Cambridge Forecast Group Blog

Zeti Akhtar Aziz: New opportunities for growth and development in Islamic

Speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the
official ceremony for the completion of the Share Subscription Agreement between BIMB
Holdings Berhad, Bank Islam Malaysia Berhad, Dubai Financial LLC & Lembaga Tabung
Haji, Kuala Lumpur, 16 October 2006.

* * *

The partnership between BIMB Holdings Berhad, Dubai Financial LLC and Lembaga Tabung
Haji is significant in several important ways. Firstly, it reflects the confidence and
trust that international and domestic investors have in the investment and business
climate in Malaysia, and in the Malaysian Islamic financial sector
in particular. Indeed, the Islamic financial services industry in Malaysia has experienced
robust growth in addition to being reinforced by enhanced market discipline and
transparency, and the vibrancy of the Islamic financial market
developments in Malaysia. The latest financial indicators show that the Islamic banking industry remains well-capitalised with a
risk-weighted capital ratio of 14.8% as at end-August 2006, while the net non-performing
financing ratio has declined to 4.2%. Clearly, therefore, the industry is strong,
resilient and well-positioned to meet emerging

challenges and to capitalise on new opportunities for the mutual return of its
stakeholders.

Secondly, this partnership comes at a significant juncture when Malaysia is enhancing
the

international dimension of its Islamic banking and financial
market, with the introduction of increased foreign participation. In line with the
aspiration to position Malaysia as an international Islamic
financial centre (MIFC), new licences and business divisions to conduct
international currency Islamic banking business, tax and other incentives have been
introduced to attract global Islamic financial institutions to make Malaysia the hub for
their regional business operations. These measures and incentives are also expected to
attract international investors, including from the Middle East, to leverage on Malaysia
as an investment gateway to tap the rapidly growing investment opportunities in the East
Asian region.

Thirdly, this partnership also serves to enhance Malaysia as a centre of product
innovation in Islamic finance. Indeed, conscious efforts have been made to ensure a
conducive environment for innovation in Malaysia, including the development of the
necessary pool of expertise and talent to drive such innovation. Within Bank Islam itself,
there is a track record and brand name for innovation, with the development of new
business models and product offerings. This partnership would thus contribute towards
accelerating this process and towards serving as a bridge to strengthen the relationship
of the Islamic financial markets as well as the investment
and trade ties between the West Asian and North African regions, with East Asia.

Strengthening the capital of a financial institution, however, is not the only factor
that will determine its capacity and potential to perform. Equally important is the
quality of its talent, the systems that it has in place, in particular, its risk
management and ICT systems and its governance structure, its leadership and its corporate
culture. Thus, while this capitalisation exercise will put Bank Islam in a stronger
position to tap new opportunities, all the other elements also need to be in place to
enable the institution to realise its true potential.

Sound corporate governance and effective management of banking institutions are vital
to ensure their effective and sound functioning. In particular, significant shareholders
are expected to play an active role to ensure that capable individuals are appointed on
the Board and senior management of banking institutions.

Bank Negara Malaysia had as early as 2001 required the Board and management of Bank
Islam to undertake remedial actions on several operational and control weaknesses. When
the weaknesses

were not adequately addressed, the process of reconstituting the Board and management
of Bank Islam was initiated in 2003. In such an exercise, key shareholders are expected to
be proactive in making prudent and responsible action to remove any member or employee
that is found to be unsuitable or not having the required calibre so as to avoid a
prolonged process in the reconstruction of the Board and management of the bank. It needs
to be recognized that the responsibility for the safety and soundness at the institutional
level rests primarily with the Board and the management of each banking institution and
the key stakeholders such as the significant shareholders. Institutional investors should
also have an active role and make swift and bold decisions in ensuring that only capable
individuals are appointed and remain on the Board and senior management of banking
institutions.

Currently, virtually all the directors and key executives of Bank Islam are new, with
diverse banking experience. In accelerating the provisions and in instituting the measures
to address the bank’s system, processes and business culture, it has now paved the way for
drawing in new shareholders. It can now offer a valued proposition. And indeed, the
participation of a new strategic investor will in fact further strengthen the bank. This
has allowed the existing and new shareholders to focus taking the bank to the next level
and to capitalize on the new opportunities the environment offers.

Indeed, the bank can gainfully advance to venture abroad to explore new business
opportunities in the regional markets. The growth prospects will also be further
strengthened by the overall performance of the industry and the sound and mutually
reinforcing inter-linkages of the various market components in the Islamic
financial system.

In closing, I would like to take this opportunity to congratulate BIMB Holdings Berhad,
Bank Islam Malaysia Berhad, Dubai Financial LLC and Lembaga Tabung Haji for their
contributions in the successful completion of the share subscription agreement for Bank
Islam. I wish Bank Islam and its shareholders every success in taking the Bank to greater
heights in its future endeavours.

Thank you.