Jakarta: Islamic finance is able to survive in the global financial crisis and is likely to support the global agenda of fostering sustainable growth that is firmly anchored to the real economy, Malaysia’s central bank Governor, Dr. Zeti Akhtar Aziz, said.
Islamic finance calls for the banking industry to focus on its core function of providing financial services that add value to the real economy.
The Islamic tenets ensure a close link between financial transactions and the real economy, strongly discourage excessive risk undertakings and prohibit speculative elements, the governor of Bank Negara Malaysia and the IDB Prize Winner in Islamic Banking and Finance 1433H/2012 said last week.
Dr. Zeti was in Jakarta to deliver an inaugural lecture as part of the IDB Regional Lecture Series on Islamic Economic, Finance and Banking at Bank Indonesia’s headquarters. The lecture was attended by Bank Indonesia Governor Darmin Nasution, Director General of the Islamic Development Bank’s Islamic Research and Training Institute Mohammad Azmi Omar, Chief Commissioner of the Financial Services Authority (OJK) Muliaman D. Hadad, Representatives of international organizations, House of Representatives members, religious leaders, senior government officials and financial industry executives.
“These rulings also serve to insulate the Islamic financial system from excessive leverage, which in turn contributes toward promoting financial stability and its long-term sustainability,” Dr. Zeti said during her lecture, “Finance and the Real Economy: Fostering Sustainability.”
She explained that the global financial crisis provided a distinct example of how excessive leverage and exponential growth in financial activities that were detached from the growth trajectory of the real economy could become a source of instability.
Dr. Zeti said that this recent decade had witnessed a dramatic transformation of the Islamic financial landscape, marked by sustained rapid growth and the widening of its geographical reach, resulting in more diverse Islamic financial institutions and the generation of a wide spectrum of innovative products. Islamic finance had also evolved from being domestic-centric to become increasingly internationalized.
“Today, the total global size of the Islamic financial assets is $1.6 trillion,” she said, adding that there are currently more than 600 Islamic financial institutions operating in 75 countries.
She acknowledged that countries hosting Islamic banks need to adjust their legal, regulatory and supervisory frameworks to accord greater clarity to the appropriate legal and regulatory treatment in order to foster the sound and orderly growth of risk-sharing structures and activities, both in terms of the funding and the assets-side of Islamic banks.
Another important dimension in fostering the further development of risk and profit sharing instruments is the need to ensure the institutional soundness of the Islamic financial institutions and their enhanced ability to assess risks in the real sector.
She said that this underscored the imperative of robust risk management capabilities to manage new risks peculiar to risk and profit sharing contracts and the adoption of strong governance, transparency and disclosure practices within the Islamic financial institutions to meet the due diligence requirements for determining the viability of business and investment proposals.
“Equally important in ensuring the institutional soundness of Islamic financial institutions is the need for robust liquidity management,” Dr. Zeti concluded.