Saturday August 8, 2009

Linking markets with Islamic finance

SBW: What is the underlying push behind Islamic finance?

Zeti: The ability to actually establish linkages in emerging markets. In the global financial system, you have to be highly developed in international financial markets to participate in and link up with countries.

In our case, because we are just developing or are in the early stage of development, Islamic finance became internationalised. We can establish linkages with other emerging economies such as Bahrain as well as international financial systems such as Hong Kong, Dubai, London or Paris.

Is Islamic finance acceptable to those who want compliance as well as those who require products?

Essentially, it is because Islamic finance meets their requirements and is competitively priced. In the more recent environment, it has also become more attractive because it reflects basic banking practices.

There is an underlying economic transaction. Islamic finance can only grow in proportion to the growth of economic activity.

You cannot have a situation where the financial sector keeps growing and there is nothing underneath. The risk management and governance aspects also make it attractive.

It is based on profit sharing, governance practices and ethical values. That doesn’t mean Islamic finance is going to be immune to external developments because if the economy slows down and asset prices fall, it is these secondary effects that will have an impact.

Have you received a lot of enquiries from world-class Islamic banks?

The licences that we are offering now are for banks with US$1bil capital. It will be an international bank that does not rely on retail business but conducts international business.

The interest is diverse over different regions.

Insurance and takaful

Do you consider the insurance and takaful industry as an integral part of the banking system?

It is part of an inclusive and resilient banking system. The central bank is the lender of last resort and should know the conditions of the financial institutions. All transactions go through the banking sector, which is the nerve centre of the economy.

For an emerging economy, the central bank has an important role in developing the financial system from micro-finance to the bond market. This is unlike central banks in developed economies, which just focus on financial and monetary stability.

The central bank also participates in reserve management in open-market operations. We have insights from different parts of the Bank that have contributed to the development of the industry.

The insurance industry has a long way to go and develop products for retirement, pension schemes, annuities and medical coverage.

We need to increase the professionalism and capitalisation of the insurance industry. There should be more mergers especially in the domestic sector, which is still fragmented, and the setting up of enabling infrastructure.

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