Interview: Jaseem Ahmed
In what ways has the development of Malaysia’s banking and IFS sector moved above and beyond that of its global peers?
JASEEM AHMED: Islamic finance has been progressively integrated into Malaysia’s long-term economic development strategy over the last 30 years. In 1983 the first Islamic banking law was established, authorising Bank Negara to issue licences for Islamic banks, but the government did not stop there. It recognised that Islamic banks needed government support in the same way as conventional banks do – via an array of financial markets and instruments to support them. The government thus recognised at the outset the need to issue sharia-compliant securities to provide liquidity management. These changes set the benchmark for support for corporations through the capital markets, and provided the financial instruments the banks needed for liquidity management. Instead of waiting for liquidity issues to arise, Malaysia foresaw the potential problem and prepared for it. Long-term planning and a willingness to make mid-course corrections is distinctive to the Malaysian experience.
How can the branding challenges facing Islamic finance be overcome to allow for greater penetration into the conventional market?
AHMED: Many people within the IFS industry would acknowledge that a different name for the industry – perhaps I-Finance, would broaden its appeal. Successfully branding Islamic finance as “ethical” could support market expansion in the western world, where people are looking at socially responsible and green investment opportunities. IFS has only just begun to adopt these concepts. While ethical conduct is built into Islamic finance, via sharia compliance, the sector has much to do in terms of developing a focus which evaluates the impact of investments in the same way the socially responsible investment (SRI) industry does. SRI is deeply committed to impact and wants to see certain things happen, whereas Islamic finance is predominantly focused on a negative list – of activities to be avoided. As the Islamic finance investment industry becomes more sophisticated, there will be greater convergence. At the same time, the industry has been very successful in convincing governments, including the UK, Luxembourg and South Africa, to start looking at Islamic finance as another viable method of public financing.
To what extent can developments in IFS provide benefits for individuals and small businesses?
AHMED: Focusing on financial inclusion is an emerging trend in Islamic finance. Financial inclusion in conventional finance, whether through SME or microfinance, has demonstrated much innovative thinking but now needs to be revisited, because the burden of debt imposed through the high interest rates in many such programmes is so high. Although it is still in the early stages of development, Islamic finance could have a major role to play in this area. We need to think of ways to promote small enterprises and entrepreneurship while using risk-sharing instruments, rather than credit-based instruments which carry a high interest cost. If we can develop these and make them generally applicable with a low transactions cost, then IFS will truly have come of age.
This is an area in which the conventional sector is very advanced in terns of delivery through the use of mobile technology, and it is a segment that IFS needs to work towards developing. It is relevant here to mention takaful (Islamic insurance), as there are many people around the world who are not insured, particularly in Muslim countries, and who are unwilling to be served by conventional insurance products. Multinational development banks could usefully start considering takaful for poverty reduction projects. Meanwhile, the British authorities are looking into the possibility of offering takaful for student loans.
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