Introducing – or rather re-introducing – financial considerations to the analysis of macroeconomic fluctuations would also be returning the study of the business cycle to its historical roots. This task is already well under way in academia and I suspect the field of macroeconomics will look very different in a decade or so. We are, though, still in the foothills. But to give a broad-brush flavour of how financial intermediaries might affect things, we can look to the graphical extension of the New Keynesian model offered by Woodford (2010). The left-hand panel of Chart 6 shows the demand for funds from ultimate borrowers, LB, together with the total supply of loanable funds from savers, LS. The former is a decreasing function of the cost of borrowing, RB, while the latter is an increasing function of the return on savings, R. For simplicity, I shall take this to be the return on deposits and the same as the central bank’s policy rate. The marginal source of funds to intermediaries, however, is likely to be in the wholesale markets and, if unsecured, these will need to offer a higher return to compensate for the associated default risk. 4  BIS central bankers’ speeches  In the standard model with costless financial intermediation, the loanable funds market clears at A and the borrowing and saving rates are equal.
In 2016, Shariah-compliant trade finance accounted for 24.1% of total trade finance provided by the Malaysian banking sector. However, our Islamic finance industry only financed about 5% of total exports in Malaysia, again, signifying an untapped growth area with large potential. Increasing bank financing for SMEs would also encourage more market based solutions to meet the funding needs of the halal sector participants, which are now largely reliant on government initiatives. There are however a number of challenges that may impede trade finance facilitation by Islamic finance players. I would like to highlight two. First is – “process inefficiencies” – that can contribute to higher operational risks such as fraud. This can be mitigated through use of technology that reduces reliance on traditionally document-intensive and multi-tiered manual processes. In Malaysia, I am happy to note that six Islamic banks have embarked on digitalisation of trade finance processes – through an integrated web-based platform that offers trade finance and working capital management solutions. The second challenge is, – the need to improve connectivity between the Islamic finance industry and the international trade community – to facilitate effective intermediation of trade finance needs. Again, the use of technology can ease the application and submission of trade-related information and documents which can expedite the whole process. If these challenges are not addressed, industry players are at risk of becoming irrelevant in the trade finance space.