The role of Islamic finance in contributing to global financial market stability and preventing the excesses that has led to the near catastrophic collapse of the conventional banking system may not have got a hearing at the G20 summit earlier this year. But at the World Capital Markets Symposium held in Kuala Lumpur last week and hosted by the Securities Commission of Malaysia, the message was loud and clear, “Let us put faith back in finance” and “Islamic finance has a key role to play in global finance”.
At the forefront of the current debate on regulation, stressed Zarinah Anwar, chairman of the Securities Commission of Malaysia, “is the attention focused on the need to strike a balance between financial stability and investor protection on the one hand, and financial innovation and liberalization on the other. Addressing them requires us to consider a broad range of themes, from the roles of regulatory versus market discipline, to the role of alternative approaches, such as Islamic finance, in complementing the prevailing financial orthodoxies.”
The issue, she added, “lies not so much with innovation but with the loss of the finance industry’s moral compass. There is therefore a need to bring back faith into finance. Islamic finance, through its set of principles for good governance and responsibility, can help curtail excesses and promote higher levels of honesty, fairness and integrity. It is heartening to see so much worldwide interests in this area.”
Perhaps the clarion call for a greater role for Islamic finance in the global financial system came from Raja Nazrin Shah, crown prince of the Malaysian state of Perak and the ambassador-at-large of the Malaysia Islamic Financial Centre (MIFC). Raja Nazrin urged global finance to consider alternatives to current conventional financial practices and to open its doors to Islamic finance. “Islamic finance, which has not been impacted by the ongoing crisis,” he maintained, “offers one. Islamic finance has borrowed from conventional finance in terms of products and the time has come where the flow of information and knowledge can and should flow the other way”.
Islamic finance, he added, “can help create an infrastructure of honesty, fairness and integrity — qualities that have taken a severe beating in the current crisis. At its heart, Islamic finance is an inspiration toward good finance (and) good finance is about trust, and trust is a cornerstone of stability... Islamic finance can help break the vicious cycle of boom and bust that has come to characterize global finance. Trust must be restored. The centuries-old motto, ‘my word is my bond’, must ring true again. In today’s interdependent world, finance is not delineated by the boundaries of a city or even a country. The challenge and the goal of the Islamic finance industry, if it is to play an important role, should be to integrate into the global financial system.”
It is a pity that Paul Krugman, professor at Princeton University and Nobel Laureate in economics, and Professor Laura Tyson of Haas Business School and an economic adviser to US President Barack Obama, who both delivered keynote speeches in the inaugural session on the first day of the symposium were not present to heed Raja Nazrin nor Zarinah Anwar’s advice.
It is as if the world begins and stops at Washington DC, given their US-centric analysis of the global crisis and the possible solutions going forward. Yet Professor Krugman admitted that he did not know what the particular solution is to the current financial crisis and the regulatory measures that need to be taken to restore faith in the global system.
Professor Krugman indeed listed five lessons to be learnt from the current crisis — economic bubbles do happen; the financial system is not safe; monetary policy has its limits; in a crisis, deficits can be your friend; and, Keynesian policies do work. Some would add an over-reliance on self-regulation and the wanton abandonment of regulatory and supervisory oversight.
But to Raja Nazrin, the important thing is to rebuild trust in finance, and in an interdependent and globalized world, countries cannot work in isolation to rebuild the financial system.
The challenge, he added, was “to break the vicious cycle of mistrust and greed and give the world an alternative that they can put their trust in.
Trust begets trust. We must ensure that the investments we make and allow are sustainable, that they will 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.”
