KUALA LUMPUR, 24 June 2005 — Malaysian Prime Minister Abdullah Badawi’s announcement yesterday that Bank Negara, the Malaysian central bank, is to establish a special endowment fund of RM200 million to promote the development of Shariah compliance and governance in the global Islamic banking and finance sector, is a major step toward bridging the gap between the Middle East and Southeast Asia in this respect, and bodes well for the future development of the sector.
It is, however, also a wake-up call for the global Islamic finance sector to put aside their differences and apathy, and to build a road map of consensus for the future development and viability of the sector, which is estimated to have funds under management totaling between $300 billion and $500 billion, and supposedly growing at an annual rate of an estimated 20 percent.
Badawi was under no illusions of the task ahead for the Islamic finance sector which he stressed is at a critical stage of its development.
Speaking at the launch of a seminar discussing the road map for the “Ten-Year Master Plan for the Islamic Financial Services Industry” in Putrajaya, the sprawling new administrative capital of Malaysia, the Malaysian prime minister stressed that “we are here to chart the future direction of the Islamic financial services industry, as we seek to enhance economic collaboration and strengthen business linkages in the Muslim world. “We know that Islamic financial services may not be an easy matter to consider, given the diversity of opinion, but we understand that we must come together to agree on the way forward. We know that we are at a historic point, one that may not repeat itself in the future.”
The RM200 million endowment fund is aimed at bringing together Shariah scholars from various countries; to finance research and development in Islamic financial product development; to fund scholarships for studies in Fiqh Al-Muamalat (Islamic Law Relating to Financial Transactions); to establish training programs for existing Shariah scholars; and to create platforms for dialogue between scholars from various countries.
Shariah governance is unique to the Islamic system of financial management. Bankers consider it to be a vital extra tier of corporate governance for Islamic financial institutions.
However, its development on a global basis has been erratic, based more on the development of a particular country’s own local Islamic finance sector, especially at a private sector level.
Malaysia is by far the most developed in its Shariah governance infrastructure and architecture. Its approach is systemic, holistic and highly regulated.
In contrast, in the Gulf Cooperation Council states the approach is more ad hoc, with individual institutions allowed to appoint their own Shariah compliance officers and capabilities.
In Malaysia, all Shariah scholars advising financial institutions must be registered by the regulatory bodies such as the Securities Commission of Malaysia and Bank Negara.
There are also barriers to entry in the sense that potential Shariah scholars must have the requisite Islamic legal qualifications and general education, and the necessary skills sets to carry out their duties as Shariah scholars.
The securities commission has even delineated the register of Shariah scholars into those who advise the 61 or so Malaysian Islamic unit trusts industry and those who advise the well-established Islamic private debt securities market, which last year totaled just under RM50 billion.
Perhaps most importantly, Bank Negara has appointed a National Shariah Council which sets the Shariah rules for the national Islamic financial services sector. A similar National Shariah Board has been established for the Labuan Offshore Financial Center.
While both councils are dominated by Malaysian scholars, there are also a few scholars from the Arab countries such as Egypt and Sudan to inject a semblance of diversity.
The Malaysian regulators have now gone even further in an attempt to enhance the quality of Shariah governance in the Islamic financial services sector.
Malaysian Shariah advisors are now barred from sitting on the Shariah board of more than one Islamic financial institutions. In other words, unlike the rest of the Muslim countries, in Malaysia Shariah scholars can only advise one bank at a time in matters relating to Fiqh Al-Muamalat.