Opening Address by Mr Nik Mohamed Din Nik Musa, Director General, Labuan FSA at the IIFM-Labuan FSA Seminar on Risk Management and Value Creation via Sustainability, Tokenisation & Hedging
Seminar on Risk Management and Value Creation via Sustainability, Tokenisation & Hedging

27 May 2024

Opening Address By

Mr Nik Mohamed Din Bin Nik Musa
Director-General, Labuan FSA
Y.Bhg. Datuk Wan Mohd Fadzmi Che Wan Othman Fadzilah, Chairman of Labuan Financial Services Authority (Labuan FSA),
Y.Bhg. Datuk Prof. Dr. Mohd. Akram Laldin, Chairman of Labuan FSA’s Shariah Supervisory Council (SSC),
Honourable Members of Labuan FSA,
Shariah Supervisory Council (SSC), and
International Islamic Financial Market (IIFM),
Brother Ijlal Ahmed Alvi, Chief Executive IIFM Bahrain,
Y.Bhg. Datuk Iskandar Mohd Nuli, Executive Chairman, Labuan IBFC Inc.
Dato’-Dato’, Distinguished Speakers,
Ladies and Gentlemen,

1. Assalamualaikum and a warm welcome to you to this seminar on “Risk Management and Value Creation in Islamic Finance via Sustainability, Tokenisation, and Hedging”. We welcome our guests from abroad who have traveled from afar to be with us today. I extend my sincere gratitude to the IIFM for jointly organising this seminar with Labuan FSA held in conjunction with the inaugural Global Forum for Islamic Economy and Finance (coined as G-5) at the KLCC. Our pre-G5 event seminar is one of its kind that combines the current top-of-mind topics in global finance, namely, sustainability, tokenisation and hedging and how they inter-link.

2. It is a true pleasure to join you today for what promises to be an interesting session with our esteemed expert panellists as they share their extensive knowledge and insights on the crucial topics at hand. This is very much in line with the saying of Prophet Muhammad S.A.W., ‘The best of people are those who bring the most benefit to the rest of mankind’. Given the unique nature of this timely gathering, I believe it presents us with a valuable opportunity to explore some critical questions, challenges, and considerations facing the Islamic finance industry today. These are pivotal aspects we must address as we work collaboratively to chart the future course of Islamic finance as it reinvents itself to stay relevant.

Need for Transformation in Changing Time – Towards Sustainability

Ladies and gentlemen,

3. The global financial landscape is experiencing significant transformations. The recent pandemic has served as an urgent call for countries across the globe to transition more expeditiously towards a sustainable economy. As this global movement gathers momentum and the need for climate change response becomes more pressing, regulators have begun implementing requirements focused on long-term sustainability. These measures aim to preserve and enhance market efficiency and economic prosperity for both immediate and long-term horizons. The financial sector in general, and financial institutions specifically, are key drivers and shapers of an economy. They possess the power to create and propel the impetus for sustainability within a particular market.

4. A truly sustainable future involves meaningful participation of all members of the global community. About one third of the global population is at risk of exclusion from services and access to markets. Hence, the future of finance will increasingly rely on financial inclusivity and social finance. In fact, financial inclusion is positioned prominently as an enabler of other developmental goals in the 2030 Sustainable Development Goals, where it is featured as a target in many of the seventeen goals. So, the question is, how do we achieve this in a short span of time and in the most cost effective way?

How Islamic Finance can play a role in Enhancing Sustainability

5. The current global finance industry has a relevant role to play and so does Islamic finance. Islamic finance, though still a small fraction of global finance, has an inherent advantage as it has overlapping principles with sustainable finance which fundamentally is the avoidance of harm and focused more on productive activities. As embedded in its investment policies, Islamic investing applies criteria such as reliance on real underlying assets, avoidance of speculation and uncertainties, accountability, transparency, and prohibition of harmful substances. Sustainability or ESG investing has similar criteria to limit harms and reduce long-term risk but usually goes beyond explicitly protecting the environment and reducing harmful emissions.

6. As the global Islamic finance assets are expected to reach US$6.7 trillion by 2027 as projected in the ICD-LSEG Islamic Finance Development Report 2023, we believe that the emergence of digital finance can accelerate it further. The digital way of doing business is sustainable in itself. Tools and technologies help businesses streamline processes, reduce paper usage and wastage, and improve energy consumption, impacting less on the environment and cost savings. Recently, the Bank for International Settlements or BIS, several central banks, and top global banks are entering the foray mainly for cross border payments and asset tokenisation. Already the asset tokenised or digital asset business now stands at a few hundred billion dollars which is predicted to become several trillion dollar business by 2030, unlocking great value into the market. Tokenization will revolutionise the way we fund, trade and manage assets, even for Islamic finance to stay relevant.

7. In this regard, Labuan IBFC established an initiative called the Islamic Digital Asset Centre (IDAC) in 2022 to develop the ecosystem and regulatory guidelines to create a conducive marketplace for the offering of Islamic digital products and services to the global market. One of the pillars of IDAC is to develop Islamic digital exchanges for the virtual issuance, listing and trading of Shariah-compliant securities token or STOs we would call RAMZ in Arabic (just as sukuk denotes Islamic bonds). This first-of-its-kind platform has created a new avenue for corporations and SMEs to raise funds and issue a new asset class for investors around the world online. Currently, four RAMZs are listed on Labuan exchanges, with a combined value of USD365 million. (We hope to more than double this amount by the end of the year.)

8. With the power of tokenization and blockchain as the underlying technology, the possibilities for creating new Shariah-compliant ethical products are limitless, especially for the betterment of the ummah and world at large. This ensures transparency, enhances liquidity, automates compliance, with Islamic principles, and provides financial inclusion and efficiency. Already there are parties interested to work on using the exchange technology for carbon credit trading to address the climate change, and funding of related green projects. Through these exchanges, climate-based RAMZ can be created for commercial trading and for the inclusion agenda via airdropping such RAMZ into the social wallets of the underserved. By leveraging on Labuan's strategic location and robust regulatory framework, this climate exchange would contribute towards facilitating the global transition to a low-carbon economy.

Ladies and gentlemen,

9. To safeguard and ensure sustainability in the growth and orderly development of the Islamic digital finance sphere, the regulatory harmonisation, or standardisation, remains a concern. The lack of consistent regulations hinders the seamless integration of Islamic finance across borders. To address this challenge and manage the risks, the establishment of some form of a global body to monitor and streamline the development of Islamic digital finance, should be explored. It would function as a collaborative platform dedicated to promoting digital innovation and standardization exclusively within the Islamic digital finance space. By fostering collaboration and establishing a common ground, this would pave the way for a more efficient and interconnected Islamic digital finance ecosystem, creating a unified regulatory framework for Islamic digital finance on an international scale.

IIFM Tahawwut – Hedging to Provide Protection Against Uncertainty

10. As vice-chairman of IIFM, I’m delighted that the awareness session of IIFM’s standards has once again held in Malaysia. IIFM has shown continuous commitment in its efforts in developing and disseminating standardised documentation for Islamic hedging products as we will be hearing this morning. A significant milestone was achieved in March 2010 with the publication of the Tahawwut Master Agreement (TMA) in association with ISDA. This agreement marked the introduction of the first globally standardised documentation for OTC Islamic hedging products. The TMA serves as a framework document that offers wider Shariah acceptability and fosters innovation in Islamic hedging products. It incorporates features such as index-based close-out mechanisms, the unilateral Wa'ad concept, and other legal and Shariah provisions specifically designed for privately negotiated and widely accepted Islamic hedging products. Under this agreement, Islamic hedging products can be transacted with greater confidence and clarity. I would urge the Islamic banks to take cognisance of this agreement and adopt it in your dealings.

11. As I wrap up my remarks, let me reiterate our journey towards a sustainable future with Islamic digital finance is well underway. By embracing innovation, fostering collaboration, and adhering to our ethical principles, we can create a robust, inclusive and resilient financial ecosystem that benefits everyone. As Labuan has in place the necessary digital financial services and governance framework, this has now paved the way for the development of over 100 digital financial services providers. We are also looking forward to the emergence of Islamic digital banks in Labuan via the announcement of a certain incentives package and blockchain masterplan launch tomorrow at G5. We invite interested parties, and fintech firms to explore this opportunity. We are excited that these new developments will find new solutions that can cater to the needs of the underserved and unserved global market.

12. I am confident that the insightful discussion and the intellectual discourse today will provide valuable knowledge and inspiration for the future of Islamic finance. I commend the esteemed panellists for sharing their expertise and enriching our understanding of the intertwined themes of sustainability, risk management and value creation within Islamic finance.

13. On that note, I look forward to and wish all of you a productive forum ahead. Thank you and wassalamulalaikum W.R.T.

Mr Nik Mohamed Din Bin Nik Musa
Director-General, Labuan FSA
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