"Islamic Finance: A Central Bank's Perspective"

While not being here in person, most certainly I am here in the commitment to this conference on Islamic finance, organised by Banca d'Italia, to speak on the subject of Islamic finance from the perspective of a Central Bank. As the international financial markets and the global economy recover from the repercussions of the financial disruptions and dislocations that have occurred in the major financial systems, there have been wide ranging proposals to strengthen the foundations for financial stability, and reviews of the existing institutional arrangements in the international financial system.

Despite this more challenging environment, the expansion of Islamic finance as a viable form of financial intermediation has gained momentum demonstrating its viability and resilience. The rapid growth and development of Islamic finance essentially reflects its ability to meet the changing pattern of demand by consumers and businesses, its ability to remain competitive and its ability to withstand a more challenging environment.

More recently, the international dimension of Islamic finance has gained significance as it transitions from being domestic centric to becoming increasingly more internationalised. There is now increased international participation in Islamic financial markets in the different jurisdictions and more Islamic financial institutions are having presence or strategic interests in several jurisdictions. This trend has resulted in increased cross border financial flows.

My remarks this morning will focus on three aspects of Islamic finance that is of interest to Central Banks. The first relates to the financial stability of the Islamic financial system and to highlight the sources of stability that is derived from the inherent elements of Islamic finance and the regulatory and supervisory framework that has been developed to deal with emerging risks that are specific to the Islamic financial system. The second relates to the role of the Central Bank in developing the Islamic financial infrastructure, including the international Islamic financial architecture.

The third aspect concerns the implications of the increased internationalisation of Islamic finance and the potential for greater interdependence thus requiring more effective surveillance and cross border coordination to ensure financial stability across jurisdictions.

Intrinsic Value Propositions of Islamic Finance

The strengths in Islamic finance are derived from the principles of Shariah that require financial transactions be accompanied by an underlying productive economic activity thus resulting in a close link between financial and productive flows. This requirement reduces the prospect for over-exposure to risks associated with excessive leverage and imprudent risk taking.

Fundamental to Islamic finance is the profit and risk sharing which explicitly requires the appropriate due diligence and ensures that the profit is commensurate with the risks. The risk associated with the real investment activity is therefore explicitly integrated into the financial transaction. There is thus an explicit emphasis on the economic viability of the underlying assets and on good governance, ethics and transparency. It is these very elements of Islamic finance that provides an in-built mechanism that enhances the prospects for its soundness and stability.

As Islamic finance evolves to meet the changing requirements of businesses and consumers, innovation is integral to the development of new Islamic financial products and services. It is recognised, however, that unfettered financial innovation can become a major source of instability. In Islamic finance, innovation must be tested against the objectives of the Shariah, where the primary objective is the realisation of benefit to the people. This demands the internalisation of Shariah principles in Islamic financial transactions, both in form and substance. Indeed, Shariah-based innovation brings with it a Shariah-compliant culture in the Islamic financial institutions that serves to ensure that the product development process incorporates ethical value propositions.

A Central Bank's Perspective

From a Central Bank's perspective, ensuring financial stability of the Islamic financial system is the paramount objective. Integral to the efforts in the development of Islamic finance, is therefore, the strengthening of the regulatory and supervisory framework. The Islamic Financial Services Board (IFSB) which was established in 2002 has been instrumental in developing and issuing global prudential standards and guiding principles for the industry. This has included capital adequacy requirements, to governance and risk management standards. The IFSB has also contributed to the harmonisation in the development of Islamic finance across different jurisdictions.

While the basic legal, regulatory and supervisory framework that takes into account the distinctive features of Islamic finance are already in place, efforts are now underway to put in place a comprehensive infrastructure to deal with the new challenges confronting the international financial system. Looking beyond the current crisis, an integrated crisis management framework will be part of this infrastructure. It is recognised that a more facilitative and modernised legal framework is also required and that the boundaries of the regulatory framework for Islamic finance would also have to be regularly adapted to keep pace with the evolution and transformation of the financial system. Finally, the supervisory framework for Islamic finance is also being reinforced by a financial safety net framework that comprises the lender of last resort facility and a deposit insurance system. These financial arrangements are now in place in Malaysia.

Also important are the institutional arrangements for resolution of troubled Islamic financial institutions. In Malaysia, we have in place a mandated resolution mechanism to provide for expedient, effective and cost efficient resolution of Islamic financial institutions. Yet to be put in place however, is a mechanism for cooperation between regulators within and across jurisdictions for resolution to contain potential systemic risks beyond the national boundaries. In 2008, the Taskforce on “Islamic Finance and Global Financial Stability” was formed by the Islamic Development Bank (IDB) and the IFSB, together with the industry leaders and international expertise to examine further the building blocks in the Islamic financial infrastructure that need to be put in place to ensure financial stability.

Among the areas covered by the report are for the effective implementation and enforcement of the prudential standards and the supervisory framework, and the recommendation for the establishment of a Financial Stability Forum to address issues of financial stability in the Islamic financial system.

In Malaysia, the Islamic financial system operates in parallel with the conventional financial system. In such a dual system attention needs to be given to avoid the potential for regulatory arbitrage that may result in distortions that undermines the environment of a level playing field between conventional finance and Islamic finance. The development of the legal and regulatory framework for Islamic financial services industry is therefore grounded on the principle of neutrality in ensuring no worse off treatment when compared to conventional finance in terms of the taxation, laws and regulations.

Equally important in the building of the financial infrastructure is the development of the Islamic financial markets. Malaysia has now developed a comprehensive Islamic financial system that includes the banking and takaful industry, other specialised financial institutions and the Islamic money and capital markets. The supporting financial infrastructure includes a robust regulatory and supervisory framework reinforced by the legal and Shariah framework, the payment and settlement systems, the development of the pool of expertise and talent to support the industry.

The sukuk market that is, the Islamic bond market is fast emerging as the most significant form of financing that continues to receive strong interest as a means for raising funds and for investment. The global sukuk market has been increasing at an average annual rate of 40 percent, with 90 percent of the issuances by the corporate sector. In Malaysia, the issuance of sukuk has now surpassed the issuance of conventional bonds. Strong demand for sukuks have also come from the high savings economies including from Asia and the Middle East. As a new asset class, it has generated demand from both conventional as well as Islamic financial investors. The sukuk is therefore not only an attractive instrument for investment but it is also a competitive means for raising long term funding needs.

Strengthening synergies between financial centres

Two important trends have increased the integration of Islamic finance into the international financial system - the accelerated development of the Islamic financial markets and increased liberalisation. The development in the Islamic financial markets has contributed to the availability of a wide spectrum of Islamic financial instruments that has ranged from instruments to manage liquidity, to structures for financing of mega investments. The higher level of foreign participation in the Islamic financial markets which has resulted in the increase in cross border flows in the international Islamic financial system thereby, enhancing international financial linkages between financial systems. Liberalisation has also brought greater foreign institutional presence in Islamic financial systems resulting in greater diversity of players and strengthening further the international financial linkages.

Malaysia has very much been part of this process. In 2003, the Islamic financial system was liberalised to allow for increased foreign presence. In 2007, the sukuk market was liberalised to allow the raising of funds by eligible corporates from any part of the world in any currency. And this year, the first foreign currency sukuk of USD1.5 billion was successfully issued by our petroleum corporation with a significant over subscription by investors from Europe, Middle East and Asia.

As the international dimension of Islamic finance gains momentum, it is necessary to facilitate the potential for liquidity management across borders. As part of an international collaborative effort, a Task Force on Liquidity Management was set up by the IFSB and the IDB early this year to develop solutions to enhance the efficiency of Islamic financial institutions in managing liquidity at both the national and international levels.

A further area of international collaboration is towards promoting value-added investment in human capital building as a long term solution to sustainable growth of the Islamic financial industry. The establishment of talent development and research institutions in Islamic finance are now increasingly wide spread in several jurisdictions with several strategic alliances across borders being entered into. The International Centre for Education in Islamic Finance (INCEIF) in Malaysia was set up by the Central Bank with programmes for practitioners and post-graduate studies to ensure the continuous supply of talent in Islamic finance. The current enrollment in INCEIF are from more than 60 countries attracting students including from the UK, Canada, France and Japan and Korea and the Middle East.

Equally important to innovative development is a deeper understanding of Shariah and knowledge of Islamic finance and for a greater convergence in the theoretical understanding and practical considerations in resolving the contemporary issues faced by Islamic financial industry players. In this regard, a platform has been established for active engagement and intellectual dialogue among global Shariah scholars, practitioners, regulators and academicians. As the global economy becomes a more interconnected and interdependent, the process of greater convergence of financial standards and mutual recognition of products is also facilitating the international integration of Islamic finance across different jurisdictions.

Concluding remarks

Let me conclude my remarks. While the inherent strengths of Islamic finance have contributed to its viability and resilience, going forward the foundations for its sustainability as a competitive form of financial intermediation continues to be strengthened. Concerted efforts are underway focusing on the further development of the Islamic financial markets, the financial infrastructure, the investment in research and development to support innovation, and enhancing further the legal, regulatory and supervisory framework.

An important part of the developments will be to facilitate a more inclusive arrangement that would allow for greater interface and inter-linkages across jurisdictions, in particular from emerging economies. As part of this process, building and strengthening linkages between financial systems will contribute to this process. Indeed, participation with the European financial systems will form an important linkage between the East and the West. In our pursuit and commitment to strengthening the resilience of Islamic financial industry and to enhance these linkages would not only have the potential to contribute towards global financial stability but also to the prospects for global growth.

Thank you.

Speaker : Governor Dr Zeti Akhtar Aziz

Venue : Rome, Italy

Date : 11 November 2009

Source : BNM

© Bank Negara Malaysia, 2010. All rights reserved.

~Leading the development of ummah...~

Why are Muslims so powerless???

Points to ponder: An Islam columnist on Jews

By: Dr Farrukh Saleem.
The writer is an Islamabad-based freelance columnist

Why are Jews so powerful?

There are only 14 million Jews in the world; seven million in the Americas , five million in Asia, two million in Europe and 100,000 in Africa . For every single Jew in the world there are 100 Muslims. Yet, Jews are more than a hundred times more powerful than all the Muslims put together. Ever wondered why?

Jesus of Nazareth was Jewish. Albert Einstein, the most influential scientist of all time and TIME magazine’s ‘Person of the Century’, was a Jew. Sigmund Freud — id, ego, superego — the father of psychoanalysis was a Jew. So were Karl Marx, Paul Samuelson and Milton Friedman.

Here are a few other Jews whose intellectual output has enriched the whole humanity:

Benjamin Rubin gave humanity the vaccinating needle.

Jonas Salk developed the first polio vaccine.

Albert Sabin developed the improved live polio vaccine.

Gertrude Elion gave us a leukemia fighting drug.

Baruch Blumberg developed the vaccination for Hepatitis B.

Paul Ehrlich discovered a treatment for syphilis (a sexually transmitted disease).

Elie Metchnikoff won a Nobel Prize in infectious diseases.

Bernard Katz won a Nobel Prize in neuromuscular transmission.

Andrew Schally won a Nobel in endocrinology (disorders of the endocrine system; diabetes, hyperthyroidism) .

Aaron Beck founded Cognitive Therapy (psychotherapy to treat mental disorders, depression and phobias).

Gregory Pincus developed the first oral contraceptive pill.

George Wald won a Nobel for furthering our understanding of the human eye.

Stanley Cohen won a Nobel in embryology (study of embryos and their development)

Willem Kolff came up with the kidney dialysis machine.

Over the past 105 years, 14 million Jews have won 15-dozen Nobel Prizes while only three Nobel Prizes have been won by 1.4 billion Muslims (other than Peace Prizes).

Why are Jews so powerful?

Stanley Mezor invented the first micro-processing chip. Leo Szilard developed the first nuclear chain reactor; Peter Schultz, optical fibre cable; Charles Adler, traffic lights; Benno Strauss, Stainless steel; Isador Kisee, sound movies; Emile Berliner, telephone microphone; Charles Ginsburg, videotape recorder.

Famous financiers in the business world who belong to Jewish faith include Ralph Lauren (Polo), Levis Strauss (Levi’s Jeans), Howard Schultz (Starbuck’s) , Sergey Brin (Google), Michael Dell (Dell Computers), Larry Ellison (Oracle), Donna Karan (DKNY), Irv Robbins (Baskins & Robbins) and Bill Rosenberg (Dunkin Donuts).

Richard Levin, President of Yale University , is a Jew. So are Henry Kissinger (American secretary of state), Alan Greenspan (Fed chairman under Reagan, Bush, Clinton and Bush), Joseph Lieberman, Madeleine Albright (American secretary of state), Casper Weinberger (American secretary of defense), Maxim Litvinov (USSR foreign Minister), David Marshal (Singapore ’s first chief minister), Issac Isaacs (governor-general of Australia ), Benjamin Disraeli (British statesman and author), Yevgeny Primakov (Russian PM), Barry Goldwater, Jorge Sampaio (president of Portugal ), John Deutsch (CIA director), Herb Gray (Canadian deputy PM), Pierre Mendes (French PM), Michael Howard (British home secretary), Bruno Kreisky (chancellor of Austria ) and Robert Rubin (American secretary of treasury).

In the media, famous Jews include Wolf Blitzer (CNN), Barbara Walters (ABC News), Eugene Meyer (Washington Post), Henry Grunwald (editor-in-chief Time), Katherine Graham (publisher of The Washington Post), Joseph Lelyyeld (Executive editor, The New York Times), and Max Frankel (New York Times).

Can you name the most beneficent philanthropist in the history of the world? The name is George Soros, a Jew, who has so far donated a colossal $4 billion most of which has gone as aid to scientists and universities around the world. Second to George Soros is Walter Annenberg, another Jew, who has built a hundred libraries by donating an estimated $2 billion.

At the Olympics, Mark Spitz set a record of sorts by wining seven gold medals. Lenny Krayzelburg is a three-time Olympic gold medalist. Spitz, Krayzelburg and Boris Becker are all Jewish.

Did you know that Harrison Ford, George Burns, Tony Curtis, Charles Bronson, Sandra Bullock, Billy Crystal, Woody Allen, Paul Newman, Peter Sellers, Dustin Hoffman, Michael Douglas, Ben Kingsley, Kirk Douglas, Goldie Hawn, Cary Grant, William Shatner, Jerry Lewis and Peter Falk are all Jewish?

As a matter of fact, Hollywood itself was founded by a Jew. Among directors and producers, Steven Spielberg, Mel Brooks, Oliver Stone, Aaron Spelling ( Beverly Hills 90210), Neil Simon (The Odd Couple), Andrew Vaina (Rambo 1/2/3), Michael Man (Starsky and Hutch), Milos Forman (One flew over the Cuckoo’s Nest), Douglas Fairbanks (The thief of Baghdad ) and Ivan Reitman (Ghostbusters) are all Jewish.

To be certain, Washington is the capital that matters and in Washington the lobby that matters is The American Israel Public Affairs Committee, or AIPAC. Washington knows that if PM Ehud Olmert were to discover that the earth is flat, AIPAC will make the 109th Congress pass a resolution congratulating Olmert on his discovery.

William James Sidis, with an IQ of 250-300, is the brightest human who ever existed. Guess what faith did he belong to?

So, why are Jews so powerful? Answer: Education!

Why are Muslims so powerless?

There are an estimated 1,476,233,470 Muslims on the face of the planet: one billion in Asia, 400 million in Africa, 44 million in Europe and six million in the Americas Every fifth human being is a Muslim; for every single Hindu there are two Muslims, for every Buddhist there are two Muslims and for every Jew there are one hundred Muslims. Ever wondered why Muslims are so powerless?

Here is why: There are 57 member-countries of the Organisation of Islamic Conference (OIC), and all of them put together have around 500 universities; one university for every three million Muslims. The United States has 5,758 universities and India has 8,407. In 2004, Shanghai Jiao Tong University compiled an ‘Academic Ranking of World Universities’ , and intriguingly, not one university from Muslim-majority states was in the top-500.

As per data collected by the UNDP, literacy in the Christian world stands at nearly 90 per cent and 15 Christian-majority states have a literacy rate of 100 per cent. A Muslim-majority state, as a sharp contrast, has an average literacy rate of around 40 per cent and there is no Muslim-majority state with a literacy rate of 100 per cent. Some 98 per cent of the ‘literates’ in the Christian world had completed primary school, while less than 50 per cent of the ‘literates’ in the Muslim world did the same. Around 40 per cent of the ‘literates’ in the Christian world attended university while no more than two per cent of the ‘literates’ in the Muslim world did the same.

Muslim-majority countries have 230 scientists per one million Muslims. The US has 4,000 scientists per million and Japan has 5,000 per million. In the entire Arab world, the total number of full-time researchers is 35,000 and there are only 50 technicians per one million Arabs (in the Christian world there are up to 1,000 technicians per one million). Furthermore, the Muslim world spends 0.2 per cent of its GDP on research and development, while the Christian world spends around five per cent of its GDP.

Conclusion: The Muslim world lacks the capacity to produce knowledge.

Daily newspapers per 1,000 people and number of book titles per million are two indicators of whether knowledge is being diffused in a society. In Pakistan , there are 23 daily newspapers per 1,000 Pakistanis while the same ratio in Singapore is 360. In the UK , the number of book titles per million stands at 2,000 while the same in Egypt is 20.

Conclusion: The Muslim world is failing to diffuse knowledge.

Exports of high technology products as a percentage of total exports are an important indicator of knowledge application. Pakistan ’s export of high technology products as a percentage of total exports stands at one per cent. The same for Saudi Arabia is 0.3 per cent; Kuwait , Morocco , and Algeria are all at 0.3 per cent while Singapore is at 58 per cent.

Conclusion: The Muslim world is failing to apply knowledge.

Why are Muslims powerless? Because we aren’t producing knowledge.

Why are Muslims powerless? Because we aren’t diffusing knowledge.

Why are Muslims powerless? Because we aren’t applying knowledge.

And, the future belongs to knowledge-based societies.

Interestingly, the combined annual GDP of 57 OIC-countries is under $2 trillion. America , just by herself, produces goods and services worth $12 trillion; China $8 trillion, Japan $3.8 trillion and Germany $2.4 trillion (purchasing power parity basis).

Oil rich Saudi Arabia , UAE, Kuwait and Qatar collectively produce goods and services (mostly oil) worth $500 billion; Spain alone produces goods and services worth over $1 trillion, Catholic Poland $489 billion and Buddhist Thailand $545 billion. (Muslim GDP as a percentage of world GDP is fast declining).

So, why are Muslims so powerless? Answer: Lack of education.

All we do is shout to Allah the whole day and blame everyone else for our multiple failures..

Sumber : http://www.FadzliYusof.com

The Journey

All across, ocean and land
Incumbent on all man
Is the pilgrimage to Mecca
Fifth pillar of Islam
In the footsteps of Muhammed (PBUH
The last prophet of Allah

Chorus:
Bow Down, Bow down and praise Allah
First sight of the Ka'bah
Break down and Praise Allah

The path, this journey from afar
To the city of Makkah
To strengthen what we believe in
The voyage we undertake
Hear the echo in the wind
Labaik, Allah Humma Labbaik

Chorus
Ismaeel, son of Ibraheem
Lay on the burning sand
With his mother running frantically
Between Safa and Marwa
From the sky came Angel Jibraeel
Brought a blessing from Allah...Allah

Chorus
It isn't always easy, there is so much we don't know
So many people in this world just don't know which way to go
But if our faith prevails
We'll always do our very best
To have the strongest conviction
And survive the greatest test

Here we are, leaving Mina

Conviction in our hearts
Crying out to the heavens
On the plains of Arafah
Standing proud beside my brother
Silent at Muzdalifah

Song by : Zain Bikha.