IFSB-FIS Regional Workshop on Liquidity Risk Management and Stress Testing Standards
Welcome Address
By
Ahmad Hizzad Baharuddin
Director-General
Labuan FSA
25 March 2013
Grand Dorsett Hotel, Labuan
Bismillahir Rahmanir Rahim
Assalamu’alaikum Warahmatullahi Wabarakatuh and Salam Sejahtera.
Mr. Abdelilah Belatik
Assistant Secretary-General, Islamic Financial Services Board,
Distinguished Speakers,
Ladies and Gentlemen,
Good Morning.
- It is my great pleasure to welcome all participants to Labuan and the Islamic Financial Services Board (IFSB) members from the various countries represented here. I thank you for your presence and may Allah bestow you with His continued blessings. For those of you who are here for the first time, I hope you will be able to take some time to enjoy the serenity of the Labuan island and its unique sceneries and charateristics.
- Labuan FSA is delighted and honoured to host the IFSB-FIS Regional Workshops on Liquidity Risk Management and Stress Testing Standards today. This is the first time Labuan FSA is hosting an IFSB regional workshop, and I would like to thank the organiser, IFSB for choosing Labuan as the venue which would give us the opportunity to showcase the Labuan International Business and Financial Centre to the participants and the international members of the IFSB. As hosts, we wish you a wonderful stay here in Labuan and hope you would leave us here with a lasting impression of Labuan IBFC and you would continue to seek us in Labuan for your future endeavours.
Ladies and Gentlemen,
- This regional workshop aims to provide an avenue for exchange of views and experience amongst experts and practitioners on the standards that are issued by IFSB, to strengthen IFSB's quest as an international standard setting organisation to better the Islamic finance industry in general. For this workshop, the focus is on risk management issues in relation to institutions offering Islamic financial services with emphasis on Liquidity Risk Management and Stress Testing arrangements for Islamic banks.
- Over the next three days we are indeed privileged to have a panel of distinguished speakers to share their knowledge in liquidity risk management and stress testing that will undoubtedly provide significant food for thought amongst the participants.
- The international financial system has experienced a series of unexpected financial retraction during the global financial crisis and its impacts continued to impair asset value and global growth. Following the inability of several important economies to structurally reform their economies and ensuring measures facilitating growth remain viable, the global economy's road to a sustainable growth path has been fraught with risks and uncertainties.
- It is of no doubt that we are now still facing the most challenging economic and financial environment in decades that warrants us to relook at the system that the interest rate based economy had brought us. The situation would certainly be different if trade would have been the major nexus propelling world economic growth instead of financial greed, and leverage and excesses would be largely limited and contained. Islamic finance offer us this possibility of a world more solid in its gowth potential, underlining each growth potential with appropriate asset backing and nurtured with funding methodologies most fitting to the demands of the Quran and the Sunnah.
- It is with this premise and belief that the pace of global Islamic finance industry is expected to gain further momentum with the expansion of Islamic financial institutions, including in new jurisdictions. Globalisation and intensification in international financial and economic linkages would also spur an increase in international participation in Islamic financial markets and contributed to the growth in cross border financial flows, within the Islamic financial industry.
- Under these circumstances, it is important that active liquidity management should be given a special focus in the Islamic banking industry. Stress testing is also a key task that requires Islamic banks to prudently manage its portfolio, and at the same time stimulate Islamic financial institutions of the need for market instruments innovativeness and developments.
- Liquidity risk is a common risk faced by financial intermediary that may create contagion effects of insolvency risk and eventually lead to system-wide repercussions. Hence, liquidity risk management is of paramount importance to regulators and financial institutions, and managing liquidity risk in Islamic banks is certainly a far more challenging task due to its unique liability features and asset composition, or rather asset distribution. The modality one Islamic banks adopts may differ from another, while product range from a Mudharabah and Murabahah offers different liability and asset prescriptions, thus making it untenable to offer a standard solution that could either address the product suite or the Islamic bank's overall liquidity position. And most importantly, in competing for liquidity within the Islamic finance industry and against the conventional system, the lack of a comprehensive Islamic interbank money market poses a challenge on maintaining attractive returns. In this regard, Islamic banks are expected to better manage their liquidity risk affairs in light of these structural imposition.
- It is equally important that Islamic financial institutions are put into stress testing to ensure that they remain resilient and sound. The financial market and the world we are living in today is very much interrelated and intertwined, that makes contant asset valuation and business reflection an important requisite. Where relationships between the asset and liability are less clear particularly to the eyes of the investors and shareholders, the management of the expectations of returns and risk protection become more challenging, which is a common peculiarity seen in the Islamic finance industry today. Only under conditions of stressed that stakeholders recognized and take cognizance of the much needed precautionary measures, hence the discussion on stress testing standard today is indeed very relevant. Stress testing, not only will it qualfy and validates the assumptions, but also brings the shareholders to appreciate the possibilty of different scenarios often suppressed by positive enthusiasm of the organisation.
Ladies and Gentlemen,
- As the regulator for the Labuan IBFC, Labuan FSA is supportive in international efforts towards strengthening the international Islamic financial landscape, encompassing the development and enhancement of legislative and regulatory framework in Islamic finance, including those of the IFSB. This is reflective in our participation in IFSB, MIFC initiatives and in the IIFM, where Labuan FSA is a founding member. The formation of the Global Takaful Group (GTG) secretariat in Labuan also shows our commitment to develop Labuan IBFC as an international retakaful centre with significant presence of takaful and retakaful operators to support the global growth in takaful business.
- As you may be aware, the Labuan IBFC is the first international jurisdiction to introduce a comprehensive Islamic Finance legislation - the Labuan Islamic Financial Services and Securities Act 2010 (Act). The Act has made Labuan IBFC the first common law international financial centre to have a specific legislation governing Islamic financial services. The Act consolidates all provisions relating to Islamic financial products and services in Labuan IBFC including Islamic capital market and Islamic foundation in addition to Islamic banking and takaful. With the enactment of the Act, procedures and requirements of all Shariah-related maters were clarified and thus provide a greater degree of comfort for investors in Islamic financial activities as it is a dedicated piece of omnibus legislation that serves to ensure compliance with Islamic Shariah principles in modern business environment.
- Against this setting, it is our intent to see the international Islamic finance industry in Labuan IBFC to grow and we invite you and your institutions to take part in this development. Labuan IBFC, with its incentives and finance ecosystem, is here to enhance the Islamic financial system by facilitating cross border Islamic financial activities and to increase cooperation and coordination towards achieving greater market connectivity in Islamic finance globally.
- With greater financial integration, it is equally important for regulatory authorities to strengthen cross-border supervisory cooperation and for international standard setting bodies to share the global best practices contributing towards a more effective surveillance and management of financial stability, including liquidity risk management and stress testing.
Ladies and Gentlemen,
- On that note, I hope all participants will leverage on this platform to better your understanding in the prudential standard needs in Islamic finance activities. Today’s workshop on liquidity risk management and stress testing standards is timely and relevant considering the business environment in which Islamic banking and financing is operating in. I wish you a productive session and a pleasant stay in Labuan.
Thank you.
