Innovation is the key to the future success of the Islamic finance industry and to meet the challenges of contributing to economic growth and to facilitate internationalization of the industry. According to Nor Mohamed Yakcop, minister in the prime minister's department in Malaysia, "the Islamic financial system has to continually innovate and adapt in order to be competitive. At the same time, innovation is also the driving force behind developing greater diversity of products and services. Therefore there is a need to focus on product innovation and development efforts that will provide a comprehensive array of Shariah-based products for the industry."
Yakcop was speaking at the KLIFF Islamic Finance Awards dinner which was held recently in Kuala Lumpur. While he may have been speaking in a Malaysian context, his words apply to the Islamic banking industry in general.
Yakcop is no ordinary observer of the Islamic finance industry. He together with others is the architect of the Malaysian Islamic financial system when he was adviser to Jafaar Hussein, the then governor of Bank Negara Malaysia, the central bank, and effectively helped the governor to implement his dream of developing a dual banking system in the country - an Islamic banking system operating side-by-side a conventional one, cooperating but not interacting.
He was also the pioneer of Malaysia's bilateral payments arrangement of settling accounts between central banks rather than using expensive correspondent banking services in London, New York and Frankfurt; a prime mover behind the concept of an Islamic dinar to settle trading accounts between Muslim countries.
However, Yakcop warned that while in Islamic finance, innovation has been significantly pervasive, the industry needs to further accelerate the innovation momentum to ensure that it achieves its objectives and aspirations. The challenge to innovate and adapt at the same time must be based on the core principles and values as well as the ethics of Islam.
"For innovation to become an important driver of growth, a critical area that needs attention is addressing the shortage of skilled and experienced professionals in the industry. WE need to build a pipeline of talents who have the ability and creativity to develop new ideas and the capacity to run ideas into achievable results," added Yakcop.
The greater awareness of the inbuilt strength of Islamic finance has contributed toward the increased international participation in Islamic financial markets. Indeed Malaysia has benefited from the internationalization of Islamic finance.
The minister highlighted Malaysia's leadership in the Islamic financial industry. For instance, in the issuance of sukuk, out of the Top 10 biggest sukuk issued globally in 2010, five originated from Malaysia. For this year todate, global sukuk issuances totaled $54.5 billion and Malaysia accounted for about 67 percent of the issuances.
The country had also attracted continued presence and interest of foreign issuers and investors, which has seen several successful issuances of foreign currency and ringgit [Malaysian currency) denominated sukuk by issuers including the Islamic Development Bank ($500 million), Gulf Investment Corporation (RM600 million), Nomura and National Bank of Abu Dhabi (RM500 million).
Yakcop also stressed that to facilitate greater internationalization of the Islamic capital market, the capacity to structure multi-currency and cross border transactions and to build greater scale needs to be further strengthened. This would allow intermediaries to make greater inroads into the international market. "The transition into the mainstream of the global financial system will provide opportunities for market intermediaries to seek new frontiers and expand new markets, as well as contribute toward further widening the diversity of products and services."
In Malaysia specifically, the country's march toward developed nation status by 2020 has required a shift toward new and competitive growth sectors characterized by higher value added and knowledge intensive activities. As identified by Prime Minister Mohd Najib Abdul Razak's Economic Transformation Program, these policy shifts also provide good opportunities for Islamic finance to also develop products which meet the needs of these growth areas.
Indeed in last week's budget 2012, Najib, who is also Malaysia's finance minister, outlined several opportunities for the Islamic finance industry including further incentives for certain types of sukuk origination, support for SMEs, for venture capital and the housing industry.
Source: Arab News, Saudi Arabia, October 16, 2011. Changes were made in keeping with the editorial policy of www.memrieconomicblog.org .