16th Kuala Lumpur Islamic Finance Forum 2021 – Strengthening Islamic Finance Towards Shared Prosperity

SPECIAL ADDRESS BY

YB SENATOR TENGKU DATUK SRI UTAMA ZAFRUL

TENGKU ABDUL AZIZ
Minister of Finance Malaysia

16TH KUALA LUMPUR ISLAMIC FINANCE FORUM 2021

Strengthening Islamic Finance Towards Shared Prosperity

Tuesday, 9 March 2021
3:00pm – 3:15pm

[SALUTATIONS]

His Royal Highness Sultan Nazrin Muizzuddin Shah Ibni Almarhum Sultan Azlan Muhibbuddin Shah Al-Maghfurlah, Sultan of Perak Darul Ridzuan and the Royal Patron for Malaysia's Islamic Finance Initiative

YBhg. Tan Sri Abdul Wahid Omar,
Chairman, Bursa Malaysia,

YBhg. Datuk Dr. Mohd Daud Bakar,
Chairman, Organising Committee KLIFF2021

Ladies and gentlemen and esteemed guests,

INTRODUCTION

1. I am grateful to Allah s.w.t for this great opportunity to address you at the 16th instalment of the Kuala Lumpur Islamic Finance Forum or KLIFF (KLIFF 2021). I would like to thank the organisers, namely Centre for Research and Training (CERT) in association with Amanie Advisors, Association of Islamic Banking Institutions Malaysia (AIBIM), Association of Shariah Advisors in Islamic Finance (ASAS), and Messrs Hisham, Sobri & Kadir (HSK) for their effort in organising this forum, which, being the 16th in the series, has definitely become a prestigious event in the global Islamic finance space.

2. The widespread multi-sectoral crisis from the COVID-19 pandemic has been the main topic of discussion all over the world. Countries have faced systemic shocks to their public health care, disruption to their economy, decline in external demand, reversal in capital flows, as well as volatilities in prices of commodities. The actual economic fallout is hard to predict, given that factors surrounding the pandemic impact economies in ways that are without any historical precedent to guide anyone.

3. As such, despite over 14 trillion US dollars collectively allocated by governments all over the world to reduce the impact, the IMF has concluded a 3.5 percent contraction for the global economy in 2020, from the impact of an estimated loss of 22 trillion US dollars from 2020 to 2025. Of more concern, is the approximately 90 million people who are expected to enter extreme poverty by the end of this year, with over 495 million jobs lost due to the pandemic. This has wiped out growth trends seen over the past two decades, increasing the risk of uneven recovery and bringing about higher inequality and socio-economic issues throughout the world.

THE STRONG UNIVERSAL VALUES OF ISLAMIC FINANCE

Ladies and gentlemen, esteemed guests,

4. As much as globalisation has connected businesses and people together in a vast network, it has also brought its fair share of challenges that will require our joint commitment and effort to address. Even prior to COVID-19, we had witnessed intense competition for economic dominance amongst the biggest nations, resulting in geopolitical and trade tensions.

5. The COVID-19 pandemic has further intensified such issues, impacting supply chains that connect most, if not all economies. Supply chain disruption will further aggravate social disparities, where numerous studies have shown how the pursuit of cost efficiency and competitiveness in producing goods and services, has resulted in poor social conditions for workers and the environment. Islamic finance and its inherent universal values can be and has been part of the solution to these issues. Since more than a thousand years ago, the central focus of the Islamic economy has always been societal welfare and its supporting environment. Core Islamic principles that promote inclusivity, equity, property rights and ethics are very much in tandem with the United Nations’ Sustainable Development Goals 2030 or SDG 2030.

7. When institutionalised Islamic finance started more than 40 years ago, no one had anticipated that it could transition from its humble beginnings into areas such as Islamic fintech and crowdfunding.

8. Sustained efforts and facilitation by the Malaysian Government and regulators, together with the solid support and active participation of stakeholders, have propelled Malaysia’s Islamic Finance from relative obscurity to being on par with conventional finance, and well-recognised on the world stage. I am convinced that this growth has been supported and inspired by its core principles that prioritise welfare and equitability.

MALAYSIA LEADS AND CHAMPIONS ISLAMIC FINANCE

Ladies and gentlemen,

9. In line with the Financial Sector Blueprint 2011-2020, Malaysia’s Islamic Finance penetration rate is on track to reach Bank Negara Malaysia’s (BNM) target of 40 percent share of total financing by end of 2020 – a significant increase from 29 percent in 2010. The resiliency of our Islamic Finance sector has been proven throughout the COVID-19 pandemic, where its penetration rate has increased steadily over the first nine months of 2020. This was supported by domestic financial institutions’ efforts to expand the sector, coupled with strong growth in household financing.

10. Moody’s, too, has acknowledged Malaysia as the biggest market in Islamic Finance within the region. The growing acceptance of Islamic financial products and services among the population – of all races and religions – will likely be sustained for the foreseeable future, attributable to the strong regulatory framework by both BNM and the Securities Commission Malaysia (SC).

11. Additionally, Malaysia leads globally with the largest Sukuk market in 2020, accounting for more than 45 percent of the world’s outstanding amount or approximately 258 billion US dollars, according to the Malaysia International Islamic Finance Centre (MIFC). Our Sukuk issuances over the years have demonstrated how Malaysia has utilised Islamic Finance as a means to fund and shape a more sustainable future. So far, we have seen more Sukuk issuances that are tied to the principles of Sustainable and Responsible Investments, or SRI. From funding renewable energy infrastructures such as solar and hydro, to supporting social purposes, such as micro financing and education, Malaysian Sukuk issuers have acquired an appetite for such ventures, reflecting an increasingly strong commitment towards a sustainable future through Islamic financing products.

12.Data from our stock market and fund management industry are also proof that Islamic Finance has shown unrelenting resiliency and has continued to attract investors during these uncertain times. In 2020, Shariah indices have outperformed conventional indices for two consecutive years. This has resulted in more demand for shariahbased investments, with total Islamic assets under management growing from 22 percent of overall assets in 2017, to 24 percent by end of 2020 with a total value of 217 billion Ringgit.

ISLAMIC FINANCE TO DRIVE SHARED PROSPERITY

Ladies and gentlemen,

13. As has been mentioned many times before, socio-economic inequality is likely to be the biggest impact of COVID-19. We risk losing years of improvements in the economic prospects for the global middle class, while poverty and hunger are expected to be more pervasive in the coming years.

14. The pandemic has disproportionately impacted communities, such as women, migrants, daily wage earners, as well as the Bottom 40 percent (B40). This has the potential to fuel conflicts and social unrest that will make any recovery even more daunting. International organisations, such as the OECD, had warned against the ‘slow growth trap’ long before this pandemic broke out, and expressed concerns regarding the enduring trend of overlooking our middle-class. Some have also been calling for active public policies to ensure inclusive growth over the years.

15. In light of these issues, the theme “Strengthening Islamic Finance Towards Shared Prosperity” bodes well with Malaysia’s efforts to move towards a more inclusive, equitable and sustainable growth for all. According to the World Bank Group, the definition of shared prosperity is the distribution of wealth for fostering income growth of the B40 in every country.

16. Under Malaysia’s Shared Prosperity Vision 2030 (SPV 2030), the Government has proposed 15 Key Economic Growth Activities (KEGA). The first is to develop an Islamic Finance Hub 2.0, and as I mentioned earlier, Malaysia is well positioned to lead globally in this sector. In this regard, the financial sector will continue to spearhead and champion this initiative. In fact, last August, the Government of Malaysia has issued our first ever award-winning digital Sukuk online, the Sukuk Prihatin, where the subscription had exceeded the target at 666 million Ringgit.

17. Recently, the country has also emerged as one of the world’s leading Islamic financial technology (Fintech) hubs that houses various Islamic fintech start-ups4 . Based on Malaysia Digital Economy Corporation’s (MDEC) Islamic Fintech Report, a total of 26 Islamic fintech providers were operating in Malaysia in 2019, higher than the UK (at 19), United Arab Emirates (at 16), Indonesia (at 12), and US (at 10 in total).

18.A key contributing factor to this is Malaysia’s comprehensive regulatory guidelines to regulate and systematically develop the fintech industry. There are also clear licensing requirements for fintech players to operate equity crowdfunding, or P2P financing platform.

19. Other initiatives to push for shared prosperity include the collaboration between public and private sector in utilising Waq’f structures for social purposes. This is evident from efforts carried out by BNM and banks, with the establishment of MyWakaf, as well as the recently announced ‘Wakaf Air’ or Water Waq’f between the Ministry of Environment and Water (KASA) and Yayasan Wakaf Malaysia (YKM). Proceeds from the Water Waq’f will be utilised to fund projects related to the provision of water services in rural areas such as well excavation, maintenance and purchase of water pumps, provision of mini water tanks and plumbing.

20. The Malaysian Government has also provided for Waq’f development in Budget 2021, through which we have announced several measures such as:

1. creation of a National Wakaf Masterplan, in collaboration with government agencies to ensure efficient management of Waq’f funds; and
2. introducing Waq’f services to unit holders of Amanah Saham Nasional Berhad (ASNB) funds. Under this service, unit holders can endow some of their units into a Waq’f fund, where the returns will be channelled to projects identified by the fund manager (PNB).

Ladies and gentlemen,

21. SPV2030 also highlights Malaysia’s potential and plans in tapping the 3 trillion US Dollar Halal market. The Halal industry covers not only food-related products, but also pharmaceuticals, cosmetics, self-care and health items, as well as sectors such as travel, media and recreation, amongst others.v

22. As this industry grows, Malaysia continues to firmly entrench its global leadership, particularly on Halal certification across diverse products’ value chain. Today, Malaysia is one of the main sources of reference for over 150 countries in areas such as the Halal industry’s development and governance. This is also reflected in Malaysia’s number one ranking in the Global Islamic Economy Indicator (GIEI), where we lead in areas such as Halal food, Islamic Finance, pharmaceuticals, cosmetics as well as Muslim-friendly travel.

23. Malaysia’s firm commitment in promoting the Halal industry can be seen in our 14 billion Ringgit investments to develop Halal Parks, where Halal-oriented businesses will benefit from infrastructure, support services and tax incentives. This will not only drive Malaysia’s ambitions to be a global Halal hub, but will also help the world become more resilient post-COVID-19 pandemic, guided by the Islamic economy’s core principles of socio-economic and environmental sustainability, as well as social equity, fair trade and ethical consumerism.

CHALLENGES

Ladies and gentlemen,

24. According to Fitch Ratings, Islamic financing’s share in Malaysia reached 37 per cent by end-2020, compared to 35 per cent in 2019, with Islamic financing contributing nearly all of the banking sector’s growth in the same year. Fitch Ratings also noted that Malaysia’s Islamic banking sector has continued to expand amid economic challenges from COVID-19 pandemic.

25. Although Malaysia’s Islamic Finance has progressed significantly, and are now well into broad-based acceptance and adoption, we must challenge ourselves to see how Islamic Finance can further help elevate our people’s socio-economic well-being. Examples include the following:

1. Based on Islamic finance’s principle of socio-economic sustainability, can the industry develop intermediation mechanisms that are need-based, and fit-for-purpose as per market requirements, as well as products that will truly serve the nation’s current and pressing socio-economic demands?
2. Can we improve the sector’s risk management by standardising as many aspects of Islamic Finance products and services as possible, to quell any further lingering misconceptions about Islamic Finance?
3. Can we work towards harmonisation with the rest of the world’s Islamic Financial markets to uplift the global Islamic Finance industry?
4. As the global Halal market’s supply chain integrates vertically, can we start using blockchain technology more extensively to prevent a recurrence of the halal meat cartel issue that Malaysia experienced recently?

26. These efforts are vital for Malaysia and its Islamic Finance sector players in order to maintain our lead in the world and the Southeast Asian region, where the total purchasing power of Muslims is expected to grow close to 300 billion US dollars by 2030.

CONCLUSION: THE ROAD AHEAD

Ladies and gentlemen, esteemed guests,

27. Historically, Malaysia has remained resilient throughout past crises, thanks to our sound economic fundamentals and well-developed institutional framework. Today, Malaysia’s economy is also more diversified, supported by our strong external position – built from 23 years of current account surpluses, adequate levels of international reserves and sizeable external assets held by banks and corporates.Despite Malaysia’s GDP contracting 5.6 per cent in 2020, our economic resiliency is reflected in IMF’s projections that we will grow by 7 percent, and in the World Bank’s recent estimate of 5.6 to 6.7 percent.

29. With our National COVID-19 Immunisation Plan, more economic sectors being allowed to operate, improving external demand and recovery in prices of crude oil, I am confident that our economy is firmly set on a recovery and growth trajectory in 2021.

30. Moving forward, the Ministry of Finance will be focusing on six priorities in 2021, and I hope the Islamic finance industry will show its full support on the following focus areas:

1. Firstly, jobs creation: We have established the National Employment Council, chaired by the Prime Minister himself, to look at creating 500 thousand jobs this year;
2. Secondly, to continue ensuring that the rakyat who are still badly affected will be supported through direct and indirect aid, like the Bantuan Prihatin Rakyat, welfare and social assistance for the hardcore poor and targeted loan repayment assistance.
3. Thirdly, on digitalisation, where we will continue with the national connectivity plan, JENDELA, and the accelerated rollout of 5G infrastructure development. On 5G, Digital Nasional Berhad will offer 5G services via a wholesale model that is regulated to ensure better transparency andimplementation. There will be an open tender process for the 5G infrastructure development, estimated to cost 15 billion Ringgit, which will be invested by the private sector developers;
4. Fourth is on revisiting the vision, mission, roles and mandates of GLICs and GLCs, where we will focus on, among others, domestic strategic investments, Bumiputra vendor development and corporate social responsibility;
5. Fifthly, is to empower the SMEs; and
6. Sixth, we will accelerate the implementation of specific projects to drive economic recovery. This includes supporting small-scale projects, and simplifying procurement processes.

31. Aside from the above, we will still continue to strengthen the country's revenue base and improve our tax framework; build capacity along the whole supply chain of certain sectors such as agritech, edutech and AI; and strengthen our entrepreneurial and start-up culture to help Malaysia progress towards becoming a highincome nation.

31. The Government has also embraced several of the SDGs in our Budget 2021 as a first step towards inclusive socio-economic development, and environmental sustainability. This is aimed at achieving a more sustainable GDP growth through a strategic, targeted, on-point and outcome-based medium-term economicplan. These will also be complemented by the SDG-aligned 12th Malaysia Plan.

32. On that note, I thank you for your kind attention and participation in the 16th Kuala Lumpur Islamic Finance Forum. I would also like to thank once again, the organisers for ensuring the success of this Islamic Finance fraternity. I wish everyone a productive day ahead and a successful conference this year.

Thank you. Wassalamualaikum warahmatullahi wabarakatuh.