Zeti Akhtar Aziz: Regulatory and governance for Islamic finance Speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the Brunei Darussalam Islamic Investment Summit 2013 “Regulatory and governance for Islamic finance”, Bandar Seri Begawan, Brunei, 19 June 2013. *  *  *  It is my great pleasure to be here in Brunei Darussalam to speak at this Islamic Investment Summit 2013. My remarks today will discuss the current landscape of Islamic finance in Asia in the context of the growing role of Asia in the global economy, and the important priorities for Islamic finance to strengthen its prospects for future growth and stability. Asia and the global economy The global economic landscape is now significantly evolving as it progresses towards a new more multi-polar world. This is being shaped by the increasing contribution of emerging economies to global economic growth, with some of the most vibrant and dynamic emerging economies being in the Asian region. In 2012, the Asian region contributed 56% to global growth. This advancement takes place at a time when the world economy continues to be significantly challenged by the lingering effects of the 2008 global financial crisis, with a sustainable economic recovery yet to be secured. Asia’s growth trajectory has been underpinned by several favorable fundamentals, which will continue to support its prospects for growth going forward. Asia is a highly diverse region in terms of its economic and demographic structure, market size, stage of development, and political systems.
This is particularly relevant for the Islamic financial services industry given the close link of Islamic finance with the real economic sector through the various modes of Islamic financing contracts. In particular, heightened surveillance is needed over developments in the real estate and commodity markets. Equally important is a greater understanding of the inter-relationships between the financial and the real sector, including the potential for second round effects that are transmitted across sectors of the financial system and the economy. The increased cross-border reach of Islamic finance has also underscored the importance of enhanced cross-border collaboration among the supervisory authorities. Information-sharing and effective coordination among supervisors will enable a complete understanding of the entire risk spectrum of the risk taking activities undertaken across jurisdictions by the Islamic financial institutions. This is especially important in crisis situations, given the serious ramifications of a delayed or ineffective response to cross-border contagion. Robust institutional arrangements are therefore vital to improve the efficiency of the supervisory processes and to allow for the early detection and management of cross-border transmission of risks arising from group-wide activities. Another key area is the evolution of the legal framework for Islamic finance. This is to provide greater certainty and to build public confidence in the system as a whole. This necessitates a legal framework that enforces end-to-end Shariah compliance in the Islamic financial services industry – through provisions and mechanisms that unambiguously define the conduct and governance of Islamic financial institutions.