Zeti Akhtar Aziz: The global Islamic financial market today – challenges and way forward Luncheon address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the annual “The Asset Triple A Awards for Islamic Finance”, Kuala Lumpur, 6 July 2010. *  *  *  It is my great pleasure to be here this afternoon on this occasion of the Annual “The Asset Triple A Awards for Islamic Finance” by the Asset Publishing and Research, to deliver some remarks on the key challenges and way forward for Islamic finance in the international financial system. Islamic finance has experienced its most rapid pace of development in this decade demonstrating its competitiveness and resilience as a form of financial intermediation. While the Islamic assets are now more than $ trillion, it is estimated that the global Islamic finance industry will reach the $ trillion mark in the next three to five years. The sukuk market has become the most significant and vibrant segment in the international Islamic financial system. Issuers are seeing the sukuk instrument as an attractive alternative means for raising capital, whilst investors are increasingly seeing it as a new asset class in their investment universe. This has generated significant cross-border flows as funds are raised from beyond domestic financial markets and as investors diversify their portfolios into assets from other jurisdictions. The sukuk market currently stands at almost $ billion, with a growth rate of about 40 percent annually.
I do think the reforms already made to the capital adequacy and liquidity frameworks have improved markedly the robustness of the system. A leverage ratio, if and when it is introduced in the UK alongside the risk-weighted approach, would in my view make the capital adequacy regime for the banking sector appreciably stronger by guarding against model risk. And, as regards the non-bank financial sector, what some would classify as “shadow banking” – I also think we are starting to see some positive momentum towards the development of diversified credit channels in the UK and the EU – though there is a great way still to go. At the same time, the financial regulatory community is keeping a pretty close watch as to whether risks are migrating from the bank to non-bank sector and building up elsewhere. The FPC recently made its first analysis and assessment of risks in the UK outside the regulated banking system. That assessment was made difficult by generally incomplete data in this area, which we are starting to correct. But it concluded that, based on its current risk assessment and policy initiatives underway internationally – including through the FSB work on shadow banking that is coming to completion this year – it did not currently see a case for recommending changes to the UK regulatory framework. I am afraid, for financial stability, that is as good as it gets. The financial sector evolves at a phenomenal speed. Risks can change and build very quickly.