KUALA LUMPUR: Islam-ic finance has a potential role in contributing not only to global financial stability but also towards more balanced global growth.
While Islamic finance by its very nature and its direct link to economic activity contributes to this process, the recognition of the new financial challenges ahead require further steps to be taken to strengthen its resilience and robustness, Central Bank of Malaysia governor Dr Zeiti Akhtar Aziz told a high-level conference on financial stability in Kuala Lumpur.
The development of Islamic finance in Malaysia that has operated in parallel with conventional finance for almost three decades now has demonstrated its sustainability as a form of financial intermediation," she said.
"Today, the Islamic banking system has emerged as a vibrant financial system with Islamic banking assets currently accounting for 18.8 per cent of the total banking assets of the Malaysian financial system.
"The product range has now expanded into an extensive range of innovative instruments while in the Islamic capital market, the sukuk market has surpassed the conventional market in terms of market share.
"An important aspect that has contributed to financial stability in the overall financial system is the conscious policy to develop a more diversified financial system that allows for the diversification of risks.
"This current global financial crisis has prompted a search for an enduring solution to ensure the stability of financial systems," she said.
"The challenge before us is to build a new financial architecture that would allow for the more efficient functioning of not only financial intermediation within national economies but also across borders.
"Islamic finance, with its emphasis on a strong linkage to productive economic activity, its in-built check and balances and its high level of disclosure and transparency offers this.
"Indeed, inherent in Islamic finance is the explicit elements that address several of the issues that have surfaced in the conventional financial system during the current crisis.
"At the centre of this recent global financial crisis was the breakdown in governance that led to indiscriminate lending, excessive risk-taking and overzealous financial innovation," she said.
"This is avoided in Islamic finance with the requirement that Islamic financial transactions must have an underlying economic activity and that the process of innovation and formulation of Islamic financial products and services must be done carefully and in accordance with Sharia.
"The crisis has provided an important lesson that the development of new financial instruments embraces this process while being able to effectively compete in the global arena.
"In this challenging international financial environment, Islamic finance has continued to demonstrate its evolution and strong growth," she added.
"Islamic finance in its advancing journey today is presented with an opportunity to increase the financial linkages with the broader financial system thereby facilitating a more efficient allocation of capital across borders.
"Indeed, Islamic finance as an integral part of the international financial system has the potential to contribute to global financial stability and to enhance the prospects for global growth."