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Zeti: Islamic Finance Remains Viable And Competitive

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Points of Essence:

  • Islamic finance is in a good stead to be a force in the international financial system by assuming a viable and competitive role of financial intermediation servicing the global community. Against the current financial eclipse, there lies a chance for Islamic finance to shine its tremendous potential.
  • The key characteristic of Islamic finance which impose appropriate due diligence and the integration of the risks associated with the real investment activity into the financial transactions underscored its overall stability and resilience. These features are unique to Islamic finance.

KUALA LUMPUR, Oct 7 (Bernama) — Against the backdrop of an increasingly uncertain global environment, Islamic finance, as a form of financial intermediation in the international financial system has continued to be viable and competitive, said Bank Negara Governor Tan Sri Dr Zeti Akhtar Aziz.

In future, greater global participation in this developmental process both directly and indirectly, would enhance the potential role of Islamic finance in contributing towards better global financial stability, she added.

“The Islamic financial services industry has during this decade transitioned into a dynamic, fast growing and competitive form of financial intermediation servicing the global community,” she said in her keynote address titled, “Islamic Finance: A Global Growth Opportunity amidst a Challenging Environment” at the State Street Islamic Finance Congress 2008 in Boston, United States yesterday.

“The strengths in Islamic finance are derived from Shariah principles, the key pillar of Islamic finance that has contributed towards its overall stability and resilience.

“The Shariah injunctions require that financial transactions be accompanied by an underlying productive activity thus giving rise to a close link between financial and productive flows,” explained Zeti.

Zeti also highlighted that in addition, under the risk sharing arrangement, the Islamic financial institution will share the profit or loss incurred by the entrepreneur.

“Under this arrangement, there is an explicit risk sharing by the financier and the customer with the real activity expected to generate sufficient wealth to compensate for the risks,” she said.

This arrangement, she pointed out, entails appropriate due diligence and the integration of the risks associated with the real investment activity into the financial transactions.

According to Zeti, Shariah principles also prohibited excessive leverage and speculative financial activities thus insulating the parties involved from too much risk exposure.

“The intrinsic principle of profit and risk sharing provides an in-built check and balance to the Islamic financial transactions. Explicit in this arrangement is the element of risk management and governance practices,” she said.

Going forward, she said there was therefore tremendous upside potential for Islamic finance.

“As the pace of development of the Islamic financial services industry accelerates, the increasingly more complex and challenging environment will continue to shape its advancement.

“Central to this will be the expansion of the business parameters and innovative product offerings.For this, there is increased investment in research and development to yield new instruments and structures to meet the changing requirements of the international community,” she added.

She told the audience that a related area of focus in particular, was the development of mechanisms for risk mitigation and liquidity management.

She also said that increased innovation called for greater emphasis on the implementation of best practices and a higher standard of risk management with the need to leverage more on IT applications as well as the strengthening of the management capabilities of Islamic financial institutions.

“With the increased awareness and understanding of Islamic finance, the role of market discipline will become more important in driving Islamic financial institutions towards ensuring Shariah compliance in operations, improving operational efficiency and in instituting sound and dynamic risk management practices,” she added.


Note: Read other related report from Reuters here and a full transcript of the Governor’s speech here.

Written by Suapi Shaffaii

October 7, 2008 at 7:49 pm

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