How Islamic Finance Can Power Asia’s Prosperity

Islamic finance is growing fast in Asia, a region that has many opportunities and challenges. Asia is home to more than half of the world’s population and many diverse cultures and religions. Asia also contributes to most of the global economic growth and innovation.

But Asia also faces some problems, such as poverty, inequality, climate change, and social conflicts. These problems need a lot of money and resources to solve. And that’s where Islamic finance can help.

In this blog post, I will explain how Islamic finance can play a stronger role in regional financial intermediation and deepen the vibrancy of Islamic financial markets. I will also share some examples from Malaysia, a country that has a long history and experience in Islamic finance.

Here are the main points of this blog post:

Read more about Islamic finance here Islamic Finance - FinFormed.

What is financial intermediation?

Financial intermediation is the process of connecting people who have money (savers or investors) with people who need money (borrowers or businesses). For example, when you deposit your money in a bank account, the bank can lend it to someone who wants to buy a house or start a business. The bank acts as an intermediary between you and the borrower.

Financial intermediation is important for economic development because it helps to allocate money to productive and efficient uses. It also helps to reduce risks and costs for both savers and borrowers.

How can Islamic finance support regional financial intermediation?

Islamic finance can support regional financial intermediation in three ways:

• First, by supporting halal trade and investments. Halal means permissible or lawful in Islam. Halal products are those that are made according to Islamic rules, such as food, cosmetics, pharmaceuticals, and clothing. Halal products are in high demand worldwide, especially in Asia, where many Muslims live. Islamic finance can offer various financial products and services that are compatible with halal standards, such as trade finance, supply chain finance, and digital finance. For example, in Malaysia, the use of Islamic bank financing by halal-certified companies has doubled between 2018 and 2021.
• Second, by supporting sustainable finance. Sustainable finance means using money for projects that are good for the environment and society, such as renewable energy, clean water, education, and health care. Sustainable finance is aligned with Islamic principles, which emphasize social justice, environmental stewardship, and ethical conduct. Islamic finance can help to bridge the funding gaps for sustainable development goals in Asian countries, which are estimated at USD 1.5 trillion annually until 2030. For example, Malaysia has issued several green sukuk (Islamic bonds) to fund solar power plants and green buildings.
• Third, by expanding the intermediation capacity of Islamic finance. This means using more diverse sources of funds and reaching more segments of society that are underserved by conventional finance. For example, Islamic social finance instruments such as zakat (charity), sadaqah (voluntary donation), waqf (endowment), and qard al-hasan (benevolent loan) can be used to complement banking and takaful (insurance) products. These instruments can help to provide financial inclusion and resilience for microentrepreneurs and small businesses.

How can Islamic financial markets be deepened and enhanced?

Islamic financial markets can be deepened and enhanced in several ways:

• First, by increasing the supply and demand of Islamic financial assets. This means issuing more sukuk and equities that are Shariah-compliant (in line with Islamic law) and attracting more investors who are interested in ethical and sustainable investments. For example, Malaysia has issued many government sukuk that are tracked by global indices and rated by top rating agencies.
• Second, by improving the infrastructure and regulation of Islamic financial markets. This means having reliable and secure systems and platforms for trading, clearing, settlement, and reporting of Islamic financial transactions. It also means having clear and consistent rules and standards for Islamic financial products and services. For example, Malaysia has enabled non-resident participation in domestic ringgit-denominated sukuk and equity markets and is working on a proposal for anticipatory hedging that is compatible with Shariah principles.
• Third, by enhancing the cross-border and regional integration of Islamic financial markets. This means facilitating the flow of funds and information among Islamic financial markets in different countries and regions. It also means harmonizing the rules and practices of Islamic finance across jurisdictions. For example, Malaysia is participating in the Local Currency Settlement Framework that allows trade and investment in local currencies among ASEAN countries.

What is Malaysia’s role in Islamic finance?

Malaysia is one of the pioneers and leaders in Islamic finance. Malaysia has a comprehensive and mature Islamic finance ecosystem that covers banking, takaful, capital market, money market, wealth management, and human capital development. Malaysia also has a supportive legal and regulatory framework that promotes innovation and growth of Islamic finance.

Malaysia’s vision is to be an international gateway for Islamic finance, especially for Asia and OIC (Organization of Islamic Cooperation) economies. Malaysia wants to leverage its ecosystem strengths and capabilities to provide innovative solutions that meet regional and global Shariah-compliant finance needs.

To achieve this vision, Malaysia has established the MIFC Leadership Council (MLC), an industry platform that leads efforts to advance MIFC propositions as a global marketplace for Islamic finance. The MLC aims to improve the global competitiveness of Malaysia’s Islamic finance industry, deepen financial linkages, expand international opportunities, and deliver more impactful financial innovation.

Conclusion

Islamic finance is a powerful way to promote regional prosperity in Asia. Islamic finance can support halal trade and investments, sustainable finance, and financial inclusion. Islamic finance can also deepen and enhance the vibrancy of Islamic financial markets. Malaysia is a role model and partner for Islamic finance in the region and beyond.

Disclaimer: The views expressed in this blog are not necessarily those of the blog writer and his affiliations and are for informational purposes only.

Want to be part of a community of informed and engaged individuals? Follow us on social media @Facebook, @Linkedin and @Twitter