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Islamic Alternative Strategy Funds

The Securities Commission Malaysia (SC) will be organising the 2nd International Islamic Capital Market Forum on 13 November 2008 in Kuala Lumpur. The Forum’s theme is Islamic Alternative Investments – Alternative Strategy Funds and Venture Capital. It is not an easy task these days to chart the landscape for finance, let alone in an area of active innovation as in Islamic finance. The enthusiasm and energy levels are certainly high enough that Islamic finance frequently wanders off well-trodden paths and beyond neatly-defined boundaries.

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Islamic Alternative Strategy Funds

& Venture Capital

13th November 2008

Conference Hall, Securities Commission, Kuala Lumpur.

Photographer : Mr. Raymond Lee @2008 Web Design : Vincent Yong

The Securities Commission Malaysia (SC) will be organizing the 2nd International Islamic Capital Market Forum on 13 November 2008 in Kuala Lumpur. The Forum’s theme is Islamic Alternative Investments – Alternative Strategy Funds and Venture Capital.

Keynote Address
by
YBhg Dato’ Sri Zarinah Anwar,Chairman, Securities Commission Malaysia
at the
Second International Islamic Capital Market Forum
Islamic Alternative Strategy Funds and Venture Capital
13 November 2008, Conference Hall, Securities Commission

Distinguished guests, speakers, ladies and gentlemen

It is a great pleasure for me to welcome you to the Second International Islamic Capital Market Forum and the Securities Commission. ‘

1. It is not an easy task these days to chart the landscape for finance, let alone in an area of active innovation as in Islamic finance. The enthusiasm and energy levels are certainly high enough that Islamic finance frequently wanders off well-trodden paths and beyond neatly-defined boundaries.
2. Managing the change process in Islamic finance becomes an even more challenging task in the current global financial crisis where recent events portend that the future topography of global finance will be radically different from the way it is currently shaped. Even as global efforts are underway to contain the effects of financial contagion, it is evident to all that the current global financial architecture is flawed and major re-wiring is required.
3. But just how different remains a conjecture. Many see — or hope to see — a future environment that provides stability where financial risk-taking and leverage is better controlled; where private gains do not come at the cost of huge social losses; and where the distribution of wealth is firmly grounded and more inclusive.
4. So it shouldn’t come as a surprise that, amid this soul-searching about the global system of finance, proponents of the Islamic approach are discovering a renewed sense of purpose and adopting a more confident view of their future — a view where, according to one commentator,

Islamic finance has entered a bright new stage of development, emerging after the global financial crisis as a more equitable and efficient alternative to the Western approach.1

5. Indeed, there are many who see the Shariah-based approach as a panacea for the problems that have beset global finance. They argue that Islamic finance has largely escaped the fallout from the global financial crisis, thanks to rules that forbid the sort of risky business that is felling mainstream institutions.2
6. So will Islamic finance lead the way for others to follow? There are certainly good reasons to think so. Islamic financing involves a closer link between financial flow and productivity because interest-bearing transactions are not sanctioned. This contributes towards insulating Islamic finance from potential risks resulting from excess leverage and speculative financial activities. This characteristic of Islamic financing, along with a tight regulatory framework governing transparency for trading and fund management has helped cushion Malaysia from the shocks affecting the global hedge fund industry.
7. Let me emphasise that the Securities Commission recognises the need to facilitate a shift from a traditional long-only view of investing into one that provides the flexibility to employ sophisticated strategies to manage risk with greater precision. The advantage of modern finance is that it makes markets more efficient and deepens liquidity and, consistent with this, it should be an objective of securities regulators to facilitate the hedging of risks in markets. From our perspective, problems arise when hedging activities are opaque, when there is lack of oversight and a sense of accountability and ethical conduct.
8. In this context, the SC is reviewing its Regulated Short-Selling and Securities-Borrowing and Lending Framework with a view to introducing appropriate flexibilities within the Shariah context to enable the establishment of alternative strategy funds which are highly dependent on their ability to undertake hedging strategies. The Shariah Advisory Council has already approved regulated short selling via a Shariah-compliant replicated SBL and would continue to assess other issues including leveraging and other hedge strategies. These regulatory developments will provide a sound basis for Alternative Strategy Funds to be used as a launch-pad for Islamic funds employing absolute return strategies.
9. In this regard, I would like to highlight that the Shariah-based approach contains in-built checks and balances through risk- and profit-sharing structures. More critically, it demands a high level of disclosure and transparency in the financial system which is consistent with the principles of sound securities regulation as well as in compliance with Shariah requirements. You would have noted the tendency for sound financial conduct to share common characteristics with Shariah principles.
10. At the same time, it is important to note that  Islamic finance is not risk-free finance. Any endeavour carries risk—otherwise there would be no reward. Islamic finance exists within the real economy; it interacts with the financial system through Muslim and non-Muslim investors, issuers and intermediaries; it is therefore no less exposed to business risks and market cycles.
11. For example, deflation of the property sector, on which many Islamic structures are based, would lead to a fall in the value of Shariah-compliant securities as it would for any mortgage-backed securities. And as Islamic finance expands its international dimension, Islamic transactions would also increasingly be exposed to broader risk elements such as currency volatility, counterparty risks, macro risks and operational risks.
12. Islamic asset markets have certainly been affected by price volatility and higher risk aversion: the value of Shariah-compliant equities worldwide has declined as a result of the current market turbulence in tandem with that of global equities; the returns on sukuk have been flat for the year. In fact, several banks in the Gulf states recently experienced liquidity problems which was triggered by the sudden appreciation of the US dollar and a decline in the price of crude oil – requiring the same type of interventions that occur also in the global markets.
13. The global environment has also affected the pace of innovation in the Islamic space. Growth in Islamic hedge funds, for instance, is reportedly slower but this is not surprising given that the conventional hedge fund industry is expected to shrink by a third to a half.3
14. However, it should also be noted that the more established areas of Islamic finance seem to be weathering the storm relatively better than their conventional finance counterparts. Global sukuk issuance is down this year—possibly by as much as 40% — but nonetheless the estimated issuance of $20–25 billion4 is reasonable in the current market environment. In fact, several Middle Eastern sukuk funds have been established in recent months reflecting the views of the fund management industry that there are still ample opportunities in this market segment.5
15. In June this year, I spoke at the Islamic Capital Market Conference on the sustainability of Islamic finance. One of my observations then was that Islamic finance has begun to move increasingly into the realm of capital markets, primarily through the growth of sukuk instruments, but also in the area of structured products. However, I also noted that so far, structured financing is being done by re-crafting conventional instruments in an Islamic way.
16. This is an important issue because if Islamic finance is to take the lead in driving forward a more robust and equitable global financial system, then innovations within the Islamic space must come organically, and not just by mimicking the conventional industry. Islamic finance emphasises the link between financial assets and real assets and provides a framework that is stable and sound. In light of the current market developments, this is highly commendable and the Islamic finance industry must take the opportunity to put this advantage to work.
17. Venture capital is another promising growth area, because the financing techniques required are similar to the stated principles of Islamic finance, namely favouring profit and loss over interest. Moreover, by providing funds to entrepreneurs with sound ideas, Islamic finance can help to promote innovation, invention, job creation and the development of high-growth industries. The promotion of Islamic venture capital is also timely given the tightness in global credit markets.
18. We can thus view the advent of the Islamic hedge funds in the spirit of promoting organic innovation. Currency and commodity funds have been successful in attracting Islamic investors because their investing styles involve underlying assets. The use of Shariah-compliant methods to cope with Islamic requirements on the use of leverage6 represents another promising path to be explored.
Conclusion

Ladies and gentlemen

19. The current challenges posed by an unstable global financial system provide an opportunity for Islamic finance experts to consider the opportunities to promote the virtues of a shariah-compliant financial system. This must go hand-in-hand with continued advancement in knowledge and innovation.  Islamic investors also need to consider diversification strategies and to reduce their reliance on their traditional investments in commodity mudharabah, mutual funds, and direct equity and bond investments. Islamic banks and other financial intermediaries do need to expand their capabilities in diversifying the risks on their balance sheets and to manage their liquidity. A thriving Shariah-based industry in venture capital, private equity and alternative investments would add breadth to Islamic capital markets and provide the impetus to grow a comprehensive and more robust Islamic financial system.
20. Overall, we must remain mindful that the key to sustainability lies in innovation. To add value, Islamic finance must provide form with substance, and not form over substance. So we must work together to chart the future landscape of Islamic finance so that it delivers an “inclusive prosperity” that meets not just the pursuit of profit for individuals but the equitable sharing of wealth for society. After all, Islamic finance is synonymous with socially responsible and ethical finance.

Thank you.

1 “Global financial crisis highlights benefits of Islamic finance.” By İbrahim Öztürk. Today’s Zaman. Oct 22nd 2008.
2 “Islamic banking escapes global financial crisis”. Middle East Online. Oct 20th 2008. The same report quotes a Kuwait Finance House report that states: “In the current financial turmoil, it is interesting to note that Islamic financing may have prevented a majority of the mess created by the conventional banking and financial institutions.”
3 “Extinction predicted for a third of hedge funds.” Financial Times. Oct 23rd 2008.
4 “Sukuk Issuance Expected To Exceed $20bn In 2008”. Standard & Poor’s press release. Sep 9th 2008.
5 They are Algebra Capital (Dubai), Elaf Bank (Bahrain), Al Arabi Investment Group (Jordan) and Jadwa Investment (Saudi Arabia).
6 A common scenario is where “… fund managers purchase a commodity from a seller – the lender – and agree to resell it to the lender at a price to be paid in the future. The fund manager then sells the commodity and invests the proceeds. In some cases, the seller also acts as broker to sell the commodity for the manager and forward proceeds.” See “Hedge funds home in on Islamic investors” by Tahir Jawed. FINalternatives.com. Nov 6th 2008. http://www.finalternatives.com/node/5994.

SIDC – Emerging Market Programme 2008

A group of senior international financial regulators from 22 emerging economies attended the week-long annual Emerging Markets Programme (EMP) in Kuala Lumpur to share their practical experiences and knowledge of regulatory issues affecting emerging capital markets. Held from 18 – 24 October 2008, the programme was organized by the Securities Industry Development Corporation (SIDC), the education and training arm of the Securities Commission (SC). The theme for this year’s programme focused on strengthening emerging markets through “Competition, Collaboration and Compliance”. In her keynote address, SC Chairman Dato’ Zarinah Anwar, who is also the Chairman of SIDC, emphasized the need for regulators to adopt new ways of thinking about competition, collaboration and compliance to prepare them for the challenges ahead.

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Emerging Market Programme 2008 by

Securities Industry Development Corporation

( SIDC )

18th – 24th October 2008

Photographer : Mr. Raymond Lee @2008  Web Design : Vincent Yong

SC Flagship Training Programme Focuses on Strengthening Emerging Capital Markets

A group of senior international financial regulators from 22 emerging economies attended the week-long annual Emerging Markets Programme (EMP) in Kuala Lumpur to share their practical experiences and knowledge of regulatory issues affecting emerging capital markets.

Held from 18 – 24 October 2008, the programme was organized by the Securities Industry Development Corporation (SIDC), the education and training arm of the Securities Commission (SC). The theme for this year’s programme focused on strengthening emerging markets through “Competition, Collaboration and Compliance”.

In her keynote address, SC Chairman Dato’ Zarinah Anwar, who is also the Chairman of SIDC, emphasized the need for regulators to adopt new ways of thinking about competition, collaboration and compliance to prepare them for the challenges ahead.

She identified three key issues for emerging market regulators to consider to further strengthen their markets:

  • Regulators must avoid both excessive competition as well as excessive focus on more compliance and regulation. The former will lead to a regulatory ‘race to the bottom’ where long-term stability and investor protection are sacrificed for short-term gain. The latter, meanwhile, will stifle innovation and risk sharply curtailing long-term growth.
  • Emerging market regulators need to more than ever understand the interconnectedness of their markets with others and implement effective cross-border coordination of policies.
  • As emerging markets become more relevant and gain a bigger voice in the global financial arena, they will need to pursue relevant competition, appropriate collaboration and maintain high standards of regulatory compliance to come to the fore of the global playing field.

The programme was presented by 23 speakers from 10 countries including regulators from the United Kingdom and the United States of America who made the case for a new set of relationships based on collaborative competition and the right amount of regulation which would enable emerging markets to stabilize and prosper despite the financial storm.

Speakers this year included representatives from the Securities Commission Malaysia, China Securities and Regulatory Commission, Hong Kong Securities and Futures Commission, Monetary Authority of Singapore, Ontario Securities Commission, Securities and Exchange Board of India, Securities and Exchange Commission of Thailand, Singapore Exchange Limited, United States Securities and Exchange Commission, and the United Kingdom Futures and Options Association.

A total of 61 countries from all over the world have taken part in this programme since it first started in 2001.

SECURITIES COMMISSION AND SECURITIES INDUSTRY DEVELOPMENT CORPORATION

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