Special Keynote Presentation




Dato Dr. Nik Ramlah Mahmood
Managing Director
Securities Commission Malaysia


at the



“The Era for Tajdid (Renewal)”



Let me begin by congratulating the organizers of KLIFF for once again bringing together local and international parties who share a deep interest in advancing Islamic finance. In the aftermath of the global financial crisis, there is clearly increasing interest in Islamic finance not merely to complement the conventional system but also to help address gaps and weaknesses in the system. Given that Islamic finance is currently merely a sliver of the global financial system, this is indeed both a tremendous challenge and an opportunity for all of us who are involved in one way or another in developing and promoting Islamic finance.


There is no doubt that Islamic finance has grown tremendously since it first emerged in the 1970s. It is estimated that current global Islamic financial assets have reached a size of USD750 billion and is expected to expand to USD1.6 trillion by 2012. This compares to USD178 trillion of financial assets worldwide, making Islamic financial assets less than 0.5% of the global total.1 But as the Islamic financial industry builds its growth momentum, the global financial landscape is facing a crisis of proportions – world financial assets fell by $16 trillion in 2008, the largest setback on record and a significant break in the three-decade-long expansion of global capital markets. Mature financial markets are expected to grow more slowly, thus presenting opportunities for other sectors, like Islamic finance, to play a bigger role in driving global asset growth.

Crisis provides opportunity for change



We have learnt from history that major financial crises brings about fundamental changes in the international economic system. The Great Depression, for example, marked the departure from the gold standard and the emergence of the US dollar as the world’s reserve currency. The disequilibria generated by US deficit spending on the Vietnam War ended the era of fixed exchange rates in the early 1970s2.


Similarly, from a regulatory perspective, bouts of market turmoil are almost invariably followed by a slew of regulatory reforms that attempt to address weaknesses in the regulatory system perceived to have contributed to the crisis. The Glass-Steagall Act, which attempted to separate investment banking activities from commercial banking activities, and the creation of the US SEC were responses to the crash of 1929. The Sarbannes-Oxley Act was put in place to ensure higher levels of corporate accountability after the Enron debacle. We have completed yet another bull-bear market cycle and it can only be expected that the current global financial crisis will bring about changes of similar proportions.


Where does Islamic finance stand even as our conventional counterparts revisit their regulatory paradigms and approaches? Professor Mervyn Lewis, a visiting scholar under the SC-UM Visiting Scholar Programme, in his analysis of the crisis, said that from the standpoint of Islamic finance, the causes of the failure of the financial systems are fundamental i.e. that it depends on riba as the underlying structure, greed, uncertainty in dealings or gharar, over speculation, lack of governance, and financialisation (i.e. where the value of financial asset greatly exceeds that of tangible asset)3. The notion that free markets are rational and efficient has been challenged, – the belief that each participant in the economy will act as a rational homo economicus in investment transactions and decisions, has been proven to be erratic and unreliable in the light of recent events.


So, Islamic finance practitioners ponder over what Islamic principles in trade and finance has to offer in terms of wisdom. Many of these virtuous principles go back in history and will need translation to modern day commerce and finance but the usefulness of principles is that they have a validity that transcends time. A Jewish Orientalist, S.D. Goitien4 who researched on the Geniza of the synagogue of Old Cairo wrote on commerce and finance that thrived between 900 AD – 1500 AD in the Mediterranean Region. Trade, commerce and banking were not just well developed and disciplined, but interest (riba) was shunned and in fact of little significance, and that Islamic finance was vibrant. There were sophisticated contracts for trades; business procedures and practices, documentation and banking practices derived based on economic models. Amazingly, this was the structure of commerce and finance that thrived not just within the Mediterranean but also across Europe. Muslim practices of venture capital under the structures of qirad or mudharabah was the only norm of contract that was used in investments. In medieval Italy, the Qirad and Mudaraba concepts were adapted in the 10th century as the commenda5, a business arrangement which was generally used for financing maritime trade. These commenda not only facilitated international trade transactions, it was also a financial instrument that was widely accepted for secondary transactions.


In order to ensure fair practices, quality standards, transaction procedures, arbitration processes and markets were regulated by the governmental institution of hisbah. The institution of hisbah has been generally understood as one seeking to ensure correct economic and commercial practices among the Muslim ummah6. Such was the contribution of Islamic finance in the early days.

The virtues of Islamic Finance



Today Islamic finance is being studied with greater seriousness not only in Muslim countries but also in financial centres across the globe. The Islamic economic perspective offers not only new growth opportunities but is also intellectually appealing in that many of the Islamic principles embedded in finance provides the potentially preventative medicine to future crises. Observations have been made that if greed can be tampered internally through self restraint, if individuals taking mortgages had been fully informed about the essence of their financial contracts, if speculation and risky trading had been forbidden or restrained, if religious principles have been written into bank and corporate governance, if usury had been banned and instead financing was based on real assets, and if the financial sector grew in harmony and did not outstrip real activity in the economy, then maybe the global financial crisis might not have happened7. The Vatican, in particular, noted this and issued a statement that called upon banks to study the values of Islamic finance as an avenue to restoring confidence amongst their clients at a time of global crisis. “The ethical principle of which Islamic finance is based may bring bankers close to their clients in the true spirit which should mark every financial service..[the] Free market model have grown too much and badly in the past two decades8.”


Islamic finance therefore has been offered a unique opportunity for renewal and universal acceptance because many in the world are disenchanted by the current conventional financial system and are looking for credible alternatives. Indeed, Islamic finance is shaping as a potential candidate to provide a system architecture that can constrain the excesses inherent in the current global financial model. Universally, an ethical and healthy relationship between man and the society can be premised on the key principles of transparency, ethical conduct and participatory arrangements. From a religious viewpoint, the most important is that the homo economicus is commanded to act as a khalifah or vicegerent9, subject to the dictates of the Quran and Sunnah.

Islamic Finance in Malaysia



Malaysia provides an interesting model to promote the co-existence of an ethical and societal-based finance that facilitates Islamic finance to appeal to non-Muslims and to operate on a universal basis. We have taken vital steps to develop a facilitative regulatory framework, create a large pool of players, introduce a comprehensive range of innovative and competitive Islamic financial product and services, and ensure sufficient depth to facilitate liquidity management.


Today, Malaysia has a highly diversified Islamic finance landscape. As at September 2009, Islamic banking assets constitutes close to 19% of total banking assets at RM213.8 billion (USD62.9 billion). Takaful assets constitute 7.5% of total insurance assets at RM10.57 billion (USD3.11b).


In the equity market, as at September 2009, 88% of all securities listed on Bursa Malaysia are classified as Shariah compliant, representing about RM574 billion or 63% of the total market capitalisation of Bursa Malaysia. From two Islamic unit trust funds in 1993, today, we have 144 Islamic unit trust funds with a total NAV amounting to RM21.2 billion, representing 11.3% of the total NAV of the unit trust industry. This represents 27% of NAV of the global Islamic unit trust industry.


There has also been unprecedented growth in the Sukuk market. In 2009, over 31% of all bonds approved by the SC were Sukuk – with a total value of RM19 billion. As at end 2008, outstanding Malaysian Sukuk stood at RM211 billion (USD62.1 billion), and this constitutes about 62% of global sukuk outstanding10.

Addressing gaps to continuously strengthen the system


Islamic finance’s rapid growth signifies that it has moved past the pioneering stage and established Shariah-compliant financing instruments as a commercially viable and effective tool for mobilising investment assets to finance productive economic activities. In the light of these successes and rapid growth, it is natural that gaps would appear and this needs to be continuously addressed.


Indeed, we must have the humility to also learn lessons from the global financial crisis as no system is completely insulated from asset price bubbles and contagion. In retrospect, the nature of the contracts and other Shariah compliance requirements did provide Islamic finance some degree of insulation. Nonetheless, the economic slowdown and fall in property values did create conditions that tested for instance, the structures of some Sukuk.


From a regulatory perspective, we must ensure that there is a reliable and speedy dispute resolution process. While the application of the Shariah alone is sufficient for ensuring that the form of transactions are compliant, issues could arise if the contracts under which they are structured do not address clearly the rights and obligations of parties such as the rights of sukukholders in the event of an issuer’s insolvency.


Also Shariah opinions differ between jurisdictions as to what constitutes a true sale. Furthermore what constitutes a true sale from a Shariah perspective may not necessarily be so according to the law of the land. Though standards issued by the Islamic Financial Services Board (IFSB), stipulates that Sukuk holders should have a claim on the assets held in the investment vehicle, the issue of how the underlying asset have been transacted need to be addressed.


We have placed considerable emphasis on transplanting substantive norms from classical Shariah practices. It is also now evident that similar emphasis needs to be placed on ensuring sufficient interface with the process of developing new legal contracts to minimize the risks of unresolved legal issues. Conceptual clarity without legal certainty is clearly insufficient.

Implementing Tajdid



We recognise how the Islamic financial system of the past had for several centuries operated in an efficient, organized and ethical culture surrounding market and transactions. However, the implicit institutional arrangements that had developed and allowed the system to flourish were not formalized: conventions and practices were not codified; roles and accountabilities not explicitly defined; and contracts were enforced purely through self- and collective-discipline. Borders expanded and practices became more uniform but the system never produced institutions and other organizations that provided the kind of stewardship needed to sustain these arrangements for the longer term. Hence the relative decline of Shariah-based finance over the past several hundred years amid the rise of the fractional banking system. In order for Islamic finance to respond to current global needs, we need to constitute renewal (tajdid) in our practices.


History does not often present people with the same opportunity twice; however, we are fortunate and should not miss this opportunity to establish a strong regulatory and institutional foundation for modern Islamic finance. We must learn from the past and continue to improve ourselves and our capabilities.


This renewal not only calls for ijtihads in the ruling on contemporary market practices such as in the area of hedging or other risk management needs; the industry must also be prepared in totality to meet global needs in terms of documentations and dispute resolution. The legal and regulatory framework particularly needs to be revisited in order to address cross-border issues and various systemic risks.


In embarking on these reforms and renewals, we must take decisive and concerted steps to address a number of critical areas concerning contemporary institutional arrangements.


First, the need to keep enhancing the level of clarity in Shariah opinions. The current governance framework is not yet sufficiently comprehensive and this needs to be addressed. A number of statements, resolutions and judgments have been issued that have triggered not merely debates but also doubts over the very nature of the Shariah governance process within the global Islamic finance industry. In this regard, the existing governance standards address the structures and set up of the Shariah committees or internal decision-making processes of the institutions, but does not address the general industry needs on how resolutions are or should be achieved. I can do no better than quote a statement attributed to the eminent Dr. Mohammad Elgari on this: “Shariah scholars should follow scientific methods to reach their conclusions. We have seen many mistakes where declarations have been issued. Only the correct resolutions will prevail. Shariah is not a group of infallible people. It is a science. It requires methodology, and resolutions require peer review and market consultation.”


Second, we must ensure investor protection principles are properly embedded within product structures. Opacity in the market and products are anathema to Islam and create latent risks to investors. In addition, there is a need to deal with conflict of interests issues in product structures.


Third, we need to promote greater harmonization not only in relation to Shariah standards but also in key areas of disclosure and transparency and market practices that could lead to abuses or regulatory arbitrage. It is critical that we safeguard confidence in the Islamic financial system through promoting greater standardization in documentation, providing greater legal and regulatory certainty and high levels of transparency.


Fourth, we must increase the level of co-ordination and collaboration among jurisdictions. It might be a tall order for the moment to talk of a single Islamic market, but we are in a position to make a start through converging standards within and across jurisdictions so that eventually we can create the necessary regulatory and supervisory structures to facilitate cross-border flows through mutual recognition and coordination; not just between the different jurisdictions and Islamic financial institutions but also between the Islamic institutions and conventional financial institutions.


Lastly, we must promote the development of common hisbah standards for commercial and financial practices.




The Asian and Middle Eastern economies have huge surpluses while at the same time require substantial investments to propel their economic growth. Clearly, there are opportunities for Islamic finance to strengthen its role in intermediating surplus savings into economic development. While in essence Islamic finance is global in character, in reality there are mismatches or gaps.


Markets and innovation cannot thrive in isolation. As in the past, it is only through building greater connectivity between our economies and markets that we can promote the relevance and growth of Islamic finance around the world.


On that note I wish to thank the organizers for inviting me to this conference and I do hope that you will all take this opportunity to exchange opinions and ideas and network for the greater benefit of the Islamic finance community.


Global total as of 2008. Source: McKinsey Global Institute.


New Era after the Crisis? By Jorg Zeuner. http://www.investmag.net/articles.cgi?id=666&page=0


Islamic Perspective of the Economic Financial Crisis, Public Lecture by Visiting Professor Mervyn K Lewis at the Securities Commission Malaysia, 22 April, 2009.


Geniza: The Unfolding Truth, Mohamed Imad Ali. An Analysis of Chapter 3, Volume 1 The World of Commerce and Finance, of, A Mediterranean Society, The Jewish communities of the Arab World as portrayed in the documents of the Cairo Geniza, written by S.D. Goitein


Jairus Banaji (2007), “Islam, the Mediterranean and the rise of capitalism”, Historical Materialism 15 (1): 47-74, Brill Publishers.


Ibn Taymiyya. Public Duties in Islam: The Institution of the Hisba, trans. Muhtar Holland, publ. Islamic Foundation (UK), 1982, ISBN 068618307X (paperback) (orig. title: al-Hisba fi al-Islam)


Mervyn Lewis, op cit.


Osservatore Romano, Vatican Official Newspaper, March 4, 2009. Quoted from Bloomberg.


Surah Baqarah: 30 “Behold, thy Lord said to the angels: “I will create a vicegerent on earth.”


The Sukuk Market Report: 2008 Report, Shape Financial Corp.,