ISLAMIC FINANCE CAN CONTRIBUTE TO GLOBAL GROWTH

KUALA LUMPUR, Oct 6 (Bernama) -- The increasingly significant role of
Islamic finance will not only increase its potential to contribute to global
financial stability but also towards strengthening global growth, Bank Negara
Malaysia Governor, Dr Zeti Akhtar Aziz said Tuesday.

"In the search for the appropriate reforms, there is a general consensus
that we need to return banking to its basic functions - to provide financial
services that add value to the real economy.

"This in fact represents the very essence of Islamic finance," she said in
her keynote address at the Seminar on Islamic Finance: During and After the
Global Financial Crisis, in Istanbul, Turkey. The speech was released here
Tuesday.

History has shown that there have been more than 100 distinct banking crises
in this recent three decades, and inherent in Islamic finance is the explicit
elements that address several of the issues that have surfaced in the
conventional financial system during the current crisis, she said.

"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," she said.

Zeti explained that as Islamic finance continues 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 global economic
activity.

She said this would also necessitate a greater global engagement between
those that are driving the reform agenda, given that it would 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. Such engagament also facilitates cooperation and collaboration
in achieving our shared interest of preserving global financial stability," she
added.

In Islamic finance, financial innovation must be tested against the 'Maqasid
al-Shariah' (objectives of the Syariah), where the primary objective is the
realisation of benefit to the people, she said.

Zeti also urged for financial innovation to be supported by robust risk
management and strong governance practices.

"The explicit risk sharing element between the financier and customer in
Islamic finance obligates its participants to evaluate risk profile of the
product or investment proposition, the underlying trends in earnings and cash
flows, and its income-producing potential," she said.

This allows the pricing of funds to be adjusted accordingly.

Zeti also called for an integrated crisis management framework as part of a
more comprehensive infrastructure, to ensure that any emerging crisis in the
Islamic financial system is promptly managed.

She said more facilitative and modernised legal framework was 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.

Citing the case of Malaysia, she said the comprehensive legal, regulatory
and supervisory framework for Islamic finance was further supported by a
financial safety net framework that encompasses the lender of last resort
facility and a deposit insurance system.
-- BERNAMA