KUALA LUMPUR, Aug 23 – As a trading nation, Malaysia stands to lose USD65.3 billion worth of annual export revenue if it does not embrace the transition towards a low carbon and climate resilient economy by 2025, said Bank Negara Assistant Governor Adnan Zaylani Mohamad Zahid, in his opening remarks at the launch of the World Bank’s Islamic Trade Finance Report today.
While acknowledging the success and growth of Islamic financing globally, and in Malaysia, he said much was still required to be done to develop Islamic finance, especially in the context of an economy that is resilient with less dependence on loans and stronger with innovative trade based solutions while moving towards climate resilience.
Among the recommendations he pointed towards such growth included looking at trade-based solutions to ease liquidity constraints, helping businesses embrace sustainability and build resilience to climate change and exploring key prospects and opportunities in Islamic finance particularly the halal industry.
On the move to developing a climate-conscious economy, he pointed at the recently published Intergovernmental Panel on Climate Change report that spelt out code red for humanity and how Malaysia could lose out if it does not catch on, and how measures were being taken in Islamic finance towards this.
“On the current trajectory, climate change is estimated to cost the world USD1.7 trillion a year by 2050, with potential escalation to approximately USD30 trillion by 2075. Globally, efforts towards building climate resilience have intensified, with global supply chains joining the movement. The race towards Net Zero by 2050 has also seen multi-national corporations (MNCs) restructure their supply chains to be more sustainable, putting non-compliance suppliers at risk of being sidelined.
“Trade partners have started to impose expectations on sustainability as preconditions to transact. For example, Malaysia’s major trade partners (e.g. China, EU, South Korea and Japan) commitments to Net Zero by mid-century and the recently EU’s proposed Carbon Border Adjustment Mechanism will increase the cost of business to export into these markets. It is clear that sustainability is no longer a nice to have but an imperative business consideration critical for long-term survival.”
He noted that the financial sector was stepping up on this front including via the offering of sustainable finance solutions and assistance to companies in their transition journey.
“Islamic financial institutions have and continue to lead through Value-based intermediation (VBI) practices. VBI stems from the underpinning values of Maqasid Shariah that propagates attainment of benefits and prevention of harm that is consistent with the principles of sustainability.
“The Islamic banking industry, through the VBI Community of Practitioners, has also issued the Value-based Intermediation Financing and Investment Impact Assessment Framework (VBIAF) sectoral guides, a set of detailed impact-based risk assessment toolkit for application in financing and investment decisions.”
He said sectoral guides on palm oil, renewable energy and green energy efficiency have been issued so far with a few more in the pipeline.
Likewise, the takaful industry has issued the VBI for Takaful Framework that integrates the principles of VBI into products and business practices that promote financial resilience and climate risk management for households and businesses. These complement the Climate Change and Principle-based Taxonomy document issued in April this year that supports businesses transition paths by recognising climate risk mitigation and adaptation efforts over time.
On the call for trade-based solutions, he said the pandemic had led to subdued domestic demand and stringent COVID-19 containment measures, and this has resulted in a liquidity squeeze among Malaysian businesses, particularly the SMEs.
To stay afloat, some companies have had to resort to increased debt to meet their payment obligations. While measures have been introduced to lessen the burden of SMEs in the form of wage assistance programmes, support grants and deferment of financing instalments, these were temporary backstop akin to a band-aid.
“Prolonged assistance of this form may not be sustainable. The over dependence on debt-based instruments also reduces the financial flexibility of businesses in supporting their recovery.
“Trade-based solutions can offer a viable option where funding is tailored to the lifecycle of production. Companies can obtain short-term liquidity via the sale of current assets such as receivables and inventories to financial institutions without increasing their indebtedness. The structuring of such solutions however, entails new sets of risks to financial institutions. In contrast to debt financing, the financier is exposed to risks beyond credit, such as inventory and market risk, which calls for additional safeguards for risk mitigation, different approaches to risk management, infrastructure and practices.
“Given the nature of the exposures, this warrants Islamic financial institutions (IFIs) to take an exploratory approach to new trade-based offerings. This allows for a better understanding of the risks and their dynamics thus enabling IFIs to put in place the appropriate framework and policies. As an example, four Islamic banks have commenced a pilot programme with four government ministries in March 2021 to provide liquidity facilities for SMEs via the purchase of outstanding invoices from Government vendors. This is an example where non-traditional Islamic trade finance solutions can help satisfy the financial needs of businesses.”