Yang Berbahagia Tan Sri Dato’ Sri Dr. Zeti Akhtar Aziz, Governor of Bank Negara and Chairman of the Labuan Offshore Financial Services Authority (LOFSA), Tan Sri-Tan Sri, Datuk-Datuk, distinguished guests and speakers, ladies and gentlemen.


1. First of all, I would like to thank LOFSA for inviting me to this 1st International Islamic Finance Conference on the Evolution of the Global Islamic Capital Market Environment.
2. I would like to share with you my perspectives on issues and challenges relating to the development and regulation of the Islamic capital market and Malaysia’s experience in the same context.

Ladies & Gentlemen,

The Islamic capital market commands increasing global attention

3. The Islamic capital market is increasingly commanding global attention as a vehicle for adding quality options to financial products and services available in the international markets today. This recognition has encouraged the steady growth of new products as well as efforts at development and promotion. The establishment of the Dow Jones Islamic Market Index and the FTSE Global Islamic Index Series is testimony of the international recognition of the tremendous potential represented by the Islamic capital market.
4. Malaysia has emerged as a significant area of growth in this sector. Since the first issue of Islamic bonds in 1990 (by Shell), many new Shariah compliant instruments have been developed and introduced, resulting in greater depth and breadth of the Islamic capital market.
5. More than two-thirds of stocks listed on Bursa Malaysia are recognised as Shariah compliant by the SC’s Shariah Advisory Council (SAC). This has paved the way for Bursa Malaysia to launch its Shariah Index in 1999 to track the performance of Shariah compliant stocks listed on the Main Board of the Exchange.
6. It has also provided the impetus for the development of the Islamic funds management industry. There are now 61 Islamic unit trust funds with a Net Asset Value (NAV) of US$1.4 billion compared to 2 funds in 1993. The growth rate of Islamic unit trust funds in Malaysia is an impressive 47.6% per year, compared to the total industry growth rate of 9.6% over the last 10 years.
7. As at the end of 2003, the outstanding size of Islamic bonds represented about 35% of the total outstanding bonds in the market, clearly indicating their acceptance as both a financing and investment tool.
8. A significant milestone was achieved in 2002 when the Malaysian Global Sukuk and the Guthrie Global Sukuk were launched to enthusiastic response from both conventional and Islamic investors. The precedent set by Malaysia was followed by similar initiatives from the Islamic Development Bank (IDB) and the Qatar Government. Today Labuan is host to the Labuan International Financial Exchange (LFX), the listing exchange for the Malaysian, Qatar and Guthrie global sukuks.

There are still tremendous opportunities for further growth

9. Despite the developments thus far, there is still tremendous potential for growth of this sector of the market. The Islamic market capitalisation is a mere fraction of total world market capitalisation of US$32 trillion. Islamic mutual funds, with a net asset value of US$3.3 billion is minute compared with the total value of global mutual funds estimated to be worth more than US$12.0 trillion. Similarly, Islamic bonds represent less than 1% of the global bond market estimated to be around US$25 billion.
10. When one measures the current meagre supply of Islamic products with the current wealth of Muslims worldwide, there is an overwhelming supply-demand imbalance. In the Middle East alone, investible wealth is estimated to be worth more than US$1.3 trillion, representing a significant opportunity for growth.
11. Over the years, the capital market has played an increasingly important role in mobilisation of funds to facilitate economic development. Growth prospects for the capital market should outstrip growth in the global economy which is expected to grow at a sustained rate of 4% over the next decade. This development arises from an increasing shift of the responsibility of mobilising capital from the banking system to the capital market. Within this context, the growth prospects for the Islamic capital market should be even higher given the untapped potential in terms of client base, product enhancement and increasingly discerning investor needs.

Ladies & Gentlemen,

Issues and challenges

12. I am pleased to note this conference will deal with key issues faced by the Islamic capital market. Recognising that the world capital markets are increasingly becoming integrated, the singular challenge is to ensure that the Islamic capital market is developed in a manner that allows it to be easily integrated within the global architecture. This has several implications.
13. The first is that Islamic capital market products must be durable, reliable and replicable. This means that there is a need to balance product origination and innovation with efforts to ensure product sustainability. While issues that are commonly faced at the product development or market build-up stage must be dealt with, it is equally important to address issues that arise after the products have been introduced and marketed to ensure that they remain attractive and sustainable in the longer run. I call these ‘after-sales’ issues. We do not want to have products that are offered with a lot of hype and fanfare to falter and fail. This will result in a loss of confidence not only in the specific product but in the Islamic capital market as a whole.
14. These so-called ‘after-sales’ issues include the need for continuous disclosure and clarification of accountabilities to ensure adequate levels of investor protection and to help build a market that is credible and transparent.
15. The second is that products must be backed by clear legal protection. There must be sound legal documentation to protect the interest of all parties and appropriate sanctions which are enforceable in the ordinary courts of law. In addition, the legal mechanism should work in a manner to resolve all disputes effectively and expeditiously.
16. Thirdly there is a need to ensure that Islamic accounting rules and standards are consistent with international practices. Given that existing accounting standards, whether based on IAS or GAAP were developed based on conventional institutions, products and practices they are often inadequate or inappropriate for Islamic products. Yet, in order to be acceptable world-wide, Islamic products are expected to address issues such as comparability and reliability of information. In this regard, the efforts undertaken by AAOFII (Accounting and Auditing Organisation for Islamic Financial Institutions) are significant in accommodating the need for some level of compatibility with conventional accounting standards.

Ladies & Gentlemen,


17. Let me conclude by reiterating my view that to enable the Islamic capital market to develop further and to tap the tremendous opportunities world-wide, we must move beyond trying to merely cater to the investment needs of Muslim investors to introducing products that are acceptable to all in the global financial arena. Hence our efforts must not be focussed merely on ensuring Shariah compliance but also in ensuring international compatibility and acceptability. Negative differentials, whether in the form of different legal, tax or accounting framework must be removed to ensure that Islamic capital market products and services are competitive with the best in the conventional market. At the end of the day, the pursuit of value is a common denominator amongst all investors and therefore the value proposition that Islamic capital market products and services can offer will make all the difference.

Thank you for your attention.