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Saturday November 19, 2011

Untapped potential in Islamic finance

By LIZ LEE
lizlee@thestar.com.my


WHETHER it is the Occupy Wall Street movement in America or the threat of a meltdown in the European economy, the ongoing economic turbulence may have ignited in many the desire for a more decorous financial system.

Among the melange of solutions provided by conventional financial institutions, perhaps Islamic finance may just be a viable option for ways to deal with money.

During the IFN 2011 Issuers & Investors Asia Forum in October, the finance minister of Luxembourg Luc Frieden made an observation that Europe could learn and gain from Islamic finance as financial institutions under it have remained stable in the furore of the eurozone debt crisis.

Frieden says despite the credit crunch that has impacted Europe's banks, Islamic financial institutions have been the most well managed.

Sharing ideas: Ernst & Young country managing partner Abdul Rauf Rashid (third from right), HSBC Amanah Malaysia chief executive and executive director Rafe Haneef (second from right) and Bank Negara Islamic scholar and Shariah Advisory Committee member Dr Aznan Hasan (right) at the roundtable.

He notes that what the financial world needs today are stability, financial partnership, provision of excessive risk and speculation and ethical principles, all of which are found in Islamic finance.

However, despite growing global foothold, Islamic finance is still alien to many whom, due to the word Islamic, view the financial system as a religious expression rather than an alternative way to manage funds.

This was a misconception the leaders in the local Islamic finance industry sought to correct when they met last week during the International Investor Islamic Finance Roundtable organised by International Investor, a niche publication targeted at the business and investing community.

Perception challenge

International Centre for Education in Islamic Finance (Inceif) president and chief executive Daud Vicary Abdullah says that there is a real challenge in both education and perception towards Islamic finance.

“People are not looking at it as other than a religious decision (and the question) do I have to be a Muslim to participate? still surfaces even though less frequently now compared with 10 years ago,” Daud says.

“There is still confusion among the non-Islamic world or in countries with non-Muslims majority (that creates) a deep-seated suspicion of what Islamic finance is and education can help change this,” he acknowledges.

Daud believes that in terms of changing mindsets, Malaysia can do a great deal by pioneering some form in the standardisation of terms.

Daud: ‘People are not looking at it as other than a religious decision.’

“There is a lot we can do by gaining consistency in language, terminology and interpretation. I think this is essential. What do we really mean by the product, cross-border liquidity, syariah interpretation and the processes as well as handling risk the syariah-compliant way,” he elaborates.

He says that there was a vacuum of explanation for the facets of Islamic finance globally and that Malaysia can be the platform to standardise terms in this financial system.

He notes that to change people's mindset, effort must go back to primary school education and when introducing basic financial literacy.

“It is about going back through history to the things the Ottoman used in the middle ages. Perhaps what our doctorate students can do is suggest the redesigning of some of the financial literacy programmes that run on e-books or tablets so that primary school children can get the fundamental concepts of Islamic finance and know the alternatives (for financing) that are out there,” he says, adding that the change of this mass would probably need generations to instil.

“There is a lot of work to be done not just in this environment but also globally to change mindsets,” he says, adding that people are starting to look at Islamic finance from the perspectives of risk-sharing but that is no more than skimming the surface.

“It's not just about risk-sharing, it's about Islamic monetary policies using different tools,” he says.

Bank Negara Islamic scholar and Shariah Advisory Committee member Dr Aznan Hasan notes that it is time practitioners and regulators promote Islamic finance as a mainstream financial system.

“If we can see it as mainstream, we can change the mindset. We will start to think of what business model it works on and find the best way for it not just to co-exist with conventional finance but be a better alternative in some ways,” he says of the opportunities to harvest in Islamic finance.

While there was an overall congruence that Islamic finance should be depicted as a mainstream financial system rather than a niche option, the leaders recognise that that was a change could not be achieved overnight.

Risk-sharing model

HSBC Amanah Malaysia chief executive and executive director Rafe Haneef says the matter at hand is not just a mindset issue but is also incentive-driven.

“We have moved to limited-liability approach since a long a time ago where (for) the investing community, they do not want to share risk knowing that they get lesser return,” he says.

In order to move towards the more stable risk-sharing financial concept, he says everyone will have to “relook the corporate entity concept and business model that facilitates maximising shareholders' return”.

“The existing conventional model gives less return when times are good but massive risk when times are bad which makes capitalists grow richer (but) the risk-sharing approach gives a greater distribution of wealth so you get greater reward through sharing when times are good as you get a greater share of the economics but when the times are bad, you share in the downturn as well.

“Investors are not prepared to share risk as they want to have their fixed income. They need to be, through tax, allowed to take more risk,” he says, citing the need to change the incentive in order to encourage risk-sharing.

He adds that risk-sharing is a better model for whole societies over the long term even though the initial stages of introducing it on a broad spectrum would incur a lot of social costs.

He adds: “The world is quite uniform in their taxing system so if you are the only country changing your system, you may find that you become less competitive in the short to medium term.”

There is much about Islamic finance in Malaysia that could still be moulded to be a leading hub.

“What we have not discussed thoroughly is the model we are working on. MIFC ( Malaysia International Islamic Financial Centre) is very good to allow international players to come in and these are usually bankers and asset managers. However, the liberalisation for other segments under IF are not well thought out,” he says.

Aznan refers to areas under the banking system like the legal fraternity and accountancy which have not been moderated to follow any Islamic models. “Are we going to adopt the UK model, or the Singapore model or have our own model (for all these areas) because Islamic finance is not only about bringing money in or out.”

To further grow Malaysia as an Islamic finance hub, local institutions have to venture out as well.

While we have had many foreign players come in to set up a base in Malaysia, the question Maybank Islamic chief executive Muzaffar Hisham asked is: “When we get people to come in, can we also go there?”

Whether the introduction of foreign players have made notable impact on the growth of Islamic finance locally, Daud believes that the only way to move forward is through reaching out.

“(The international players) have not made as much difference as everybody wanted or they haven't done it quickly enough and we can complain about it,” he said, “but this is also about us going out there (through) reciprocal arrangements on a regulatory level.”

He says that from a business standpoint, there is more that the local Islamic finance industry can do in terms of taking the expertise and products here abroad.

“We have grown from 6% to 23% (but) growing any further is outcome-based and part of that outcome is what we have to define (such as) the business model, legal system, regulatory structures and so on,” he says, adding that Malaysians should not be afraid of defining new global measures and standards for Islamic finance.

He remarks that Malaysia has the “perfect right to do that because it has been doing it. It has been on the front curb and continuous improvement is going on”.

The roundtable also gathered the participation of Ernst & Young contry managing partner Abdul Rauf Rashid, CIMB-Principal Islamic Asset Management chief executive Datuk Noripah Kamso, legal firm Shook Lin & Bok partner Jalalullail Othman, Securities Commission Islamic Capital Markets executive director Zainal Izlan Zainal Abidin and International Investor country publisher Cory D'Abreo.

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