|Zeti: Greater global engagement needed in Islamic finance|
|Business & Market 2009|
|Written by Yong Yen Nie|
|Wednesday, 07 October 2009 10:27|
Speaking at an Islamic finance seminar in Istanbul, with the text of the speech released here, she said as Islamic finance continued to become an integral part of the global financial system, it would increasingly be exposed to risks of financial stress arising from global financial instability and economic activities.
The event was jointly organised by the World Bank, the Islamic Financial Services Board (IFSB), the Islamic Development Bank (IDB) and the Institute of International Finance (IIF).
“This necessitates a greater global engagement between those that are driving the reform agenda given that it will result in new structures, standards and regulatory regimes for the industry.
“This is particularly important when such standards become the basis on which assessments are made by multilateral agencies, rating agencies and the market at large,” she said in her keynote address “Islamic Finance and Global Financial Stability” at the seminar on Islamic Finance: During and After the Global Finance Crisis.
Zeti said as part of the global collaborative efforts to enhance the efficiency of Islamic financial institutions in managing liquidity at both national and international levels, a Liquidity Management Task Force had been established by the IFSB and the IDB early this year.
This work was being supplemented by ongoing market initiatives by the International Islamic Financial Market (IIFM) which focused on the advancement and the standardisation for Islamic financial instruments for the Islamic capital and money markets, she said.
“Looking beyond the current crisis, there needs to be an integrated crisis management framework as part of this infrastructure to ensure that any emerging crisis in the Islamic financial system will be promptly and efficiently managed.
“More facilitative and modernised legal framework is also required to make business more conducive for Islamic finance. In addition, the boundaries of the regulatory framework for Islamic finance would also have to be regularly adapted to keep pace with the evolution and transformation of the financial system,” she said.
Zeti said the combination of indiscriminate lending, excessive risk-taking and over-zealous financial innovation were at the root of the current financial crisis.
“The challenge before us is to build a new financial architecture that would allow for the more efficient functioning of not only financial intermediation within national economies but also across borders.
“Islamic finance — with its emphasis on a strong linkage to productive economic activity, its inbuilt check and balances and its high level of disclosure and transparency — offers this prospect,” she said.
Zeti said despite the recent global developments, the Islamic financial industry was able to weather this first wave of the global financial crisis, demonstrating its robustness as a stable form of financial intermediation.
However, as innovation is integral to the development of new Islamic financial products and services as part of its evolvement to meet the changing requirements of businesses and consumers, unfettered financial innovation could also become a major source of instability in the financial system.
“With increased globalisation and greater integration of Islamic finance with the international financial system, the higher will be the risk of the contagion effects from other markets and jurisdictions. In addition, Islamic finance will also be affected by the second-round effects arising from slower economic growth and the reduction in global liquidity.
“It is therefore important for there to be engagement with the prudential standard-setting entities for Islamic finance, not only to raise awareness of whether the new standards being introduced can be applied to Islamic finance and whether modifications need to be made but there could also be possible consequences that are unintended,” Zeti said.
This article appeared in The Edge Financial Daily, October 7, 2009.