr transgressions, moral hazard was effectively dealt with; only then did Danamodal come to inject freash capital. Our banks are now the envy of the region.
10. Danaharta will cease operations on 31 December 2005. meanwhile, Danamodal and CDRC have since ceased operations in December 2003 and August 2002 respectively. The total cost of restructuring Malaysia's banking sector is estimated at RM12.5 billion, which is about 3% of GDP. This is far less than Bank Negara's estimate in 2002 of 5% of GDP and IMF's estimate of 18%. The restructuring cost related mainly to RM11 billion incurred on the NPLs of the now defunct Sime Bank Berhad and Bank Bumiputra. The cost relating to the NPLs acquired directly by Danaharta at a discount from financial institutions was only RM1 billion. In addition, the recapitalisation cost incurred by Danamodal was only Rmo.6 billion. The cost may be lower taking into account the shares the Government holds as a result of the restructuring, including the stake in Commerce Asset Holdings. The low cost of restructuring, which the lowest in the region, was due to the full commitment of the Government and these agencies. With the close of this restructuring phase, we can now look forward towards growth on much stronger foundations.
11. In line with the stronger banking sector, Islamic banking and takaful have also achieved double digit growth. Assets of our domestic Islamic banking grew by 18 percent per annum since 2000 and accounted for 11% of total banking assets last year. In the insurance sector, the takaful industry expanded by 28 percent per annum and accounted for 6 percent of total assets.
12. To further develop a more comprehensive Islamic financial system, the Government has further liberalized our Islamic financial sector with the issuance of three new Islamic banking licenses to foreign banking institutions. This is to further enhance the diversity and depth of participants in Islamic banking whilst strengthening the global integration of the domestic financial system. In addition, we have also allowed foreign investors to participate up to 49 percent in the equity of the new established Islamic banking subsidiaries of the Malaysian banking group and 4 new takaful operators.
13. While significant progress has been achieved in our efforts to build an efficient, dynamic and resilient Islamic financial system, the way forward is clearly through innovation to further expand product diversity to meet the growing requirements of more sophisticated investors and users of Islamic finance. Innovation will also strengthen capabilities and provide cost effective options which are important in the efforts to secure and sustain our competitive edge. Innovation will, therefore, enhance the effectiveness and efficiency of the nation's Islamic financial system, thus further enhancing our objective of positioning Malaysia as an international hub for Islamic finance.
14. At the same time, to enable our Islamic financial industry to advance towards the next phase of its development, and to tap the tremendous opportunities world wide, we must introduce products that are globally acceptable, by focusing our efforts not only on ensuring syariah compliance but also in ensuring international compatibility and acceptability. In this context, the pursuit of value is a common denominator, and therefore, it is important that our proposition is based on Islamic core values and principles, and they be embedded in the Islamic financial products and services that we offer. This value proposition will become increasingly important as we continue to expedite the pace of integration with the international financial system.
15. Industry players, financial institutions in particular, have an important role to promote innovation through their research and development efforts in designing new products and services. In this regard, I would like to congratulate Standard Chartered Bank Malaysia for achieving a first in introducing the innovative Commodity Murabahah Programme-i and Commodity Murabahah Financing-i. This is indeed an auspicious start as we look forward to more such financial engineering to offer innovative products in Islamic finance.
16. I understand that a key differentiation of this product is that the structure is substantiated by an underlying sale and deferred payment commodity transaction, thus complying even closer to Syariah requirements adopted globally. This means the product is better able to bridge perceived gaps in Syariah compliance between the Middle East Islamic banking practices and those of Asia, thus forging greater integration of the Malaysian Islamic banking system with the rest of the world.
17. Commodity Murabahah also expands the capability of Islamic banking in providing solutions to cash flow planning and risk management. It also provides multi-currency financing, thus expanding the benefits in the creation of multi-currency accounts in Malaysia.
18. In concluding, I would like to once again congratulate Standard Chartered Bank for its initiative in developing the Commodity Murabahah Financing. It is my hope that the Bank will continue with its noble effort to promote further innovative products and contribute to the Government's vision of promoting Malaysia as an international Islamic financial hub.
19. On this note, it is now my great pleasure to officially launch the Standard Chartered Bank's Commodity Murabahah Financing.
Wasalamualaikum Waramatullahi Wabarahkatu.
Ministry of Finance