MIFC Ambassador Urges Innovation within Shariah to Meet Liquidity Challenge

Raja Nazrin Shah, Financial Ambassador to the Malaysian International Islamic Financial Centre (MIFC) has strongly urged the Islamic finance industry not to “dilute the authenticity of Shariah” in their quest for innovation and to welcome only newcomers who are scrupulous in their observance of “the true essence of Islamic finance”. Failing this, the industry may suffer a reputational risk.

Raja Nazrin was giving the Keynote Address at the 3rd SC-OCIS Roundtable which was organized by the Securities Commission Malaysia (SC) and the Oxford Centre for Islamic Studies (OCIS), United Kingdom at the Securities Commission, Kuala Lumpur on 12-13 March 2012, in the presence of Zarinah Anwar, Chairman of the SC and Dr Farhan Nizami, Director of OCIS.

The theme for this year’s Roundtable, ‘Solutions for Liquidity Management’, could not be more pertinent as the Islamic finance industry, perhaps for different reasons to the lack of liquidity in the conventional banking sector, too is grappling with the challenge of generating greater liquidity in the system, without which the future sustained development of the industry could be undermined.

Among the many challenges impacting liquidity in Islamic finance is the lack of secondary trading in the global sukuk market. This explained Raja Nazrin, is due to the scarcity of supply; lack of infrastructure; trading mechanisms that are not globally accepted; or unresolved issues over valuation. This in turn has led to investors holding on to a ‘Buy-and-Hold’ attitude of the certificates until maturity. Despite the fact that sukuk has become an effective tool in allowing corporations and governments to meet their capital and expenditure requirements, there remains a stark imbalance in sukuk infrastructure development between jurisdictions, thus curtailing cross-border transactions. As a result, sukuk trading takes place largely at the country and regional levels. This limits the ability of sukuk to be at par with conventional fixed income securities, which are traded extensively on a global scale.

The MIFC Ambassador advised that “to allow sukuk to grow as an important liquidity management tool, its secondary market needs to develop more depth and breath. A dynamic cross-border framework in liquidity management would enable the expansion of markets and allow Shariah-compliant financial products to reach communities that currently have limited access to them.”

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