Royal Address


His Royal Highness

The Crown Prince of Perak Darul Ridzuan

Raja Nazrin Shah

at the

World Capital Market Symposium

11 August 2009

Mandarin Oriental Hotel, Kuala Lumpur

The Role of Islamic Finance in Shaping the Future Global Financial and
Capital Market Landscape


Bismillahi Rahmani Rahim.

Assalamualaikum Warahmatullahi Wabarakatuh.

Salam Sejahtera.

Beta bersyukur ke hadrat ILAHI kerana dengan izin dari Nya juga Beta dapat berangkat untuk melafazkan titah di The World Capital Markets Symposium pada pagi ini.


It gives me great pleasure to be here to make this special address at this World Capital Markets Symposium, a timely gathering in view of global concern over the current turmoil in the financial markets and the economy. Markets and innovations in finance have funded production and trade that has underpinned the growth of the modern economy and society. Yet, every now and then, and more so today, we are reminded that the financial system is not infallible. We have to reflect and deal with its consequences and this symposium should provide much thought leadership on the challenge.


We cannot deny the benefits of financial innovation. At the same time, how do we explain to ordinary people who have lost their savings and their homes or are having difficulty finding a secure job to earn a livelihood that this is but a side effect of financial innovation? They view the financial services sector as having created this crisis and being responsible for their predicament. Who can contradict them?


Society has come to view markets and market intermediaries as institutions that we should trust and trust is the cornerstone of modern finance. Individuals pass their savings to their financial intermediaries to invest in markets with the faith that the intermediaries will be responsible stewards of their wealth.


All of us would like to believe in the system of finance, but it seems to have let us down. It has tried to place mathematics at the centre of a financial system to manage risks and provide reassurances – and that is all well. Yet, no matter how sophisticated the calculations are, they can never be a substitute for trust. Formulas cannot replace the human conscience, and markets will not flourish if people no longer believe in the products being sold or in how markets work. There is a century old maritime brokers’ motto “My word is my bond”, and a century later, this should still ring true.

The Five Pillars of Islam


Trust can be an elusive concept, and simply changing rules or systems will not be sufficient to either rebuild trust or restore confidence in finance. In my view, rebuilding confidence in the financial system is about creating belief without reservation. The challenge ahead is therefore to put faith back into finance. Perhaps, it is timely for finance to learn from the lessons of life. To learn what shapes beliefs and to learn what the obligations are to maintain one’s faith.


My topic today is on “the role of Islamic finance in shaping the future global financial and capital market landscape”. I am reminded of what Einstein wrote about science and religion in a 1930 New York Times article, and since it is the science of finance that I’ve been talking about, and religion as it relates to finance that I am going to talk about, allow me to share this with you:

Even though the realms of religion and science in themselves are clearly marked off from each other there are strong reciprocal relationships and dependencies … science without religion is lame, religion without science is blind … a legitimate conflict between science and religion cannot exist


It is often that in our endeavors our minds run fast and that our hearts and souls follow; it is in the name of innovation at first but that can quickly lead to greed as well. The equilibrium created by balancing these two important facets of our being, our hearts and our minds, is truly a virtue. The best possible scenario is when the morals and the mechanics of our actions are balanced. Today I would like to add for our deliberations the lessons I believe drive Islamic finance.


I would like to draw on the five pillars of Islam, which are the basic tenets of the religion, to draw some parallels. These five pillars form the fundamentals of the religion and provide a structure to our faith. They are Shahada, the profession of faith; Salat, or daily prayer; Zakat, which is the giving of alms; Sawm, or fasting; and Hajj, the pilgrimage.

Shahada (Profession of Faith)


The first of the five pillars is the profession of faith or Shahada. The act of professing faith by stating your intention is the initiation of faith. The professor states in one statement that he or she believes in and has trust in the faith and that profession of belief and trust fulfils the obligation of the first pillar of Islam. Similarly, the act that signals to markets that the trust of the economy is in them is when investors are willing to invest: it is through this act, the act of investment, that investors profess their faith in the markets.


The availability of information builds confidence in the market. Without information there can be no knowledge, and without knowledge there can be no basis for trust and confidence. For the economies to profess faith in their markets there needs to be transparency and disclosure. Of late, there has been a great erosion in that trust and this is why the industry’s greatest priority should be to rebuild trust and to restore confidence.


This industry is based on reciprocity of trust where the markets depend on investors and investors depend on markets. Unfortunately, markets have recently let the investors down and need to work hard to regain their trust. The first move must come from the market but to reestablish this relationship, investors must also start placing responsibility on and trust in the markets. Booker T. Washington, a freed slave and pioneer in higher education for African-Americans wrote:[1]

Few things help an individual more than to place responsibility upon him, and to let him know that you trust him.

Ladies and Gentlemen, trust begets trust.

Salat (Prayer)


Prayer, or Salat, is the second pillar of Islam. There are five daily prayers for the Muslim and it is the duty of the Muslim to perform these prayers. Importantly, prayer starts with a declaration of intention, or niyya. This declaration of intention is supposed to help one remain focused and direct to the objectives at hand. This type of explicit disclosure and statement of objectives is fundamental to any serious act, personally and for businesses. Financial management and fiduciary responsibility are a combination of serious acts and responsibilities.


There are clear guidelines on prayer in Islam and this helps everyone to pray together in the same way. Prayer helps instill discipline, and helps establish orderliness, regulating people and the way they do things; down to how they divide their days. One is required to pray at specific times of the day, towards a specific direction, and in a specific manner. Prayer is a very communal concept in that it suggests that one should try to pray as part of a group whenever possible. It is about following rules.


In financial markets, rules and systems, whether they are laws or guidelines, help to govern the markets. They can only be effective if everyone believes in the rules and follows them. It is incumbent on market players to understand and follow the rules and systems to ensure integrity and responsibility in market activities. We hear of rogue traders, fraudulent practices, and the selling of dubious products to innocent people. It is clear that there must be extensive discipline in the market to ensure that all participants are aware of these rules and that they follow these rules. If enough market participants follow these rules, it becomes harder for the others to go astray.


This is not just about rigidly following the rules, but like in Salat or Prayer, it is as much about understanding the principles and spirit behind those rules.

Zakat (Alms)


Contribution to community and society by way of giving Zakat, or alms, is the third of the five pillars of Islam. Zakat, from Arabic, is translated to alms giving in English, or tithe. This is not to be confused with charity, or Sadaqa, which is not an obligation in Islam. Zakat, however, is obligatory. The giving of alms, from your own wealth, to benefit the growth of the community is analogous to a gardener pruning his plants to make them grow more healthily.


The concept of Zakat is to ensure societal and individual virtues and it translates quite well into the modern-day business philosophy. No financial or commercial enterprise operates in isolation from its community. Hence, many firms now adopt stakeholder approaches and place emphasis on meeting their corporate social responsibilities. Incorporating the responsibility to the community is healthy in that it dilutes the preoccupation with excessive profits and lessens the motive of greed.


A firm that contributes to its community and that is aware of and concerned with its stakeholders will generate goodwill and inspire trust among its investors, employees, customers, and other stakeholders. This will build more confidence in the firm.

Sawm (Fasting)


Sawm, or Fasting, is the fourth pillar of Islam. During the holy month of Ramadan, Muslims are supposed to abstain from the comforts of life from dawn until dusk. The idea is that both manners and moderation are founded in the mind with the Muslim developing a heightened conscience through the exercise of fasting. The awareness of what is needed as opposed to what is desired and what constitutes excess is borne of this fourth pillar of Islam.


In the recent financial crisis, I feel the fault lies not so much with innovation, but with the loss of the industry’s moral compass. Investors who lost their life-savings are now distrustful of the financial services sector and they have every reason to be. Finance has come to be known for excesses and for inequities; this is surely not how this endeavor should be seen.


It is true that the concepts of financial engineering provide us with tools but it is ultimately human behavior, whether as individuals or collectively, that determines the outcome. Financial innovation must be guided by a strong code of ethics to be able to avoid the traps of excess, greed, and ego.

Hajj (Pilgrimage)


The final pillar of Islam is Pilgrimage, or Hajj. For Muslims, the Hajj is a call for global brotherhood and unity. Once a year, Muslims from all over the world gather in Mecca to perform the Hajj. Though the Hajj is a prescribed duty, if the Muslim cannot afford to perform it, it is forgiven. Nonetheless, Muslims strive to make the pilgrimage at least once in their lifetime.


Several generations ago, the greatest challenge in performing the Hajj was the journey itself. From Malaysia, the journey would take weeks by boat and not all pilgrims were sure about their safe return home. But the journey is only the first step. Once there, pilgrims from all over the world and from different backgrounds have a chance to meet as equals, learn from each other, join in the greater network of Muslims around the world, and in doing so fulfill their obligation.


The lessons of Hajj show us that a greater awareness of our global brotherhood would make us feel more responsible to and for each other. This lesson is especially pertinent for today’s financiers. The development of the awareness of global interdependence and the knowledge that they are responsible to prevent excesses that could tip the balance and damage the global financial world is now more important than ever before.

Islamic Finance Today


Today, finance is not delineated by the boundaries of a city or even a country. It is global and interconnected; each interwoven strand is dependent on the next. The fabric of global finance today is a tightly woven one and if even one of components is weak, the integrity of the system could be at risk.


The Islamic finance industry grew substantially and spread from the banking sector into the capital markets with the first offering of sukuk in 1990. It is now a truly global market, participating across borders with a vast range of investment alternatives including sukuk, mutual funds, commodity funds, ETFs, REITS, Takaful, Shariah compliant derivatives, and hedge funds. Market participants in the Islamic finance industry now include banks that have Islamic windows, Shariah compliant financial institutions, brokerages, fund managers, and takaful operators, and more established financial centers are vying to be global hubs for Islamic finance.


Recent developments have included the possibility of an Islamic bank in France, the publishing of a book on Islamic finance in Italian, Shariah compliant real estate funds in Australia, and there is news of expected sukuk issuances from the UK, Australia, and Korea. Islamic finance is no longer limited to the Islamic world. The world is interested and I believe Islamic finance to be up to the challenge.


As the industry grows, it is more apparent that there is more demand by non-Muslim investors and issuers to play a role in the industry. Here in Malaysia, for instance, there is just as strong a demand for Shariah compliant products among non-Muslims as there is among Muslims. Around the globe, there have been a diverse range of issuers of Shariah compliant products including the World Bank, the IFC, the German state of Anhalt-Saxony, Aston-Martin, and Shell, which pioneered the sukuk; and the list continues to grow.


While we have seen rapid growth in the industry so far, for it to continue to flourish, I foresee that industry participants will have to be unambiguous in defining their corporate strategies. They must share their risk management best practices and document plans and processes so that they may be used for studies evaluating the industry. Such self-critical evaluation can only help. This type of disclosure, transparency, and self critical evaluation will help establish accountability and help the Islamic finance industry and Islamic financial institutions stand apart from those of their conventional peers that have recently engaged in the type of business that led to the crisis.


One of the most important goals of the Islamic finance industry should be to integrate into the global financial system and one of the important goals of global finance should be to open doors to Islamic finance.

The Values Circle


We all must work together to rebuild the trust in finance. Finance requires trust; and we have established that. Trust is comprised of a set of universal elements like honesty, fairness, justice, and clarity, which can be found in all religions. By virtue of the Islamic finance industry being based on the principles of religion, these universal values are an integral component of its makeup. The guidance provided by these values is supposed to help in ensuring that responsibility is exercised when making decisions to do with the deployment of capital.


Going forward, we must ensure that the investments we make and allow are sustainable, that they fuel real economic activity, and that the commitment of capital is met with an intention of creating real value in the economy and benefit for society. These are intentions inherent in Islamic finance as it sticks to the prescription of a high moral standard and I believe, in this sense, Islamic finance plays a great role in today’s financial landscape.


To date, Islamic finance has borrowed from conventional finance in terms of the products it offers, but I think the time has arrived where the flow of information and knowledge can and should flow the other way as well.  As conventional finance has taught Islamic finance how to balance portfolios and manage funds, I believe Islamic finance can now return the favor by lending conventional finance its set of principles for good governance and responsibility.


Islamic finance can help the global finance industry to be more aware, to help it follow the rules, to help it curtail excesses, and to create the infrastructure of honesty, fairness, and integrity. But I believe Islamic finance can offer much more than this. At its heart, Islamic finance is an aspiration towards good finance; and as we have seen, good finance is about trust, and trust is a cornerstone of stability. Therefore, I believe that Islamic finance can help break the vicious cycle of boom and bust that has come to characterize global finance.

Concluding remarks

Ladies and Gentlemen


To conclude, I would like to leave you with some thoughts on Islamic economic ideas of societal justice, the distribution of resources, and individual responsibility.


Like their Western counterparts, Islamic thinkers have also made a distinction between needs and wants. Needs concern necessities. Wants, on the other hand, have to do with conveniences, refinements and luxuries. In Islamic thought, the distribution of resources is to provide justice in society. The necessities of life should be met first; next should come conveniences; then refinements. And only when there is an equitable distribution of resources in this way, can resources be spent on luxuries. And at all times, excesses should be avoided.

So, in Islamic economics, the distribution of resources has a very clear purpose, that is societal justice. By extension this applies to Islamic finance as well. The idea is that resources are ultimately not ours. They belong to God and are His blessings. Our responsibility for these resources, therefore, is paramount and we are fully accountable for how we use them. This concept of stewardship does not exclude a person from rights of ownership. It is to promote the idea that future generations of our race depend on these same resources and that we should be responsible with them.

Justice, self-discipline, integrity, good morals and responsibility are core attributes of the Islamic faith and of all other faiths. And I believe they have good application in the markets and finance as well. While finance has faced turbulence recently, this period provides us with an opportunity to get together and plan for the future. Let us begin with the basics. Let us challenge ourselves to break the vicious cycle of mistrust and greed and give the world an alternative that they can put their trust in. Let us put faith back in finance.

Thank You.

[1] Washington, Booker T. “The Awakening of the Negro”, The Atlantic Monthly, 78 (September, 1896).