Keynote Address


His Royal Highness Raja Nazrin Shah

Crown Prince of Perak

at the

Inaugural Securities Commission – Oxford Centre for Islamic Studies Forum

16 March 2010

Securities Commission Malaysia

Kuala Lumpur

Assalamualaikum Warahmatullahi Wabarakatuh

Good morning.

I am thankful to Allah the Almighty for the opportunity to address this distinguished gathering. I am particularly happy that this Forum is co-organised with my alma mater, Oxford University. The English philosopher John Locke had the idea that we all start off life as clean slates and are moulded into shape through education. And I, along with many other Malaysians, have a lot to be thankful to Oxford. Of the things that I learned, the one I particularly appreciate is the spirit of rigorous inquiry and the love of knowledge.


Knowledge of economics and finance has strong roots in academic research. Theorists have been particularly important in laying the foundations for the behaviour of financial markets, while mathematicians, also known as ‘quants’, have been responsible for the growth of the modern financial industry. Well-known examples are the Nobel Laureates Fischer Black and Myron Scholes, whose options pricing model in the early 1970s spawned an entire financial derivatives industry.


Both these gentlemen were also directors of Long-Term Capital Management, one of the early hedge funds that had to be bailed out almost exactly a decade before the spectacular failure of Lehman Brothers in 2008. A less famous name is 2 that of China-born David Li, whose mathematical work in 2000 led to the rapid growth of collateralised debt obligations or CDOs. Rightly or wrongly, Mr Li has been said to be partly responsible for the recent global financial meltdown.


Modern finance therefore heavily relies on scholarly research, research that can be said to be conducted in a largely value-free environment and then subsequently commercialised by investment banks. The primary driving force behind the derivative desks of these banks is profit. Larger questions of social good are either left to the workings of the market or else left unanswered. Even the moderating hand of government is by and large absent. Indeed, bankers stoutly defend their right to originate and distribute financial products without regulation, arguing that such regulation inhibits innovation and therefore the making of profits.


Islamic finance also intensively engages the services of scholars but takes a rather different tack. Rather than treat societal welfare as an after-thought, it is inbuilt into the instruments right from the start. The requirement for funds to be invested only in worthy businesses, to be based on risk-sharing and on real assets, and the prohibitions against interest and speculation, ensures that no financial product that can cause harm leaves the office. There is already a great deal of consumer protection in place even before regulatory overview takes place.


This dissimilarity is the reason that Islamic finance can take its place as an alternative to conventional finance. I do not think that Islamic finance can substitute conventional forms of finance just yet but what it can do is inform, influence and, ultimately, improve, the world of global finance.


If one thing is clear, markets alone will not produce the kind of results we all desire. The testimony of former Chairman of the US Federal Reserve, Alan Greenspan, to Congress in March last year is highly instructive. He basically admitted that his long-standing belief in the efficient markets hypothesis and his decades-long rejection of government regulation was misplaced. As the world 3 grapples with the effects of the recession and plots the path of recovery, I would argue that the principles of Islamic finance are integral to the reform of regulation. The cases, lessons and views found in this great body of knowledge can be applied and could contribute greatly to what is to become the renewed and stronger fabric of the financial markets.


Are these qualities recognised and respected? Is Islamic finance making any headway? I think the answer is clear from the following facts. Last month, the UK House of Commons approved legislation that provides a level playing field for corporate sukuk as an alternative investment bond. In introducing it, the Secretary to the Treasury said that the government’s purpose behind the amendment was to maintain the UK’s position as a centre for international Islamic finance and to ensure that everyone, irrespective of belief, has access to competitively priced products.


The UK has now five fully shariah-compliant banks and 17 others with Islamic finance windows for a total of 22. There are 20 sukuks listed on the London Stock Exchange and the first private sukuk issue in the UK, by a private healthcare organisation, is in the offing. There have also been movements, albeit delayed, towards a sovereign sterling sukuk issue.


And it does not just stop in London. Luxembourg was even earlier in recognising the demand for Islamic financial services and now offers favourable tax treatment to a whole range of Islamic finance products. There are 15 sukuk issues listed on its stock exchange and almost 40 shariah-compliant investment funds and sub-funds. There have also been similar developments in Hong Kong, Tokyo and Singapore. Even South Korea will shortly approve laws aimed at establishing tax neutrality for sukuk, thus allowing them to be utilised by foreign and domestic issuers. 4 Islamic finance as an alternative system


These facts indicate that Islamic finance is now growing in momentum. In my view, we are now at the third, and perhaps most critical, stage of development. The first stage was to establish Islamic finance as a viable business. This is no longer at issue. Islamic finance is neither a fledgling nor a fringe activity. It is growing by leaps and bounds in all the major financial centres of the world.


The second stage was to ensure that it was stable and therefore trustworthy. The global financial crisis has tested financial institutions to an inordinate degree. It is clear that by avoiding much of the excesses of conventional finance, Islamic financial institutions have an innate ability to remain stable.


The third stage, as I see it, is to broaden its acceptability and grow the market. For all its successes, Islamic finance still accounts for less than one percent of global financial instruments. Muslims make up over 20 per cent of the world’s population. Even in Muslim-majority countries, the assets of conventional banks far outstrip those of Islamic ones. Strategic approaches


While there is no doubt that Islamic finance has a great deal to offer, whether it will do so is another matter. It will take careful and astute initiatives before Islamic finance can begin to actually make such a contribution. We will have to adopt strategic approaches in widening its acceptability.


First, we must define what needs to be done. Merely lecturing the world on the merits of Islamic finance is not sufficient. We should seek to develop strategic and complementary approaches to making them competitive and attractive.


Second, we should be as transparent as possible. Transparency ensures predictability and confidence in processes. While there may inevitably be some 5 element of complexity when devising risk management products, it is important that there are clear and direct relationships between products and their underlying assets.


Third, we must ensure that we are inclusive. Engagement of stakeholders, especially consumers and financial institutions are the keys to unlocking the potential within Islamic finance. The western world badly needs to roll back the era of financial capitalism where financial transactions trump those of the real economy. We ought to be restoring balance and actively debating how to create more value for all stakeholders.


Fourth, there must be a high level of innovation. True innovation, as opposed to imitation, also requires the involvement of all stakeholders and not just jurists and regulators. Islamic finance scholars have a great deal to contribute in this respect. Their work should not be confined only to Islamic finance but encompass that of the wider world of global finance.

Institutionalisation in Islamic finance


Ladies and Gentlemen:


I want to close by deliberating a little on the fifth element, that of the role institutions. Islamic finance has come a long way from where it was even a decade ago. This has been accompanied, indeed facilitated, by the institutionalization of Islamic finance. Institutionalization introduces sustainability through the formalization of practices and processes. A sustainable model for the industry requires a widely shared objective and well-established practices.


These include not only the financial institutions that originate and distribute the Islamic financial products but also a wide array of supporting infrastructure. There are indeed a host of entities that are working toward achieving the common objective of making Islamic finance more robust.


Each is an integral and indispensable component of the Islamic finance value chain. What is especially critical is that this value chain functions seamlessly and effectively across borders so that investors are left in no doubt about the purity and trustworthiness of Islamic finance products. For this to happen, there must be greater consultation among the institutions concerned so that depositors and investors do not end up perplexed.



Ladies and Gentlemen:


Harmonisation and convergence will take its own course, and diligence, patience and determination are what are required of us. We must at all times not lose sight of our common vision; that of making the global Islamic industry a robust one, one that can withstand the test of crises and time.


With good leadership and smart governance, we will have laid the foundation for a truly conducive Islamic finance ecosystem. Strong leadership has brought us this far and it comes in many forms – as scholars, practitioners and regulators. More and more, however, I am seeing that our leadership is being transferred to institutions. This is part of the evolution of the industry. We need to work together to ensure that everything is in place for the industry to continue to expand its reach and influence in the coming years.


Thank You.