Muhammad bin Ibrahim: Future of Islamic finance - delivering actions today for a sustainable tomorrow Keynote address by Mr Muhammad bin Ibrahim, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Global Islamic Finance Forum 5.0 "Future of Islamic Finance: Delivering actions today for a sustainable tomorrow", Sasana Kijang, Kuala Lumpur, 11 May 2016. *  *  *  It is my pleasure to be here today to speak at the Global Islamic Finance Forum 2016. The forum which was conceived in 2007 has now become a hallmark event for the Islamic finance industry – where the best minds and leaders of the industry come together to address the issues, opportunities and imperatives that are shaping the current and future path of Islamic finance. The fact that this event has attracted more than a thousand participants from all over the world is a testament to the growing global significance of Islamic finance. Today, Islamic finance is one of the fastest growing segments of the financial industry in many parts of the world. It registered double-digit growth rates in the past decade despite challenging circumstances globally. Its reach and influence has expanded beyond the traditional Islamic markets, with increasingly strong footholds in banking, takaful and the capital market. Global sukuk issuances, for instance, increased by 13% in the first quarter this year despite less favourable market conditions. This positive growth continues to be supported by the progressive development of market infrastructures, strengthened regulatory and supervisory frameworks and active industry participants.
The Bank and its staff will have to be good at risk assessment, due diligence, assets valuation, good at project financing and management, a good landlord, skillful in project monitoring and have the necessary expertise on specific areas such as construction, agriculture, manufacturing, fishing and other industries. Under this model, the banks created are very specialized with a set of expertise that they are not trained and possess. Its an entirely new “ball game”. Currently 71%, the bulk of financing in Islamic finance is fixed, only 29% is on a floating rate. In conventional, only 26% is fixed. This gives rise to the issue of mismatching. For as long as source of funds for Banks is floating and its asset gives fixed return, the risk of funding cost being more expensive than income is a very real possibility. Rate of Return Risk and DCR will become a challenge to overcome. Would an equity based approach significantly remove such risk? Most likely, it is an area of where the practitioners can develop and explore. Or whether the benefits of equity-based financing would outweigh the risks associated with the obviously higher risks posed by the structure. The shift from asset based financing to equity based financing does not mean that Islamic banks will operate without any risks. Whilst the risk of mismatching between floating and fixed will be greatly reduced, it does also mean that Islamic banks will be taking the unprecedented step of actually owning the assets for which they are financing.