Keynote Address by

YBhg Dato’ Zarinah Anwar, Chairman, Securities Commission

at the

Malaysia Islamic Capital Market Conference 2008
“Key Building Blocks and Sustainability”
18 June 2008, JW Marriott Hotel, KL

YBhg Dato’ Yusli Mohamed Yusoff, Chief Executive Officer, Bursa Malaysia Berhad

Encik Omar Merican, Chief Operating Officer, Bursa Malaysia Berhad

Distinguished speakers

Ladies and gentlemen

1. Thank you for inviting me to speak at this conference. The issue of sustainability is an important one to address in all aspects of human endeavour, ensuring that the necessary investments are made into the potential longevity of vital support systems. In the field of Islamic finance, although much attention has been focussed on its phenomenal growth, it is crucial that the aspect of sustainability is addressed to ensure that the potential that Islamic finance offers can continue to be fully optimised.

At a time of volatile markets and general economic uncertainty, we have been warned that

… the history of modern finance is littered with examples of financial booms and busts. [It is said that] Financiers have dashed into new immature, fragmented and opaque markets-producing subsequent scandals when it emerges that a host of shaky business practices underpinned this investment mania.1

3. It is reassuring therefore that, despite the global credit crunch, the momentum of Islamic finance has not diminished. The industry continues to expand. It is attracting new players; and as a result the range of Shariah-compliant products offered to Islamic customers has proliferated. At the same time, the industry is becoming a lot more competitive: customers no longer have to pay high premiums for Islamic products.
4. The sukuk market, in particular, remains robust, with global issuance expected to remain healthy. While some issuances were apparently delayed on concerns over pricing and overall risk-aversion to credit markets, the market on the whole is expected to expand rapidly.
5. But there is further room for growth. At present, Malaysia and the United Arab Emirates account for three-quarters of global sukuk issuance, while in 2007, Saudi Arabia reportedly issued a fifth of the global sukuk. Large markets with predominantly Muslim populations remain largely untapped, especially here in Asia. For instance, it is said that only 1% of Indonesia’s bond issuance is Islamic.2
6. Attracting a greater number and range of issuers calls for a vibrant, liquid international secondary market in sukuk, where investors are assured of trading large orders readily at efficient prices. Right now, the market has yet to achieve sufficient depth. Trading continues to be minimal, and many international trading desks still do not provide quotes for sukuk.
7. Liquid markets are all the more important because consumers of Islamic finance are becoming more demanding. Global conditions are more and more uncertain. Those who choose to invest in Islamic products are no longer satisfied with simply parking their funds in deposit accounts or real estate or equity funds. Not surprisingly, they too want the kinds of investment opportunities and hedging facilities that give more consistent returns and smooth out volatility-just like those offered in conventional markets.
8. All this bodes well for Islamic finance. But as the industry has grown, so have the attendant risks. For investors, the underlying basis of a well-functioning market is ensuring that they are able to base their investment decisions on sound disclosures of the prospects and attendant risks to the venture, and of its compliance with Shariah principles. For Islamic intermediaries, the pace and scale of their growth mean that risks unique to Islamic financial products need to be managed distinctly.
9. If recent events in the credit markets have taught us anything, it is precisely during a boom that we ought to be asking ourselves hard questions about financial practices. Although Islamic finance has existed in some form or other for around 1,300 years,3 as the likes of Bear Sterns and Barings have discovered so abruptly, financial markets pay little deference to past glories. So at this juncture, it is appropriate that we, as stakeholders, examine the hallmarks of sustainability while the going is good. And since they say that diamonds are forever, it is perhaps fitting to look at the four Cs of sustainable Islamic finance.


10. The first C is compatibility. The industry continues to push the frontiers of innovation in structuring products and offering services that are Shariah-compliant. Those seeking funds are also looking for more flexible forms of financing that can cater to their specific business requirements. Investors are looking for more innovative ways of capturing and maintaining returns. These developments while extremely positive for Islamic finance has also given rise to some scepticism about the sector. Questions have been raised whether mirroring existing products and returns through financial engineering is a sound basis on which the industry should develop.

A key aspect of Islamic finance is of course the need to interpret Quranic injunctions and the guidance provided by the Hadith to provide modern-day economic and financial solutions which are then capable of being reflected in the form of rules, guidelines and practices. Islamic finance differentiates itself from other forms of finance through the sanctity of the Shariah principles on which it is based.

This is in fact its key value proposition. If this sanctity is compromised, then the point of Islamic finance is lost. In delivering Shariah-compliant financial solutions intermediaries tend to be guided by expedience and familiarity. After all, consumer requirements are varied and the environment in which they operate is dynamic. But in its rush to grow, the industry must be mindful that a key to sustainability lies in innovation. Critics of the industry have claimed that innovation to date has been more of creating products that are compliant with the letter of the law rather than with the spirit and intent of the Quran.

12. So how do we address this issue? I don’t pretend to have the answer to this, although I firmly believe that we certainly should not halt the development of new ideas just in case they contravene the spirit of Islam. Perhaps it calls for a greater emphasis by Islamic finance on making available risk capital for the purpose of advancing education, scholarship and discovery. After all, this was how the Muslim world grew by leaps and bounds in science and technology during the early days. In this regard, there is possibly scope for Islamic finance to borrow more ideas from the venture capital industry that are both consistent with its own beliefs and contribute economic and scientific development, much in the way that so-called “socially-responsible finance” aims to maximise financial returns and social good.
13. Whatever the solution, one thing is clear: we need more clarity and consistency in the way we pronounce on what is Shariah-compliant. In other words, our approaches need to be compatible with each other and with the real needs of the market. Now it is only natural that models of Shariah compliance tend to start as being more domestic-centric, consistent with national legal and tax frameworks. But as the global industry grows, we will all need to work more closely together to foster greater convergence in our approaches. I am delighted that Shariah scholars from different jurisdictions have been interacting more closely with each other and deepening their understanding of respective fatwa pronouncements. International Islamic institutions such as the IFSB and AAOIFI and locally, the Shariah Advisory Councils of the Securities Commission and of Bank Negara Malaysia, have certainly provided the critical intellectual leadership.
14. In Malaysia, we have increased our dialogue with international Shariah scholars to learn from them. We have also allowed foreign Shariah scholars to participate in our market. Clearly this is one area where we need more global clarity on what is mutually acceptable rather than to keep on focusing on the differences in our views.
15. Users of financial products and services, whether conventional or Islamic, also want to be assured that globally accepted standards and best practices in regulation and supervision apply to them. In Malaysia, the Securities Commission emphasises a common regulatory approach for both Islamic and conventional products, based on the International Organisation of Securities Commissions’ objectives and principles of regulation. It is essential that the Islamic capital market is subject to the same regulatory framework as the conventional market and satisfy the same requirements for disclosure, transparency and governance. Of course there are provisions specifically for Islamic instruments to ensure conformity with Shariah principles.
16. We have made these requirements explicit in our product guidelines and best practices.4 We find this provides clarity to the market and has been key to the development of the Islamic capital market in Malaysia. For example, the breakthrough in our sukuk market occurred when we decoupled sukuk issuance from the conventional legal concept of debentures, as set out in the Guidelines for Islamic Securities. This allowed the market to adopt widely-accepted structures involving the element of equity participation such as musyharakah (joint venture) and mudharabah (profit sharing).



Having looked at compatibility across Shariah pronouncements and across the regulatory and supervisory infrastructure, let me turn to the second C of sustainable Islamic finance, namely capacity. Given the kind of growth we have seen in this industry, there is clearly a shortage of people with the right qualifications. In history, Islam has been famous for mathematicians and scientists. Today, there is a pressing need for a new breed, the equivalent as it were of the scholar-financier!

The problem with finding the right people to run this fast-growing business is that it requires Islamic finance managers with cutting-edge knowledge of mainstream markets (to be competitive) and of the Shariah principles that underlie Islamic financial transactions.

18. For now, the typical business model splits the work between trained finance professionals who run the business and make the institutional decisions related to investments and other financial matters, and the Shariah scholars who vet those decisions. However, many of these scholars include those trained in traditional Islamic schools where the emphasis on finance may have been limited; as a result, they may not have the complete grasp of financial markets. On the other hand, financial practitioners, even those who claim to be knowledgeable about Shariah standards, do not have the authority to rule on religious edicts.
19. In Malaysia, we have tried to tackle these issues through training programmes whose objective is to widen the pool of Shariah expertise and deepen skill sets. These programmes have three levels. At the entry level, they target fresh Shariah graduates through training and attachment with the industry; at the intermediate level, we target Shariah scholars through skills training; and at the advance level, we aim to increase the number of Shariah scholars able to participate in the international arena.

Capital markets

20. This need to build capacity is even more pressing when we consider the third C of sustainable Islamic finance-capital markets. I have already mentioned that Islamic investors are becoming more adventurous about where they park their funds, and are looking at capital market instruments such as exchange traded funds and even hedge funds. What is also interesting is how much Shariah funding through the sukuk market is moving into the mainstream, with reports suggesting that a number of listed western companies, including the S&P 500 index members, having mandates to launch Islamic bonds. At the same time, Islamic banks themselves are looking to benefit from diversifying the risks on their balance sheets and managing liquidity through the capital markets.
21. What is clear is that Islamic finance has moved increasingly into the realm of capital markets. While the most visible sign of this so far has been the growth of sukuk instruments, innovation is fast taking place in other areas, in particular structured products. This is not surprising because the structuring of risks and financing requirements is intrinsic to Islamic finance.
22. However, key to the sustainability of Islamic finance is that innovation must be from within, and not just mimicking the conventional industry. In management-school parlance, it therefore needs to actively pursue strategic differentiation. The strategy for Islamic finance must be to identify an integrated set of actions designed to produce or deliver products and services that customers perceive as being different in ways that are important to them. In the case of Islamic finance, it has already been argued that a financial framework which emphasises the link between financial assets and real assets has a lot to commend it-especially given the problems we have recently seen concerning the apparent disconnect resulting from complex and highly-leveraged financial engineering in conventional markets. In this regard, venture capital may be a promising growth area, because the financing techniques required are similar to the stated principles of Islamic finance. Moreover, by providing funds to entrepreneurs with good ideas, Islamic finance can help to promote innovation, invention, job creation and the development of high-growth industries.
23. Let me add that the development of a global Islamic capital market also requires the emergence of many more centres and players. As our markets grow, they can have positive spill-over effects on each other. There is also room for major Islamic centres to emerge within regions, as well as across regions.



The issue of multiple centres of Islamic finance leads me to the fourth and final C-connectivity. By this I am referring to bilateral or multilateral linkages between economies and markets.

These make cross-border product issuance and distribution easier, allows freer movement of intermediaries and other professionals, formalises links between exchanges and market participants, and reduces friction that would otherwise raise the cost of cross-border transactions and market access.


In Malaysia, we have taken strong measures to promote these linkages. The first global Malaysian sovereign sukuk for example was listed simultaneously in Labuan, Bahrain and Luxembourg. Khazanah’s Islamic exchangeable trust certificates were listed on the Dubai International Financial Exchange, Labuan and Hong Kong.

At the same time, sukuk issued by the Gulf Co-operation Council states have been listed on Labuan. Just last year, the Securities Commission and Dubai Financial Services Authority signed a mutual recognition agreement for product distribution and marketing between our two jurisdictions.

26. The importance of these linkages should not be underestimated. The new demands for recycling capital flows that arise from excess savings amongst members of the Organisation of Islamic Countries for example offer the ingredients for a large scale industry in Islamic capital market products and services. A more connected or “integrated” market, that bridges the resources of the Middle East, Asia and Africa, coupled with innovation in providing for relevant Islamic products, would meet these demands far more readily than would a set of fragmented markets. Some have pointed out that this would go some way towards achieving the Shariah principle of ensuring an equitable allocation of capital to achieve the objectives of the Ummah.


Ladies and gentlemen


What we do today will determine the success of Islamic finance in the future. Sustainability of this industry is our responsibility. To paraphrase the scientific definition of sustainability, we therefore have to ask ourselves what it takes for us to make this system of Shariah-compliant financing and investments productive indefinitely? The field of sustainability covers a wide range of areas, from agriculture and the environment, to economic development.

What is interesting is that over the years, experts have come up with a set of common principles that can apply to all these areas, which I believe has many parallels with what I have covered this morning.


One principle relates to ensuring equal opportunity and community participation. This clearly has parallels with our aim of making Islamic finance a universal global market, for Muslims and non-Muslims alike. A related principle recognises the global integration of localities, which supports the notion of connectivity that I have mentioned. Principles relating to the need for good governance, and a commitment to best practice need no explanation, as does that which concerns dealing transparently and systemically with risks, uncertainty and irreversibility.

The ethical basis for Islamic finance is closely aligned with another principle that advocates the integration of environmental, social, human and economic goals in policies and activities. I believe the essence of these principles are captured in the four Cs of sustainable Islamic finance that I have presented.


To these I should perhaps add a fifth: commitment. Efforts to sustain the growth of Islamic finance need the strong and active support and involvement of governments and regulators-witness the announcement of the United Kingdom Budget 2008 which strongly reiterated the UK Treasury’s continuing interest in the feasibility of issuing a sovereign sukuk in the UK sterling market. Elsewhere in Europe, the French senate announced in May that it will bring together politicians, bankers and Shariah scholars to discuss how to support Islamic finance, in particular, by raising awareness and changing legal and fiscal frameworks. These trends are not peculiar to developed European markets. Japan, for one, has announced a number of measures to broaden the scope of businesses permitted to banking and insurance groups by allowing their subsidiaries to engage in Islamic finance. We should not, therefore, underestimate the key role of governments and other authorities in creating an enabling environment.

30. Above all, what we as stakeholders in Islamic finance must remember is that quality is crucial. At the end of the day, we cannot ignore the fact of business life that end-users, on top of fulfilling their religious obligations, will demand quality if they are to be attracted to Islamic finance. The long-term growth of Islamic finance therefore also depends on how far it can address the needs of business and investors just as it is a platform for observing Islamic principles in finance.

Thank you.

“Islamic finance: Backwater sector moves into global mainstream” by Roula Khalaf and Gillian Tett. Financial Times. May 23rd 2007.

Figures quoted from “Islamic Finance”, Lex column, Financial Times, July 30th 2007.

See for instance, “Capitalism in Medieval Islam” by Subhi Labib, The Journal of Economic History 29 (1) (1969).

For example, Guidelines for Islamic REITs and Guidelines for Islamic Securities, and best practices regarding Islamic stock broking