Oleh/By : DATO SERI DR. MAHATHIR BIN MOHAMAD
Tempat/Venue : MANDARIN ORIENTAL HOTEL,
KUALA LUMPUR
Tarikh/Date : 03/11/2002
Tajuk/Title : THE INAUGURATION OF THE ISLAMIC
FINANCIAL SERVICES BOARD,
KUALA LUMPUR
Versi : ENGLISH
Penyampai : PM
"RESHAPING THE INTERNATIONAL FINANCIAL ARCHITECTURE
FOR BALANCED AND STABLE GROWTH"
I am pleased to join this distinguished gathering
today to officiate at this historic occasion of the
inauguration of the Islamic Financial Services Board
(IFSB). To our foreign guests, I would like to add my
personal words of welcome.
2. The birth of the I.F.S.B., the international
standard-setting body for Islamic financial
institutions, comes at a time when the global economic
and financial outlook is clouded by escalating
uncertainty. The anticipated recovery in world growth
has not yet happened. Indeed the risks have
intensified. In the advanced economies, corporate
failures and financial reporting problems have adversely
affected investor confidence, resulting in downward
trends in the global equity markets. Property markets
have also begun to soften. These developments in the
asset markets have shaken consumer confidence. In
addition, the risk of further exposure of corporate
scandals or a deterioration in the Latin American
situation could destabilise financial markets further.
The weaker economic prospects and the resultant
financial sector problems that could emerge would affect
capital flows adversely. At the same time,
macroeconomic imbalances remain an area of concern in
some of the advanced economies. The current global
scenario is also characterised by widening income
disparities, in which 15 percent of the world's
population controls 80 percent of its wealth, while 23
percent of the people in the developing world survive on
less than US$ 1 a day.
3. In the face of all these difficulties and
inequities, there is a global recognition on the need to
evolve an international financial system that will
deliver greater stability and that will result in a more
equitable distribution of the benefits of globalisation.
There is now much support on the need to strengthen the
global financial infrastructure to deal with the
inherent tendencies for financial markets to become
destabilised periodically. There is a recognition that
markets are subject to excesses, including deliberate
manipulations, which generally work against the
interests of developing countries. There is a
recognition that we need to develop an international
financial regime that promotes more balanced growth;
including greater equity in the distribution of income,
less disruptive capital flows, and relatively more
stable financial markets.
4. However up till now the progress in international
financial reforms has been mainly focused on initiatives
to encourage developing countries to adopt international
standards and codes, enhance transparency and disclosure
of information, and promote greater private sector
involvement in crisis resolution. Such initiatives are
aimed at promoting more informed decision-making by
markets. However, we also need to see that such
efforts by the authorities to improve transparency and
disclosure are matched by efforts by the market players
to correctly and effectively utilise the information
provided. Tendentious reporting, both by the media and
the professional analysts serve only to confuse decision
makers and result in wrong deployment of capital. More
importantly the private sector including the hedge funds
must be more transparent. Recent history has shown how
hedge funds and corporate America can stray far from
ethical paths. Unless something is done, more of the
newly merged corporate entities are going to fall,
dragging down with them other market players.
5. The assumption that the free market will be self-
disciplined is erroneous. The market is managed by
people whose primary aim is to make profits, for the
corporations, and for the managers themselves. The
welfare of society is not the concern of these people.
The free market cannot therefore be left absolutely
free. Governments must oversee the market closely and
in many instances must provide necessary rules and
regulations.
6. The complaint will be that the free market will not
be free anymore. But so far the market has not proven
the effectiveness of self-discipline. It has yet to
come up with its structure for self-governance. If the
lack of rules by the market to govern itself is regarded
as an essential element of the free market, nothing that
we have seen so far provides assurance that true
discipline on the part of the market players will be
upheld.
7. Thus while the hedge funds insists on Government
enforced transparency for businesses, the funds themselves
are not only opaque but have proven themselves quite
devious. At least one such fund very nearly brought about
the financial collapse of a major financial power. It took
Government action to prevent this from happening. Left to
the market we would have seen total financial disaster which
could have affected the whole world.
8. The advances in information and communication
technology have also dramatically changed the way
business is done globally.
9. Used properly they will not only speed up business
but also speed up the detection of fraud and other
misdemeanours. If real transparency is practised by
all, the market can follow transactions and the
movements of funds and this will help to reduce the
risks which investors face. Certainly Government will
be able to react quickly enough to avoid any economic or
financial catastrophe.
10. Recent initiatives to promote greater stability
in financial markets have also included measures to
enhance private sector involvement in crisis resolution,
notably in the restructuring of debts. These have
focused on measures to encourage all creditors to agree
to a coordinated debt-workout scheme. The proposals
that have been put forward include the use of collective
action clauses (to prevent the derailment of an agreed
debt restructuring plan) and the creation of a sovereign
debt restructuring mechanism similar to a global
bankruptcy court. The aim of such initiatives has been
to encourage more equitable burden sharing in crisis
resolution by both the creditors and debtors. While
both approaches have their merits, further consideration
of the implementation details and implications are
necessary to ensure that they do not impose undue
burdens on borrower countries, especially in terms of
higher borrowing costs.
11. Mounting challenges confront the global
community. Indeed, the international community needs to
come to terms with all these issues in order not only to
promote stability but also to enhance the sharing of
prosperity.
12. We would all like to benefit from the process of
globalisation and liberalisation. We would like to trade
more, open up markets and enjoy the higher incomes and
increased welfare that globalisation is supposed to deliver.
Stability in financial markets is essential for this to be
achieved. We need an international financial system that is
fair and rewards hard work rather than speculative
activities that take advantage of the weak and the ill-
informed. Speculation is really not business. It is a kind
of gambling. It becomes worse when in an effort to ensure
high returns, manipulative measures are utilised. Thus by
creating an impression of oversupply it is possible to
depress prices, and vice versa. The unfortunate thing is
that the ordinary players, the small men, would always bear
the losses, dragging down with them their banks. In the end
the whole economy of a country would suffer. Islamic
banking principles require financial transactions to be
supported by genuine trade or business-related activities.
By definition, therefore, financing for non-trade related
activities such as currency speculation, derivatives and
other unproductive financial manipulations are excluded.
The basic tenets of Islamic banking prescribe a financial
system that rewards productivity. There can be innovative
financial products which facilitates business and reduces
risks. The Islamic financial system is fundamentally based
on the absolute proscription or prohibition of the payment
or receipt of any predetermined, guaranteed rate of return,
which in effect prohibits the concept of interest (usury).
The lender must share the risks that the borrower is exposed
to, although the real cost of management which should be
variable and not predetermined is not within the definition
of usury.
13. The other prohibition is on excessive profits, or
profiteering through unprincipled manipulation of prices
or supplies. Clearly Islamic financial injunctions are
meant to create an equitable and fair social and
economic order. They are only oppressive to those who
wish to exploit society through their superior wealth.
Well-administered the Islamic financial system will
create a better social order while increasing the wealth
of everyone. Together with the tithes (zakat) and
obligatory charity the Islamic system must result in
prosperity with stability.
14. It is therefore not too much to suggest that the
international financial system can benefit from the
adoption of at least some of the Islamic financial
system. The lenders must be prudent and judicious
because they would share in the profits or loses.
Admittedly much skill and expertise in business will be
needed if the system is to work smoothly. These are not
easily available today. It is imperative therefore that
conventional systems be allowed also, if business and
growth is not to be stifled. The option to use the
Islamic financial system must be open and voluntary so
as not to cause turmoil and economic regression,
something which Islam does not wish to promote, which in
fact it expressly forbids. It is imperative that Muslim
countries remain stable and achieve prosperity in order
to ensure the well-being of the ummah.
15. We now talk a lot about smart partnership and the
win-win concept. The idea that someone must lose in
order that someone else will gain is slowly being
rejected. Because in the Islamic system risk is shared
by the lender and the borrower, there should be a win-
win situation, for obviously a smart partnership is
involved. As a partner the Islamic bank must carefully
scrutinise the honesty and reliability of the borrowers.
Mistakes will happen of course but even with the present
banking system injudicious lending takes place and banks
suffer serious losses sometimes. Due diligence is
therefore more essential in Islamic banking than in the
present system, where the borrower can always be
bankrupted and his collaterals etc. seized.
16. One has to remember that Islamic banking was
enjoined because of the oppressive practices prevalent
in those days when debtors who could not pay back the
money they owed were made debt slaves of the lender. We
can imagine the sufferings and the misery of these
people. Today of course this practice has been outlawed
universally. But debt slavery is not yet totally
eliminated. Countries which are unable to pay their
foreign debts, are actually being made debt slaves of
the rich countries whose Government or banks had lent to
them. Obviously if Islamic banking is practised in the
International financial lending, this debt slavery of
borrowing countries cannot happen. But of course the
international community is not about to adopt Islamic
Banking. They are not going to lend if they cannot gain
control over their borrowers in order to recover their
loans, irrespective of the misery this might cause.
That they had been imprudent in their lending does not
mean they should incur losses. Yet even in the ordinary
banking system it is common for banks to take hair-cuts
if for some unexpected reasons the loans go sour.
Clearly debt slavery has not been fully abolished in the
International Financial System.
17. Under the risk sharing principle of Islamic
banking, banks have to share the losses incurred by an
entrepreneur. Banks are not guaranteed to receive
income when the enterprise makes losses. This
arrangement enhances the long-term commitment to work
together, as both sides would be accountable for the
performance of the enterprise. Under Islamic banking,
the issue of non-performing loans would not arise, as
any losses would accrue immediately to the banks, as
well as the entrepreneurs. Islamic banks, acting as
business partners, would therefore go the extra mile to
keep good companies afloat in good times and bad,
instead of abandoning them by withdrawing credit lines
at the first sign of distress. In this manner, the
Islamic banking principle of risk-sharing embodies an in-
built capacity that contributes to ensuring greater
stability in the financial system.
18. Islamic banking emphasises the values of
entrepreneurship. Entrepreneurs compete to become the
agents for the suppliers of financial capital who, in
turn, will closely scrutinise projects and management
teams. As the financing is rewarded through sharing of
profits (and losses), it encourages competition among
entrepreneurs. The incentive to investors (or suppliers
of capital) is the internal rate of return of the
project (as opposed to interest). This encourages the
entrepreneurs to be more truthful and transparent when
making their applications for loans. Harebrained
schemes and ideas which obviously have no reasonable
returns are not likely to be entertained by Islamic
banks. This may disappoint some borrowers but it will
encourage greater care in the feasibility of a project
or enterprise.
19. As a partner the Islamic banks must truly oversee
the quality of corporate governance. This requires a
great deal of expertise in the management of Islamic
banks. And of course the management must have high
standards of ethical, moral, social and religious
commitments, qualities which enhance equality and
fairness in the treatment of all transactions. In
addition to the strict regulatory and supervisory
precepts of conventional banking, Islamic banking
principles are reinforced by the Shariah framework. The
Shariah strengthens the governance of Islamic banking
operations, based on the belief that justice or
injustice will be appropriately rewarded or punished.
Islamic principles uphold contractual obligations and
the disclosure of information as a sacred duty.
20. All these principles promote financial stability,
as a successful venture will result in a "win-win"
situation to all participants in the financial system
while an unsuccessful venture will spread the losses and
not confine such losses to one segment of the financial
system. Governance and transparency with the absence of
interest would also ensure that contagion and systemic
risks would be avoided, as players in the financial
system would not react in an erratic manner or exhibit
"herd behaviour" since players can evaluate individual
fundamental strengths. In this regard, the work of the
Accounting and Auditing Organisation for Islamic
Financial Institutions will make a significant
contribution to the promotion of more uniform practices
of good governance in Islamic finance.
21. By replacing the interest element with profit-
sharing as the reward for the use of capital, the
speculative motive for the demand for money would not be
entertained. Money cannot be traded as a commodity as
the bank would have to be involved in the trade. The
absence of interest also means that traders cannot take
positions. Hence, the risk of herd behaviour of market
players will also be avoided. Adherence to the risk-
sharing concept in Islamic banking should accord lenders
with the appropriate returns for their capital and would
contribute to the growth process. A valuable outcome of
this principle of sharing profits as well as losses is
that Islamic banking prohibits lenders from withdrawing
their capital in difficult times. This principle
applies not only at the project level, but also at the
national level. In the case of sovereign debt, the
sharing of risks and rewards between lenders and
creditors imply that creditors participate in the
development of a country until the maturity of the bond.
The need for creditors to discuss with their debtors on
the best, mutually agreeable options to resolve any debt
problems prior to maturity of a bond, does not arise.
22. In other words, debt workout arrangements to share
risks between creditors and debtors are already embedded
in Islamic-based bond contracts. Under Islamic banking,
therefore, private sector debt workout schemes for
crisis resolution, as currently being discussed by the
international community, would not be necessary. The
basic principles of the proposal on collective action
clauses (CACs) being promoted by the Organisation for
Economic Cooperation and Development (OECD), the Bank
for International Settlements (BIS) and other
international financial institutions have already been
embodied in the contractual obligations of sovereign
Islamic bond issues.
23. Although the size of the international Islamic
finance is still small (about US$200 billion), it has
expanded significantly at 15 percent per annum. The
potential for growth is enormous, given not only the
huge wealth of the global Muslim community, but also the
interest shown by the international financial markets in
this form of financial intermediation. To meet the
projected increase in demand for Islamic financial
instruments, there is a need to develop the range of
Shariah-compliant financial instruments which are
universally acceptable. The higher demand and the
development of the financial market infrastructure would
provide opportunities for Governments and corporations
alike to utilise more sophisticated and diverse Islamic
financial instruments to access the international
financial markets. And as Islamic financial
instruments have a wider investor base, such universally-
accepted Islamic financial instruments would also draw a
wide investor base, regardless of their religious
background.
24. The establishment of the IFSB will reinforce the
potential for the stability of the system. As a global
authority for setting standards for Islamic banking and
finance, it will ensure that Islamic banking
incorporates international best practices and standards
for the supervision and regulation of Islamic financial
transactions, and that it is not only consistent with
Islamic principles, but is also based on prudential
standards that are on par with those observed in
conventional banking. The subsequent improvements in
supervisory standards of Islamic financial institutions
will enhance the credibility of Islamic banking and
finance in the financial world. All these developments
point toward an important role for the I.F.S.B. in
charting the future course of Islamic banking and
finance as an integral part of the international
financial system.
25. The launch of the Islamic Financial Services Board
today represents an important milestone in Islamic
financial cooperation. I am confident that the
establishment of the I.F.S.B. as the global standard-
setting authority for Islamic financial services will
serve to enhance the development of Islamic financial
products, for the benefit of the Ummah.
26. Malaysia is honoured to have been entrusted with
the responsibility to host the Secretariat for the
I.F.S.B. I would like to take this opportunity to
congratulate the governors and senior officials of the
central banks and monetary authorities of Bahrain,
Indonesia, Iran, Kuwait, Lebanon, Malaysia, Pakistan,
Saudi Arabia, Sudan and the United Arab Emirates, as
well as the Islamic Development Bank, the Accounting and
Auditing Organisation for Islamic Financial Institutions
and the International Monetary Fund. Your efforts over
the past two years have culminated in the establishment
of this important institution.
27. The road ahead for Islamic banking and finance is
long and will be full of challenges. More so, in the
current global financial environment characterised by
volatile and unpredictable market dynamics, rapid
advancements in technology and financial innovation,
which have all culminated in increasingly more complex
and heightened financial risks. With the continued
cooperation and active participation of the central
banks and the financial community, I am confident that
the I.F.S.B. can become the pre-eminent global authority
responsible for international Islamic financial
services.
28. In the name of Allah, The Merciful, The
Compassionate it now gives me great pleasure to
officiate the inauguration of the I.F.S.B.
Sumber : Pejabat Perdana Menteri
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