INCEIF was established by Bank Negara Malaysia as the only university in the world dedicated to Islamic finance. President and CEO of INCEIF, Daud Vicary Abdullah, speaks to PM about Malaysia’s leading role in international Islamic Finance.
How could Islamic finance contribute to shaping a more sustainable financial system?
There have been three major tipping points in the development of Islamic finance. The first was the generation of petrodollars. The second one was the tragic events of 9/11 and its aftermath as Gulf investors relocated their money out of the US, which created liquidity that, helped take Islamic finance to the next level. The third tipping point was the global financial crisis. There is an idea that Islamic banks are safer and in certain ways they are, but not simply because of ethical values - but because of its’ scale. They accounted for only 1% of global assets so there wasn’t a critical mass.
I wanted to be a banker since I was 16. My concept of banking was one of being a financial intermediary in order to promote the development of the real economy within the local community. What I liked is that I was helping people. In the 70s, the banking sector underwent a dramatic deregulation, which in turn gave rise to a speculative financial economy. Since then, virtually nothing ended up in the real economy. The crisis demonstrated that something was wrong, and that ethical values were eroding. The trust in the conventional system has been completely lost; the only trusted people are those that came out with an alternative, like Islamic finance.
In the American capital market 33 trillion dollars circulate every year, which is 30 times the size of the global Islamic financial service industry. Less than 1% of that amount goes to the real economy. So, the 2007-2008 crisis has been pivotal. There is much more receptiveness to Islamic finance now, but you have to be careful how to phrase it. We have risk sharing, and not risk shifting schemes. There is huge opportunity in the sector; the challenge is the political will to accept it.
When it comes to Islamic finance, Malaysia is the global leader. What are Malaysia’s competitive advantages that made it so?
The most important contributor in making Malaysia the global leader in Islamic finance is the infrastructure that was put in place by Bank Negara Malaysia (Central Bank of Malaysia) through its strategic vision. Moreover, there has been a good level of political will that started before independence. There was a concern about financial inclusion for the ethnic Malaysian Muslims. The second point is momentum, Malaysia has been a pioneer in the sector and has shaped different enablers, I like to refer to those areas with the acronym S.T.A.R.S. First, Sharia and Islamic jurisprudence that works successfully; the second is a level playing field in tax; third, accounting standards; fourth, regulatory framework. (Nobody else is close to our regulatory infrastructure, allowing the conventional and Islamic market to run parallel) and the final area is standards of documentation, education, and professionalism. I have more professors practicing Islamic finance than the whole UK university system. This is a global marketplace because the expertise is here. In a global marketplace, experience matters. That is why the UK comes here for support and advice.
What is the contribution of INCEIF in supporting Islamic finance as a National Key Economic Area, and in particular with regards to the objective of making Malaysia the indisputable global hub of this sector?
We are a postgraduate university created 9 years ago. Our first course, in 2007, had 33 students from 7 countries. Today, we have 2,500 students from 85 countries; and 619 graduates (soon to be 950 post our Convocation in October 2014), all at masters and PhD level. That is a significant contribution. This happened because of the remarkable support and vision of the Governor of Bank Negara.
Secondly, we are the only global university of Islamic finance till date. Our non-Muslim students are 13%. When we started, I needed to go and see people; now they come to see me. That is a barometer. Dubai’s designated university for Islamic finance came here for advice. We also have a collaboration partnership with the World Bank. The WB collaborates with three universities in the world: Harvard, Oxford, and INCEIF. This demonstrates that our professional skills are of global standards. We are the benchmark for Islamic finance education. The power of INCEIF is global. We will continue to grow and we are glad that the world looks at us as thought leaders in Islamic finance.
Considering the exponential growth in the sector, do you think the human capital development is one of the major challenges?
Amongst the most significant things we need in Islamic finance are education, perception, and liquidity (EPL). The human capital demand is there. However, some people associate Islamic finance with terrorist activity. You need education in order to change this perception.
The first sentence of the Quran says everybody should read and be educated. When you are born, you are no better than an animal, but you are differentiated as a human being through education.
One of the sub-sectors in Islamic finance that is experiencing high growth rate is Takaful. Could you please share with the readers of The Daily telegraph what is the difference between Takaful and conventional insurance?
Takaful is about mutual insurance. A community comes together to protect itself against certain events. People put their savings together, and if something happens to any of the members, the fund takes care of these people. This is a community-based approach to insurance. Takaful is not gambling, everybody is protected and if there are no accidents, you get money back. I opened an insurance account in Takaful, and every year I have a cheque back from the company, sometimes exceeding my annual premium because there weren’t many claims that year. That is mutuality. Everybody is an owner of the company.
Takaful needs long-term instruments. Therefore, Takaful operators are long-term investors and this is vital for the growth of Islamic finance.
Where do you see the main opportunities arising from London being the gateway for Islamic finance in the Western world?
London is a major financial market. Cameron said the UK should embrace Islamic finance. The significance of this is that there is a renewed commitment for Islamic finance because it is good for business. The growth in UK is facilitated by the size of the financial market and presence of top-notch professionals.
People come to Malaysia for advice because the experience is here. There is recognition of the expertise and also an increasing level of influence. Of course, it is necessary to change the mentality and prejudices about Islamic finance.
You need experts and competent people that understand how Islamic finance works. You cannot get that from Islamic finance PhDs. So having only graduates in Islamic finance won’t help you expand to Islamic finance markets. What London needs are executive programmes with experts, and people with experience in practical issues. Training programmes for practitioners is precisely what we are doing with the University of East London, for instance.
Many experts in Islamic finance in the UK are lawyers. The legal profession has some advantages in niche areas. For example, we are launching an arbitration program next year as it provides great business opportunities.
How would you like to tackle misconceptions? Do you think Islamic finance has the potential to change the course of history in terms of the relations between the West and the Muslim world?
The way to tackle misconception is two-fold. On the one hand, the audience has to have a level of awareness not to believe everything they hear on the street. On the other hand, it is also important to have people who can explain clearly what Islamic finance is about.
I don’t look like an Islamic banker. People expect to find a man with a long beard. You need to have people that speak to the audience in a rational manner. Not about Islamic concepts; the starting point is convincing people that this is a good business. If you can convince people that Islamic finance makes perfect business sense, everything will be much easier. I used to talk about the fact that we don’t charge interest when I just converted. Now, what I say is that Islamic finance is about the efficient and effective mobilisation of capital for the benefit of the real economy. That is the essence of Islamic finance.
The challenge is about people understanding that this is not a threat. It is something advantageous. It is not about Islam dominating everything, it is practical common sense. This is time for change.