5 ways to widen Islamic finance's acceptability

ISLAMIC finance is now in the third stage of its development that requires the broadening of its acceptability and growing the market, Raja Muda of Perak Raja Dr Nazrin Shah said.

The first stage was to establish Islamic finance as a viable business, followed by a test of its stability, which was proven during the global financial crisis.

"For all its successes, Islamic finance still accounts for less than 1 per cent of global financial instruments, while Muslims make up over 20 per cent of the world's population.

"Even in Muslim-majority countries, the assets of conventional banks far outstrip those of Islamic ones," Raja Nazrin said in his keynote address at the forum on "Contribution of Islamic Finance Post Global Financial Crisis" in Kuala Lumpur yesterday.



The forum was organised by the Securities Commission and the Oxford Centre for Islamic Studies.

Raja Nazrin outlined five strategic approaches to widen the acceptability of Islamic finance, namely developing a well-defined strategy; being transparent to ensure predictability and confidence; engaging stakeholders like consumers and financial institutions; higher innovation; and institutionalisation of Islamic finance by formalising the processes and practices.

Raja Nazrin said Islamic finance, although not a substitute to conventional finance, can influence and ultimately, improve global finance.

There is already a great deal of consumer protection in place before regulatory overview takes place.

"Rather than treat societal welfare as an after-thought, it is in-built into the instruments right from the start. The requirement for funds to be invested only in worthy businesses, to be based on risk-sharing and on real assets, and the prohibitions against interest and speculation, ensures that no financial product that can cause harm leaves the office," he said.

Meanwhile, International Monetary Fund former executive director Abbas Mirakhor said Malaysia's model in Islamic finance is the best in charting the future of the industry.

"The paradigm in Malaysia is unique," he said, adding that without Malaysia's initiative, the industry will not have achieved its progress today.

"There is a huge commitment by the government in putting infrastructure in place and human capital pipeline," he said at a discussion panel on "Lessons from the global crisis impacting Islamic finance".

Abbas said Malaysia should "complete" its Islamic finance paradigm by developing the Islamic equity market as the country has what it takes to implement "the tail end of the Islamic finance".

Professor Dr Habib Ahmed from Durham University in the UK, said the global financial crisis shows that the market cannot be left to regulate itself.

He believes that regulators should oversee the system as a whole in order to minimise systemic risks. Until now, he said the focus has been on regulating individual institutions.