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Sunday, 23 November 2008

Keep Foundation Of Islamic Finance Intact, Says Zeti

KUALA LUMPUR, Nov 20 (Bernama) -- The foundation upon which Islamic finance has been built must constantly remain intact as it is the only key to sustain the resilience of the system in the more challenging international financial environment, Bank Negara Malaysia's governor Tan Sri Dr Zeti Akhtar Aziz said Thursday.

"In a highly globalised financial market, innovation has been a key differentiating factor to remain competitive. The current turmoil has, however, highlighted that highly complex, unbridled innovation can become highly destabilising resulting in major disruptions in a financial system," she said.

It is therefore important for financial innovation to have clear Syariah objectives and adhere to the requisite principles of Syariah, Zeti said.

"In this manner, Syariah-based innovation would contribute towards Islamic financial products that have distinct value propositions with in-built strengths arising from the essential features of Syariah," she said.

Zeti said this in a keynote address at the Islamic Financial Service Board and Institute of International Finance Conference entitled "Enhancing the Resilience and Stability of the Islamic Financial System".

Such measures would ensure Islamic finance contributing to the overall stability of the global financial system, she added.

The second strategy is to raise the bar in the status of the Islamic financial infrastructure that supports the risk management and governance of Islamic financial institutions.

To ensure sustainability of the resilience of Islamic finance, it is important to have the comprehensive enabling infrastructure that allows for the management of the risks that are peculiar to Islamic finance, Zeti said.

"There is a need for Islamic financial system to have the capital requirements, effective risk management and strong governance that are fully equipped to manage the risks that are specific to Islamic financial transactions," she said.

It is also important for the institutions to spread the risks by having prudent asset allocation based on different Islamic contracts so as to ensure a sustainable revenue stream and to ensure the institutions are in a position to absorb the extreme circumstances that occur during a crisis, Zeti said.

She also said that the Syariah values in the realisation of benefit (Masalih) to the relevant stakeholders must also be assimilated.

"Islamic finance industry may, by according attention to the preservation of good relationship with the customers and relevant stakeholders, avoid extreme solutions when severe deterioration has taken place," she added.

Consistent with this is the principle in Islamic finance to promote justice, fairness and shared responsibility.

The focus of Islamic finance thus transcends beyond just the pursuit of growth and monetary performance by emphasising ethical market conduct practices, according to Zeti.

"Central to this is the adoption of a comprehensive consumer protection framework," she said.

Hence, in shaping the robust growth of Islamic finance, the strategic direction of the industry moving forward needs to be accompanied by the efficient implementation of the legal, regulatory and supervisory regime, including having in place a crisis prevention and management framework, she added.

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