Asia undergoing structural shifts in the aftermath of crisis: Zeti
Published: Oct 17, 2010 22:40 Updated: Oct 17, 2010 23:02
Straight from being named with six others as the “The World’s Best Central Bankers in 2010” by New York-based Global Finance magazine in its latest issue, Zeti Akhtar Aziz, governor of Bank Negara Malaysia (BNM), the central bank, not surprisingly was in great demand as a keynote speaker at several of the important side meetings at the 2010 IMF-World Bank annual meetings which was held in Washington last week.
In fact, Gov. Zeti used the occasion to warn the West that the best way to overcome the effects of the current economic and final crisis is through collaboration between countries across the world and to push Asia’s importance in the global economy. Perhaps equally is the potential contribution of Islamic finance to global financial stability and economic growth. The two keynote luncheon addresses she gave — one at the 2010 Institute of International Finance (IIF) annual membership meeting on the theme "Southeast Asia: Potential and Perspectives in the New Asia" and the other at the Islamic Development Bank Group’s meeting on the theme "Islamic Finance: An Agenda for Balanced Growth and Development", not surprisingly was well attended.
The challenges for the global economy, she told guests at the IIF luncheon, call for a collaborative approach to strengthen the prospects for a global recovery. The way forward is also to recognize the relative strengths of different parts of the world and the potential to leverage on these strengths. In the above respect, Asia offers the prospects for a greater shared responsibility toward a greater shared prosperity in the world, while Islamic finance is playing an increasing role in enhancing global economic and financial linkages particularly among emerging economies.
Asia is a rising giant with a motley of highly diverse economies. Southeast Asia, with a population of more than 500 million people and straddling strategically between China and India, has been since the 13th century an important trading hub connecting Asia to the West. But, “being the most open economies in Asia, and perhaps in the world, we, therefore stand to be the most vulnerable to global developments,” she warned.
According to Gov. Zeti, one of the most respected central bankers amongst her peers in the world, Asia has been undergoing three important structural shifts in the aftermath of the financial crisis. These include economic restructuring and the strategy to pursue more balanced sources of growth; greater regional economic and financial integration, with the aspiration for ASEAN (the Association of Southeast Asian Nations) to become an economic community by 2015; and the global development of Islamic finance and its increasing role in enhancing global economic and financial linkages particularly among emerging economies including Asia.
One of the consequences of the crisis is a greater reliance on domestic demand as a driver of growth. Other drivers include the growing importance of trade with emerging economies, in general, and with Asia, in particular; and the pragmatic policies and economic flexibility of the Asian economies to adjust to the changing conditions in the global environment.
On the other hand, economic and financial regional integration has been reinforced by a higher level of regional cooperation, especially to address financial stability issues, including in surveillance, crisis management, liquidity support arrangements, financial supervision and financial market development. The most recent development here, said Zeti, is the two schemes for reserve pooling, the Asian Bond Fund and the ASEAN+3 Chiang Mai Multilateralized Swap Arrangement as a liquidity support facility, which have both proved to be highly successful.
But Zeti warned that there is an important need for a more efficient intermediation of the surplus funds in the region, both into productive investment opportunities in the region and to finance the massive development of infrastructure required by the region.
She lauded the transition of the G7 into the G20. But she strongly regretted that the representation in the G20 is by virtue of the size of the economy and not by representation of specific groups of countries. Its outreach and inclusiveness, she maintained, is therefore limited, and small and medium sized emerging economies are not part of this process.
While the sense of purpose and urgency of the G20 did contribute to restoring confidence in the global financial system and the coordinated policy stimulus was an important catalyst for the economic recovery, in recent months, however, warned the governor ”the momentum for this coordinated actions have dissipated and there have been differing positions on several important issues. In view of the far reaching implications of any reform agenda, it is an important global responsibility to ensure that the reforms achieve their intended results and that this new phase of globalization will result in a more inclusive international financial system that will allow for the effective participation in the global economy and international financial system regardless of size or stage of developments.”
Three Muslim countries are represented in the G20, namely Saudi Arabia, Indonesia and Turkey. Some analysts would prefer to see the inclusion of Malaysia, arguably the most functional Muslim democracy in the world.
On regulatory reforms, the goal of financial stability must remain paramount and the reform implementation should be even-handed. “With greater capital mobility across borders, the stricter regulations could result in the migration of financial business to less regulated market segments, institutions or financial centers,” she added. A further priority in emerging Asia is the promotion of responsible market practices and consumer protection given the stage of development and level of financial literacy. There is significant scope for creating greater global momentum for improvements in regulatory standards on market practices.
She warned of the risks of using the exchange rate as the solution to global imbalances, because the foreign exchange market is not like any other markets. With a daily transaction amounting up to $4 trillion, it is the most liquid and dynamic market in the world. It is a market that is prone to excessive movements and overshooting. Any effort to engineer a significant exchange rate adjustment within a short period of time carries the risk of highly destabilizing consequences.
Zeti reminded her largely American guests that Islamic finance is all about basic banking that is always supported by underlying economic activity. Its profit sharing feature provides for risk sharing and thus the necessary due diligence, disclosure and transparency, risk management and governance. While the focus has been on keeping the regulation abreast with the developments in the global financial system, emphasis is also given on the supervisory oversight, capacity building, and institutional and financial infrastructure development as part of the efforts to ensure financial stability. The most recent significant development was the establishment of the International Islamic Liquidity Management Corporation (IILM) that will issue highly rated short-term Islamic instruments to facilitate more efficient liquidity management of cross border investments.
At the packed IDB luncheon, Gov. Zeti extolled the increased role of Islamic finance in contributing to global growth and financial stability; and to foster greater financial flows across borders to contribute toward economic progress and development. Islamic finance, as a rapidly growing form of financial intermediation, she reminded, has demonstrated its resilience during the global financial crisis and has every potential to advance the growth and development agenda.
“Fundamental to Islamic finance is the requirement that financial transactions be accompanied by an underlying productive economic activity that will generate legitimate income and wealth. There is therefore, a close link between financial transactions and productive flows. Thus, the growth in Islamic financial assets is generally accompanied with growth of underlying activities that have economic value,” she added.
The sustainability of the Islamic finance intermediation proposition is proven. Islamic finance has been able to respond to the requirements of consumers and business, and to remain a competitive form of financing. In Islamic finance, financial stability has been addressed on three fronts. Firstly, Islamic finance has its own inherent inbuilt checks and balances. Its value preposition of profit and risk sharing requires the appropriate due diligence, disclosure and transparency.
Secondly, the role of the Shariah Board is to ensure all aspects of the business operations of Islamic institutions are in accordance with the Shariah principles. This therefore adds another level of oversight which inherently safeguards against irresponsible practices.
Thirdly, the establishment of the Islamic Financial Services Board (IFSB) in 2002 is a major development in that it sets the prudential standards for Islamic finance including those for capital adequacy, risk management and corporate governance taking into account the specific risks inherent in Islamic finance.
The IFSB together with the Islamic Development Bank in April 2010 published a report proposing eight recommendations to contribute towards a sound and stable Islamic financial system, including the establishment of the Islamic Financial Stability Forum (IFSF) as a platform to facilitate better understanding of emerging developments in the Islamic financial system and their implications for national and global financial stability; and the development of a liquidity management infrastructure to facilitate cross border financial flows.
The globalization of Islamic finance has been pervasive. Today, there is now increased presence of Islamic financial institutions beyond their domestic borders and increased foreign participation in Islamic domestic financial markets. As such Islamic finance has therefore become an important channel for fostering international financial linkages and in so doing is contributing to more balanced growth and development. The internationalization of Islamic finance has therefore not only allowed for further diversification of risks, it has also contributed to more efficient allocation of funds across borders from centers with surplus funds to regions with investment opportunities.
For instance, sukuk have emerged as a prominent and attractive new asset class for investors and a competitive form of financing for businesses. The global sukuk market, she said, currently stands at almost $130 billion, with an average growth rate of about 40 percent annually, and has evolved into a truly international market, generating significant cross-border flows as funds are being raised from beyond domestic financial markets. The recent issuance of Malaysia’s $1.25 billion sovereign sukuk in May this year, for instance, was 6 times oversubscribed with a wide investor base from Asia, the Middle East, Europe, and the US, despite the prevailing volatile market conditions.