Advancing Regulatory Developments In Islamic Finance

[Music] thank you very much for the kind introduction ladies and gentlemen as you will have noticed I've been asked to step in because unfortunately Luma was not uh couldn't make it at the last minute but I think that you know uh I'm very pleased to be here because I think we're talking about what is one of the most significant areas of Islamic Finance which is the regulatory development and the regulatory infrastructure and I think that any Market that has gone through the implementation of Islamic Finance understands that the regulatory framework really is the Crux on which the industry is built right and you have so many different considerations to take into account you have the legal and legislative framework to consider obviously as Regulators you have a duty to protect the uh rights of the consumers and the retail individuals you have Sharia considerations and different markets have different norms and different understandings of what is acceptable so it is a very very interesting uh you know area to look at which forms the basis of the development of Islamic Finance in the respective markets and today we are very privileged to have you know three representatives from three very different markets right when we talk about Islamic Finance Malaysia obviously is one of the most advanced Islamic Finance markets in the world but they have their own regulatory considerations we're going through a period of macroeconomic uncertainty policy divergences in different markets so they have to plan for the future on how to take the industry to the next level when we talk about markets like uh the Philippines you know recently with the issuance of U there auk instrument with the rolling out of Islamic banks in the market a new market that's entering the frey in a region with a significantly developed uh Islamic Finance ecosystem so how does Philippines play into that and how do you serve the needs of the local consumers while increasing trade activity with uh the international markets around you and obviously in Italy one of you know a very welldeveloped regulatory Market from a conventional Finance perspective but new to the Islamic Finance space and how do you bring that in and develop that and and and play a role within Europe so I think we'll get some very very interesting perspective and insights on this and maybe what I'll do is I'll start with the neurala and talk about you know how significant has the regulatory framework been in the success of Islamic Finance in Malaysia and when you look forward what are the areas of focus that you're looking at to continue to promote and enable that growth going forward thank you mamum very good morning and thanks for having me here so for Malaysia I think we've had uh four Decades of uh our journey in developing the Islamic Finance equ system one of our primary objective of codifying the Dual Financial system in Malaysia is fundamentally to provide the market certainty for long-term strategy development I think we took that decision in 2009 to not just do it as a national strategy but to actually reflect it in the Central Banking law and that provides the concrete foundation for for decades to come so this is a long-term plan for us and how that has contributed to developing that market certainty is it allows us to Pace our regulatory approach it allows us to focus on building blocks from inclusion when we first started in the 1980s to Market development in the 1990s to diversifying and internalizing in uh the early 20s and now we're looking at positioning ourselves as an international Gateway for asan GCC the market is no longer small and nothing with that it comes with unique considerations of regulating Market at scale so Islamic banking in Malaysia total financing that is Shar compliant is already reaching 46% on the liability side is around 42 uh and a bit our Equity Market more than 80% is actually already sh compliant and when we look at the suot market we're one of the largest sukot market so having been in this journey for more than a decade what I've realized is from a regulatory perspective making sure that as Regulators we're striking that intricate but interesting balance between development and risk consideration has been Central to enabling us to support Market development whilst making sure that the growth will be lasting so our approach has been to ensure that we focus on stability but at the same time the developmental aspects is done through engaging the players when it comes to Market priorities when we roll out our financial sector blueprints we've had three iterations of our financial sector development master plan in our latest iteration we've got three uh priorities the first one is to internationalize the market the second is to actually mainstream social finance and we've been experimenting quite a bit uh in terms of Blended structure I'll Shar in a little bit uh how that has gone uh and and thirdly to ensure that Islamic Finance really delivers on its promise from the fundamental values of Shara and and that is essentially through anchoring our development strategy with value based intermediation uh which is an initiative that we've rolled out back in 2017 before the green movement becomes uh what you see here today so I think for Malaysia um making sure that we learn through the process regulating Innovation but at the same time being risk responsive to the profile of the unique features of Islamic Finance has been our approach to Market development I'm just going to pause there that's that's very interesting and and I and I like that focus internationalization social and Sharia social Finance obviously has been an area that has been a uh challenge for Islamic finance and you know some criticism that we see that Islamic Finance hasn't done enough to Leverage The Social Capital that is there and to utilize that what specifically do you think is missing for us to be able to mobilize that uh capital and what can we do from a regulatory perspective to enable Banks to tap into that capital and to effectively utilize it for having an impact on the society that operating what I observe is when it comes to tackling social impact often times the sector looks at it in isolation of the other components that builds the ecosystem so I take an example of our Blended Finance experimentation but now has actually scaled up in 2020 at the peak of covid what we realized overnight is there were lots of people who suddenly lost their jobs these are aligned industry manufacturing companies who were not able to operate in a closed uh Market environment so recognizing that um if we were to just look at it at traditional banking instruments provide loans for startups they can't generate income at that point in time traditional Finance instrument may not be always well suited to deliver on the social outcomes that you want to achieve so back in 2020 we then piloted a blended structure we has a combination of philanthropic Capital um micr financing because the repayment Behavior remains interesting if you give free money money that doesn't create the incentive nor the financial behavior that would be necessary to ensure that it would last uh and the third part is structured mentoring recognizing also that Islamic Banks is not really able to reach all parts of the society the branch networks are limited digitalization has its constraint having implementation Partners partnering in particular with third sector with the ngos who are actually on the ground has enabled this particular program to deliver on not just the finan ing component but actually building that social Mobility we've seen companies that were part of this program so it started with just two Banks now we has expanded to 11 Banks it started with just less than 100 uh firsttime micro entrepreneurs now we have about 8,000 under the program looking at sustaining business resilience so Revenue growth looking at retaining employment and employing more people looking at digital upscaling so not just selling what they used to do which is by the roadside but digital marketing having that access and thirdly building their social residents looking at how much they able to save how much they able to actually provide for their lives and livelihood and working with the entire ecosystem Partners to actually track this data at a granular level from day one and having that long series data now after 5 years we're seeing the benefits of taking a cross- sectoral approach to Market development making sure that we take an ecosystem approach in developing um solutions to problem statements that have remained persistent so I think for Malaysia we're very conscious of the fact that we want the Islamic Finance to not just say that they do good but to actually deliver on that promise and be able to demonstrate that delivery as well no I think I think it's you know we always look to Malaysia as a uh guidance for the rest of the industry in many of these areas and as you mentioned initi like vbi and Blended Finance are all U areas that many markets can benefit from I want to turn the conversation now to to uh arifa and you know obviously completely different from the Malaysian experience you know you are a new market when it comes to Islamic Finance you recently um you know launched Islamic banking services the sukuk ISU and you operate in a region that has you know much more developed markets who have been operating for a much longer time the likes of Malaysia Indonesia brunai each one having their own unique flavor so it's not a homogeneous U you know regulatory framework can you talk to us about what has been Philippines experience in launching Islamic Finance setting up the framework for Islamic finance and going forward where do you see the area of focus needs to be to really help spur this you know emerging uh Market yeah Mustafa the story of the Philippine Islamic banking is quite unique in that uh actually the Philippines is one of the oldest Islamic banks in the world uh we have the alamana Islamic Investment Bank of the Philippines which was established way back in 1973 which is five decades ago but due to a number of constraints like lack of a regulatory framework because in the general banking law of the Philippines Islamic Bank was specifically uh just um limited to Al Amana Islamic Bank so effectively we cannot allow other players to enter the Philippine Financial system until in 2019 it was a milestone when the Islamic banking law was enacted and that law has practically opened the Philippine Financial system to other Islamic uh banking players and since then the Central Bank of the Philippines has been leading an Islamic Finas coordination Forum comprising of different Regulatory Agencies and institutions with an aim to establish an um Islamic Finance ecosystem that can viably alongs operate alongside the conventional banking system we understand that if we want to establish an effective and uh viable Islamic Finance Eon ecosystem the different components namely Islamic banking Islamic Capital Market and Islamic Insurance have to be developed and so we had to create this uh coordination Forum to ensure that this different regulatory agencies are working on the implementing regulations so shortly after the enactment of the law in December 2019 the central bank has issued the licensing framework to announce to the public the requirements of the U the Central Bank in terms of Licensing Islamic Bank Islamic banking windows and the central bank has adopted a very Flex approach we we allow both full-fledge Islamic Bank Islamic banking Windows it can also be domestic bank or foreign Banks and it is timely because we have also liberalized the ownership of foreign Banks um in the Philippines now alongside this development it is complemented by the um implementing regulations so for example insurance commission they have issued the takaful guidelines which actually led to the issuance of takaful operators license to two players Nam PR life UK and the other one is IA which is the Islamic banking arm of May Bank Philippines now on the side of this Islamic banking because of the implementing regulations that were quickly issued by the central bank we have licensed two more Islamic banking window licenses in the Philippines one is card bank which is a conventional bank it's a large conventional bank and the other one is May Bank Philippines May Bank Philippines is actually a domestic Corporation but it's a fully owned subsidiary of May Bank uh Malaysia now aside from that you mentioned about the suku and that's a very strong signal of the Philippine government of that the serious um effort of the Philippine government to promote Islamic banking in December 2023 we have issued our first Sovereign Suk and it was subscrib over subscribed by almost five times and this was listed in the Dubai NASDAQ that is very promising and actually stakeholders are actually asking when are we going to issue the next suou now to complement all of this Milestones the government has also established a Sharia supervisory board the main responsibility of the board is to issue opinions on Sharia compliance matters this is very important as we gather more uh players in the system we would need an institution that can provide guidance to the players on what is Sharia compliant and not Sharia compliant now we understand that we need to um move on with capacity building to support all of this um initiatives moving moving forward we the Philippine government would Target to have more players in the system because then we would be able to back test the regulations that different Regulatory Agencies have been issuing if uh there are regulatory gaps we can address and of course the uh persistent question that we get from stakeholders is there a demand for Islamic banking in the Philippines and and because of that persistent question the Asian development has commissioned um a report uh entitled unlocking the potential of Islamic Finance um in the Philippines and this is publicly available in the website of the Asian development bank and the bank of Central and Filipinas that that report um shows a compelling case of an unta demand for Islamic Finance both from the Muslim uh population of the Philippines which is about 10% of the population also from non-muslim Filipinos so that's why the government agency the way that we are communicating to the stakeholders is that Islamic Finance is not it's exclusive to Muslims it's for all Filipinos and we hope to see more players um in the future as we continue to drive with this initiative of includ uh Financial inclus because we have linked this to financial inclusion we hope to see more players in the Philippine Financial system no that is fantastic and I do stand corrected on you know the history of Islamic Finance in the Philippines but it's very heartening to see so many different institutions launching windows or or playing a role there and I can talk to you from experience with institutional uh players that when the Philippines launched their sukuk it was very well received by the market as you mentioned five times over subscribed and there is a lot of interest for further issuances uh from that so we hopefully look forward to you know uh welcoming more its instruments into the market from the Philippines andela I want to turn to you now and uh you know from from Bank Italia's perspective right how do you view Islamic Finance as as as a priority area and area of focus for the and what is the bank's plans or intentions for Islamic Finance in Italy okay good morning everybody and thank you for accepting this very last minute request of moderating uh yeah I will start saying that in Italy we have no Islamic financial institutions but uh we have a lot of interest in Academia researchers and also Market players so what have we done as Italian Central Bank is start asking what does it mean for us as a central Banker as a monetary um policy from a monetary policy point of view having uh uh Islamic financial institutions and so what I can share is the uh as what we uh did with our publication we we issued an occasional paper uh on these and we also hosted some events in order to raise awareness on Islamic Finance we also hosted an Islamic Financial Services Board a European Forum in the Italian Central Bank and and also uh participated in an exercise at European Central level uh so we issued the paper uh on Islamic Finance in Europe um so uh what's are uh in our view uh the challenges because to us Islamic Finance um it's a um it's something that we approach from two point of view I will say first of one uh it's uh the main message is Europe uh Italy is uh embedded in European framework in in Italy in Europe we share a common monetary and financial sector framework so uh this is this means that if you want to operate in Italy you have to take into account this more General framework and the second message is um a secular approach uh being a European regulator um to us is very important to take a neutal stance U uh regard to the uh I mean uh ethical and religious aspect of uh Banking and Financial activity so these are two main messages but this does not means that uh there is not a compatibility between uh um European um regulatory framework and Islamic finance and then I come to challenges I I like to to call it challenges because there is something that we can we can Sol we can find a solution also based on other legislation and other regulatory Authority uh experiences and I will focus on three main areas one is the monetary policy as you know uh the uh European um monetary policy instruments are all interest based so Islamic financial institution in the European framework cannot access um monetary policy operation and also sukuk are not eligible collaterals for uh counterparts in monetary policy operation the main the main other areas is supervisory um supervisory uh area and here the challenges are related to uh access I mean uh there is an issue whether uh Islamic banking activity is um um um is compliant with the notion of banking activity set out in our Italian banking law so this is the main step we have together with market player to uh to to face and the other one is uh uh that in our system uh it is mandatory to have a license to get a license a banking license to uh be part of uh depositor guarantee scheme but we we' seen that in UK and other jurisdiction Sol have been found um and then there are um the usual issue related to corporate governance and the role of sharia supervisory board in uh our U uh commercial um commercial and civil law uh other issue relas I will not go in deep to uh uh credential supervision I mean how we uh take into account the very peculiar risks of Islamic financial institutions but in my opinion there is a third area that it's it's the biggest challenge and then the first step um to take into account if you want to uh create a Level Playing Field that is tax regulations I mean it has to be uh equally convenient to uh to use Islamic confront and conventional one and we seen that in UK in Ireland and Luxembourg and other European Juris jurisdiction where Islamic Finance has been developed developed we have had this uh this uh tax amendment to uh tax um to regulations um in it we had a draft law uh a few years ago so this is a good news we're trying to I mean avoid this double duty stamp for uh especially mortgage operation but also to um to have the same taxation for equity and and depbt uh but this is it was only a draft law um I can Al I can conclude my my my my my first round of um of speech uh with with another um with a an interesting development on the Islamic Finance in Italy that is also related to this country we had our uh Italian export credit agency uh that is sa uh that was uh uh issuing an Islamic facility uh in cooperation with a UA based um player um so this is something that brings to me to um uh to say that Islamic fin Finance can can be we see we in the general system of uh I mean promoting Italian competitiveness also as a tool to support uh to support it and yeah this is from my side no I think that is fantastic um all all the challenges that you mentioned you know I think are very pertinent because people don't realize you know they think that implementing Islamic Finance is a very straightforward thing in a new market but you have to take into account as you mentioned the monetary policies supervision licensing and so on the double taxation has always been an issue and as you said markets like the UK and others have come up with a legislative framework on how to address that and create a Level Playing Field for both Islamic institutions and the conventional banking institutions but it's great to see that despite these challenges there are transactions taking place it's you know it shows that Islamic Finance can operate in that framework um I'm very mindful of the time we just have a very short time but I would like to turn to each of the panelists to you basically ask you if there was one initiative that you think is the most important thing that your institution should be looking at going forward for the promotion of Islamic Finance what would that be what what is the area of focus that you think that you know whether whether it's you know Bank Nara Malaysia whether it's you know Central Bank Philippines Central Bank Italy what is the main area of focus related to Islamic finance that you should be looking at going forward and maybe nura will start with yourself perhaps this is a reflection of the stage of development as to where we're at but our main priority now is to ensure that the ecosystem gap of developing A system that is now at skill is fully address and that includes expanding investable assets making sure that takaful industry the risk management tool are keeping Pace with Market development thirdly looking at the full potential of sharah contracts and transactions making sure that those value propositions that come with different types of contracts can actually be fully delivered in a efficient and competitive manner optimizing digitalization uh and Market developments that we see across uh the financial system as a whole fantastic uh in the case in the case of the Philippines there's really low awareness and understanding of Islamic Banking and finance and I would consider increasing awareness and capacity building is very important to to keep the momentum and uh develop further Islamic Banking and Finance in the Philippines I completely agree with you uh building awareness is key and it's good to see Asian development bank has done their report and hopefully more thought leadership pieces to come as well and Angela yeah being a secular Central Bank as I was saying before we don't see a role in promoting Islamic Finance but we don't promote any Market developments but I see interesting following other regul s developments and being open to uh Market operators requests and trying to understand what's going on so that's that's our role in the general European framework yeah you always have to be Market focused to be able to serve the consumers best on that note ladies and gentlemen we've run out of time please join me in thanking my fellow panelists for this great session thank you [Music]