Aashna Agarwal (GH): How can new financial innovations be put to work for the real productive economy?
Zeti Akhtar Aziz (ZA): Innovation needs to be aligned to the overall benefit it’s going to bring. For example, in ethical finance or Islamic finance, innovations go through a screening process to indicate the benefit they bring to the economy, community and environment. So, if they (the implementing authorities) look at the ultimate objective of this innovation, then it can bring the benefit we want to see.
GH: You were instrumental in the implementation of Islamic financial mechanisms. How can these mechanisms be adapted by countries like India to make themselves more global and inclusive financial hubs? Which countries offer the best models for this ideal today?
ZA: First of all, [it’s important] to understand what Islamic finance is – it requires every financial transaction to have an underlying economic transaction. It relies on profit sharing, which involves risk sharing – that is, governance process, transparency and disclosure – because you share the risk between borrower and financier. So this kind of finance is highly sustainable. Right now, even if countries like India may not be offering Islamic finance they can participate in Islamic financial systems in other parts of Asia, the Middle East and even in the developing world, like London, Luxembourg and Paris, where they have frameworks and structures which allow Islamic finance to happen.
GH: Which countries offer the best models for more global and inclusive financial mechanisms?
ZA: There’s been a convergence in thinking – of course, you need to have a model that is sustainable. This model requires many elements for a more developed financial system, including all its components, such as financial intermediaries, financial markets and the financial infrastructure. Yes, there have to be greater market orientation and competitiveness which require financial reforms. This also needs to be regulated: there has to be a balance between the regulation and the market process.
GH: And isn’t this where ethics and values also come in?
ZA: Yes, that is correct.
GH: Are there adequate circuit-breakers in place to prevent crises of political and social regression caused due to financial liberalisation?
ZA: There are no short cuts to preventing crises. There has to be a building up of resilience – and that is what most countries in South East Asia did in the decade following the Asian financial crisis. That demonstrated our ability to withstand the crisis that happened in the United States and Europe (in the United Kingdom) which had global implications. But South East Asian and other countries that were highly open did not face any disruptions in their financial systems and they were able to recover within a very short period of time to be on a sustainable growth path. So it’s all about building resilience.
This is a transcript of a video interview conducted with Governor Aziz on 13 March 2018 and has been edited for this format.
Zeti Akhtar Aziz is former Governor, Bank Negara, Kuala Lumpur, Malaysia. She has been appointed to Malaysian Prime Minister Mahathir’s 5-person Council of Advisors.
Aashna Agarwal is Content Coordinator at Gateway House
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