Islamic finance promotes moderation

Differences of opinion with regards to the determination and application of Syariah rulings in Islamic commercial and financial transactions have been mutually recognised and accepted in product development.

THE Islamic finance industry in Malaysia has been thriving una­batedly over the past 30 years.

Today, Malaysia has successfully developed a conducive and comprehensive environment for Islamic finance, with continuous product innovation, a large presence of both local and foreign financial institutions, a wide variety of innovative syariah-compliant instruments, an advanced financial infrastructure and a robust legal and regulatory framework that adopts global standards and international best practices.

In addition, Malaysia has emphasised human capital development strongly in order to ensure sustainability of talent supply to support further expansion of the Islamic finance industry. Invariably, these developments have steered Malaysia’s position as a global leader in Islamic finance.

Malaysia’s success story in developing and advancing its Islamic financial system is perhaps a manifestation of how the spirit of moderation enshrined in the teaching of Islam has been utilised effectively in order to achieve this great accomplishment.

The spirit of moderation has been reflected in the various phases of development of Islamic finance in this country and has been expressed through values and qualities such as harmonisation, unity, mutual cooperation and collaboration of all the stakeholders comprising the Government, Islamic scholars, the regulatory authorities, financial practitioners, as well as the public at large or the consumers.

Through these qualities and values, differences of opinion with regards to the determination and application of syariah rulings in Islamic commercial and financial transactions have been mutually recognised and accepted in product development.

This has accorded greater flexibility to the industry players in their efforts to develop and introduce a wide variety of syariah-compliant instruments, given the increasing complexity of the financial landscape. Furthermore, the stakeholders also recognised the need for Islamic finance infrastructure to evolve into a modern and advanced system that is on par with the conventional system, in order to attract wider acceptance from a pluralistic consumer community. Evidence of this can be witnessed in greater product innovation as well as in the modernisation and technological advancement applied in the Islamic financial system.

Malaysia’s journey in Islamic finance began 33 years ago, with the enactment of the Islamic Banking Act 1983 that paved the way for the establishment of the country’s first single Islamic bank. Since then, the country has moved forward and more Islamic financial institutions have been established.

Further liberalisation in the industry has created a more conducive and facilitative business environment, thus attracting many international financial institutions to spread their Islamic finance businesses in Malaysia.

This has expanded the number of players from both local and international financial institutions in the country, and provided consumers with flexibility of choice.

As reported in the recently released Bank Negara Malaysia’s Financial Stability and Payment System Report 2015, the total number of Islamic banks operating in Malaysia now stands at 27, including 11 banks currently operating as Islamic windows. These comprise several foreign-owned entities and conventional institutions who have established Islamic subsidiaries and also entities who are conducting foreign currency business.

It was also reported that Malaysia continues to strengthen its reputation as an international Islamic finance marketplace. Total foreign currency assets of Islamic banks grew by 10.1% in 2015 to RM30.5bil, reflecting increased cross-border transactions in Islamic finance.

On average, Malaysia’s Islamic banking assets have been experien­cing an average growth rate of 18-20% annually. Similar commendable development can also be seen in Malaysia’s Islamic capital market, which also grew by 6.7% to RM1.70 trillion in 2015, compared to RM1.59 trillion in 2014.

The underlying significance of the spirit of moderation in Islamic teachings are that it calls for the practice of Islam in a balanced and comprehensive manner in all aspects of life and to provide greater focus on improving the quality of human life associated with developing knowledge, human development, science, the economic and financial system, the political system, nationhood, defence, unity, equality among races, the environment and other aspects.

On the other hand, there also exists an extremist attitude that lambasts trivial issues, and does not address differences of opinion in an appropriate manner.

In this regard, it is interesting to observe how the Malaysian Islamic financial system has evolved over the past three decades and has been widely accepted by the pluralistic community, not only in Malaysia but also globally.

Perhaps, one of the recipes of success that has propel­l­­ed Malaysia’s position as the global leader in Islamic finance lies in its spirit of moderation, which has enabled the industry, with greater flexibility, to develop within the complexity of the contemporary financial system.

Mohamad Azhar Hashim is Fellow at Ikim’s Centre for Economics and Social Studies. The views expressed here are entirely the writer’s own.