KUALA LUMPUR, 29 March 2007 — A new Silk Road is emerging between the Middle East and Asia, and Islamic finance is one conduit for strengthening financial linkages between the two regions, stressed Dr Zeti Akhtar Aziz, Governor of Bank Negara Malaysia (the central Bank) yesterday, in a special address at the Global Islamic Finance Forum held in Kuala Lumpur.
Zeti said that Bank Negara, together with the Securities Commission and Bursa Malaysia and industry players, have established the Commodity Murabaha House, which will act as a liquidity management scheme for Islamic bank overnight and short-term deposits, using crude palm oil as the underlying commodity traded for investment. Bank Negara has executed CMP (Commodity Murabaha Program) master agreements with eight Islamic banking institutions to promote the use of the instrument for liquidity management.
This new route, she said, not only carries flows of oil, manufactured goods, and technological innovation, but also flows of direct investment, portfolio capital, private equity and human capital. “The emergence of the New Silk Road,” she explained, “reflects the increasing and evolving economic and financial relationships and interlinkages, with Islamic finance well-positioned to further facilitate these linkages. Indeed, the New Silk Road opens up the prospect of exciting opportunities for economic progress and prosperity.” However, this new Silk Road could also be extended to the rest of the world to advance global economic stability and prosperity.
Underpinning this new Silk Road is the huge growth in trade relations between the Middle East and Asia. While world trade has, on average, expanded by 10 percent over the 2000-2005 period, trade between the Middle East and Asia has expanded by a staggering 24 percent for the same period. More than half of GCC exports go to Asia and more than one-fifth of GCC imports are from Asia. The GCC is also the main supplier of oil to Asia.
Since 2005, some $160 billion worth of projects in Asia are being financed from GCC investment. In 2006 alone some $16 billion of M&As and real estate purchases have been closed by GCC corporates in Asia, including IPO subscriptions in financial institutions, oil companies and telecom companies in China.
Foreign currency reserves in Asia since 2000 has topped $2 trillion and Middle East oil revenues have exceeded $1 trillion. As such, the management of surplus savings and reserves, Zeti said “will offer significant investment opportunities.”
Private wealth in the two regions is also increasing at a phenomenal rate — Asia has 2.4 million high net worth individuals who control an estimated $7.2 trillion of assets, while the GCC has 300,000 such individuals controlling some $1.3 trillion of liquidity. The size of this group is increasing at an annual rate of 7 percent in Asia and 9 percent in the Middle East.
Zeti said that the different demand patterns of both regions reinforce “the significance of complementarities.”
Middle East investors have a greater need for diversification both in terms of geographical allocation and asset classes “beyond the traditional investments in the US and Europe”. Asia, in turn, with the fastest growing economies in the world, offers highly diverse investment opportunities, ranging from Vietnam to Japan, across a broad scope of industries — from natural resource producers to established high-tech brands.
According to one estimate, Asia needs $1 trillion of infrastructure investment over the next five years, and is seeking partners and strategic investors to co-invest in these undertakings.
Islamic finance is now increasingly becoming an integral part of the global financial system, and has demonstrated its viability and competitiveness in a more liberalized and globalized financial environment and has become important in strengthening the linkages between the two regions. “While the sizeable Muslim populations in both regions have been attracted to the unique features of Islamic finance, it has also attracted interest and participation from non-Muslims within these regions,” she added.
In addition, the use of Islamic scheme promotes stability in the financial markets and financing flows, which is important for developing economic regions such as Asia and the Middle East.
Islamic finance is well positioned to be a vehicle on the new Silk Road, as the enabling supporting infrastructure is already in place.
Malaysia, Zeti said, is committed to and is extensively engaged in further fostering linkages through Islamic finance. It has introduced wide-ranging enabling legislation to enhance the Islamic finance sector including tax neutrality for Islamic products and conventional products and the liberalization of the Islamic capital markets.