Tharman Shanmugaratnam: Opportunities facing Islamic finance and challenges in managing capital flows in Asia Outline of special address by Mr Tharman Shanmugaratnam, Chairman of the Monetary Authority of Singapore, at the 8th World Islamic Economic Forum, Johor Bahru, Malaysia, 4 December 2012. *  *  *  The Prime Minister of Malaysia, His Excellency Dato’ Sri Najib Tun Razak The President of Comoros, His Excellency Ikililou Dhoinine The President of the Islamic Development Bank, His Excellency Ahmad Mohamed Ali Chairman of the World Islamic Economic Forum Foundation Tun Musa Hitam Ministers and distinguished guests Ladies and gentlemen Introduction It is my pleasure to be here today and have the opportunity to share some thoughts. Let me first congratulate the WIEF on the progress it has made in establishing itself as a leading international forum for economic leaders and opinion shapers from a broad range of countries to discuss issues of interest in Islamic Finance and related themes in global finance. The theme of the Forum, “Changing Trends, New Opportunities” is particularly relevant. Allow me to first offer a brief perspective on opportunities facing Islamic finance. I will then go on to talk about the challenges we face in Asia in managing capital flows in the aftermath of the Global Financial Crisis. Islamic finance: opportunities for growth The Islamic finance industry is estimated to have grown by some 19% per year since 2006 – to record nearly $ trillion of total shariah compliant assets in 2012.
I will mention three sets of policy responses that will inevitably have to figure in our toolkits. First, there is much sense in curtailing volatility in the exchange rate over the short-term. The costs of volatile and uncertain exchange rates are high in small open economies especially – which is what most of our ASEAN economies are. Accordingly, Malaysia, Singapore and several other Asian countries have not felt comfortable leaving their exchange rates entirely to market forces. Their central banks, within each of their monetary policy frameworks, have sought to instil a focus on longer term fundamentals. There is merit in allowing exchange rates in Asia’s emerging economies to appreciate gradually over the long term, reflecting their more rapid growth. If we resist these long term trends, we are likely to see more inflation in our economies. But some stability in the short term is wise. Second, macro-prudential policies are now an important part of the policy tool kit. Many Asian countries have introduced new macro-prudential measures to try and avoid bubbles in  BIS central bankers’ speeches  3  their property markets over the last two years. Malaysia brought in stricter limits on loan-to-value ratios on housing loans. Singapore and Hong Kong have done similarly, and have introduced additional stamp duties or transaction taxes to discourage speculative demand for residential properties. These targeted administrative and prudential measures are not conventional macro-economic tools.