Remarks at the Conference on Islamic Finance for Asia

Remarks by ADB President Takehiko Nakao at the Conference on Islamic Finance for Asia on 4 November 2013, ADB Headquarters

as drafted

Distinguished guests, ADB colleagues, ladies and gentlemen:

It is a great pleasure for me to welcome all of you to ADB and to Manila.

This is the first time ADB has held a conference on Islamic Finance. I would like to thank the Islamic Financial Services Board, IFSB, for their joint sponsorship of the conference. This conference is among the first outcomes under the MOU which we signed last year with IFSB, to promote cooperation and information exchange. And I’m very pleased that IFSB Secretary-General Mr. Jaseem Ahmed will join me in welcoming you today. Mr. Ahmed, as you may know, is also a former staff member of ADB, and we are honored to welcome him back.

Now, some may ask: Why is ADB interested in Islamic Finance? The answer is threefold: because it is relevant to our work; because it increases financial inclusion; and because it promotes financial stability.

First, it is relevant to ADB because it is relevant to our developing member countries – our DMCs. Islamic Finance is one of the fastest growing segments of the global financial system. In several of our DMCs – including Bangladesh, Indonesia, Malaysia, and Pakistan – Islamic finance systems have already become well-established. Others – including the Philippines and several Central Asian countries – are looking to establish such systems of their own. In fact, the majority of the world’s Islamic Finance activity is occurring in ADB’s member countries.

Second, Islamic Finance promotes financial inclusion by offering vehicles for savings, financing and insurance to large Muslim populations in the region.  They cannot access or are wary of conventional finance systems and services. ADB’s developing member countries are home to about 80% of the world’s Muslim population. The growth of Islamic Finance provides ADB an opportunity to further pursue our agenda of inclusive growth.

And third, Islamic finance promotes financial stability because it is based on two pillars: materiality of transactions and mutuality of risk sharing. This means that all financial contracts are to be backed by real assets, and risks are to be shared among the partners. Compared to conventional finance, Islamic financial instruments tend to be more stable against unanticipated shocks.

However, Islamic finance does have its own risks and faces its own challenges, and I am sure that we will discuss some of these in the next two days. Just like conventional finance, Islamic finance faces market and transactional risks. This is why the work of organizations such as the Islamic Financial Services Board (IFSB) to promote the development of a prudent and transparent Islamic financial services industry is important. With appropriate standards and supervisory frameworks, integrating Islamic Finance into the global financial system can contribute to the stability of the regional and global financial systems.

As Asia’s premier development partner, ADB can play a catalytic role in the development of Islamic Finance in the Asia and Pacific region and ADB has already made a contribution in this respect. First, about technical assistance. Since 2005, ADB has approved three technical assistance projects for the development of international prudential and supervision standards for Islamic Financial Services. We have also provided advice and assistance directly to our DMCs in the development of capital markets for Islamic financial institutions.

Second, about cofinancing. ADB has been promoting the use of Islamic Finance by pursuing cofinancing opportunities with other international finance institutions, such as the Islamic Development Bank, or IsDB. For example, ADB and IsDB have jointly established the Islamic Infrastructure Fund. This $300 million equity fund will support infrastructure development in the 14 common member countries of the two institutions. We have also jointly provided Shari’ah compliant assistance to Pakistan for two wind farms through a $60 million partial credit guarantee.

And finally, ADB is supporting the International Islamic Liquidity Management Corporation, or IILM. The IILM was established in 2010 to provide instruments for managing liquidity for Islamic financial institutions. ADB participated in technical committees to establish the IILM. We have an MOU of cooperation and support between the two institutions. And we are working with the IILM to help their innovative Sukuk program. This program helps DMCs mobilize capital from the assets they hold. ADB can assist this program through the provision of credit enhancement facilities to DMCs who wish to participate in the program.

Some people may ask whether ADB can do more than what it has already done to promote Islamic finance in the region. In particular, some might ask why we have not issued a Sukuk? Clearly, we see the importance of this issue and we’ll be discussing this and related matters with our stakeholders going forward.

In closing, we at ADB are committed to enhancing our knowledge of, and support for, Islamic Finance in our region. Since assuming the Presidency of ADB, I have been promoting the three mutually reinforcing concepts of innovation, inclusion and integration as the way forward for Asia and the Pacific. I am confident that the further development of Islamic Finance will contribute to making our region more innovative, more inclusive and more integrated. This helps promote inclusive growth that particularly benefits the poor in the region.

Thank you very much. I look forward to the outcomes of this exciting conference.