Malaysian banker to head UK's Islamic finance summit

The keynote speaker will be the governor of the Central Bank of Malaysia, Dr Zeti Akhtar Aziz, who has been at the forefront of efforts to encourage the country's majority Muslim population to participate more fully in Malaysia's growing prosperity.

Dr Zeti, who has headed the bank since 2000, was named the world's best central bank governor in Euromoney magazine's 2005 awards. She spearheaded reforms that brought Malaysia out of the 1997-98 Asian financial crisis in better shape than most other economies of the region.

The achievement for which she is at least as well known, however, is the development of financial instruments that comply with Islam's ban on usury. This stipulation kept many of Malaysia's Muslims outside the mainstream banking system and was seen as a brake on Muslim participation in Malaysia's flourishing business sector, which has been traditionally dominated by the country's Chinese and Indian minorities.

Speaking shortly before setting off for London, Dr Zeti insisted that Islamic banking should be referred to as Islamic finance, because Malaysia has reproduced almost the whole gamut of financial services so they comply with Islamic principles.

Business financing, mortgages, bonds and insurance are all feasible for even the most devout Muslims. As well as being offered by separate Islamic banks, they are offered by the mainstream financial sector.

Islamic finance accounts for about 11 per cent of Malaysia's financial sector. Outside Malaysia, interest in bringing Muslims into the financial mainstream rose sharply after the terror attacks in the US in 2001.

Malaysia's 30-year experience of Islamic finance was widely studied, and contributed to the introduction of "Islamic mortgages" by banks in Britain. Dr Zeti traces the genesis of Islamic finance with some pride to her father, an academic economist and later vice-chancellor of the University of Malaya, who as a young researcher studied Malaysia's rural economy. He had found that many Malays saved hard so that they could fulfil their obligation as Muslims to go on the Haj to Mecca at least once in their lives. But this kept a large sum of money out of the economy, and many people lost their savings because of fires, floods or theft. He devised a system that obviated the need for interest, but enabled Muslims to benefit from their savings and to finance their participation in the Haj.

The concept he developed, which ensures that a direct link is maintained between the buyer or investor and whatever they want to purchase or invest in, lies at the basis of all subsequent Islamic finance schemes.

While Islamic finance has benefited Malaysia, and affirmative action has improved the prospects for many Malays, the wealth gap persists, and there are fears that the country's recent growth could slow.

Pressure for further reform is mounting. From inside the country, a young generation of mostly Western-educated entrepreneurs doubts that the recent high growth rates of 7 per cent per annum can be sustained without major deregulation.

From outside, Malaysia faces pressure from the US, which is using its dominant position in the IMF to push for a revaluation of the Malaysian currency, the ringgit, just as it pushed last year - with only limited success - for China to revalue.

Dr Zeti fiercely denied that the ringgit is undervalued. Malaysia's strong economy, she said, derived not from an undervalued currency, but from its flexibility, the fast development of its service sector and its sound fundamentals.

Fixed at 3.8 against the US dollar in response to the 1997-98 crisis, the ringgit was freed to float within managed margins last July. Since then, it has appreciated significantly against sterling and the euro, but by only 1.5 per cent against the US dollar.