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 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 center 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.
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.
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 are Shahada, the profession of faith; Salat, or daily prayer; Zakat, which is the giving of alms; Sawm, or fasting; and Haj, the pilgrimage.
The Islamic finance industry 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. 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.
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.
(This is an abridged version of a presentation given at the world capital markets symposium held in Kuala Lumpur on Aug. 11, 2009. The author is the crown prince of Perak Dar-Ul-Rizduan and the ambassador-at-large of the Malaysia Islamic Finance Center.)