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105 Enhancing Interlinkages and Opportunities: The Role of Islamic Finance Zeti Akhtar Aziz Zeti Akhtar Aziz has served as Governor of Bank Negara Malaysia since May 2000. She has been with the Central Bank since 1985 in a career spanning several senior positions in monetary and financial policies and reserve management. Dr. Zeti has written extensively in the areas of monetary and financial economics, Islamic finance, capital flows, macro-economic management, and financial reform and restructuring. Dr. Zeti is actively involved in the development of Islamic finance and in regional financial cooperation. Prior to her career at Bank Negara Malaysia, Dr. Zeti served from 1979 to 1984 in the SEACEN Centre, where she conducted research in the area of financial policies and reform in the Southeast Asian region. [This page intentionally left blank.] 107 zeti F ive years ago discussions regarding Islamic finance focused on the challenges of developing an efficient and robust Islamic financial system. Today the Islamic financial system has evolved significantly to become a dynamic and competitive form of financial intermediation in the global financial system. This transformation has been achieved in an increasingly challenging environment. This essay addresses the transformation and innovation that have taken place in these five years in both the national and international Islamic financial systems and concludes with an examination of necessary elements for sustaining the systems’ growth. Most significant have been the development of the Islamic financial markets, the growth in the range of financial products and services, the increasing significance of the international dimension of Islamic finance, the development of an international Islamic financial architecture, and the enhanced international interlinkages that have been brought about by these developments. Transformation of the Islamic Financial Landscape As recent as five years ago, the development of Islamic finance was regarded as an infant industry striving to prove its viability and competitiveness. At that time, the growth of Islamic finance was organic and largely concentrated in countries where the Muslim population was significant. In these five years Islamic finance has recorded dramatic growth and has a presence in more than 75 countries in both Muslim and non-Muslim dominated communities. A growing number of the international financial centers, including London, Singapore, and Hong Kong, are beginning to offer Islamic financial products and services. The number of Islamic banking institutions worldwide, including conventional banks that are offering Islamic banking services, has doubled to more than three hundred. Total Islamic financial assets under the management of these institutions are now estimated to exceed $1 trillion, about fivefold their magnitude five years ago. Islamic finance is now among the fastest growing financial segments in the international financial system, with an estimated average annual growth of between 15% and 20%. More recently there has been a growing diversity both in the range of products and services being offered and in the markets that have been developed. The sukuk market (i.e., the Islamic bond market denominated in international currencies) has registered remarkable growth, having doubled in size to amount to $28 billion compared to a year ago. Including sukuks denominated in domestic currencies, the size of the market is now about $82 billion. This market is expected to continue to expand significantly given the massive financing requirements for infrastructure nbr analysis 108 investment and other private-sector investment by countries that have shown interest in Islamic funding. There has also been significant innovation in Islamic financial products. This has been especially evident in sukuk products. Following the Malaysian government’s issuance of the world’s first global sovereign sukuk in 2002, other countries have issued several other sovereign sukuks. This development has also encouraged the issuance of international corporate sukuks by multinational and domestic corporations. One innovation is the landmark issuance in 2006 of the exchangeable sukuk by Khazanah Nasional, the Malaysian sovereign wealth management entity. In this arrangement the sukuk can be exchanged for other shares held by Khazanah Nasional. In the same year a convertible sukuk, in which the sukuk can be converted to the issuer’s own shares upon initial public offering, was issued by a Middle Eastern-based corporation. A derivative market has also developed with the introduction of Islamic currency swaps and profitrate swaps. There has been significant growth in Islamic asset and wealth management following the development of diverse and innovative structures of Islamic investment funds, including Islamic hedge funds. There are now more than 250 mutual funds, managing an estimated $300 billion in assets, that are compliant with sharia (Islamic law...


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