Zeti Akhtar Aziz, Bank Negara Malaysia: let us do things our way

II: Tell us about the new Central Bank Act.
We have greater clarity of our mandate articulated in the act. We have greater accountability of the central bank, and we are institutionalising many of the practices we have adopted, like the monetary policy committee; the level of disclosure and transparency is all embedded in the act. We have also taken into account all the issues which have emerged in this financial crisis – the lender of last resort facility, and how we would deal with non-regulated institutions that may have systemic implications for the financial system. One of the mandates we have put in is financial inclusion: we think it is very important that future generations of central bankers will always give regard to that, because we want balanced growth, we don’t want it all in urban areas. It promotes social and political stability because the income disparity is narrowed.

II: Is it similar to other central bank acts?
We have worked on this for two years, consulted experts around the world; we have had our act for 50 years and now we want to have an act that is robust enough to take us through the next 50.

II: So it’s not a response to the crisis?
Not at all. We thought it was timely to reflect on all the changes that have taken place. But the crisis brought to the forefront many of these issues.

II: When will it be passed?
We hope it will be passed by parliament this year. It will provide the bank the ability to be effective in a very changed environment. In the previous crisis the government machinery was very efficient and we were able to set up the asset management corporation, a special purpose vehicle to recapitalise the banks, but even then it took about three months for that process. Now, if this act is enacted, we would be empowered to respond immediately.

II: Last year for the first time there was a decrease in the issuance of sukuk. Do you see a chance of recovery for that market this year?
Very much so, because there are so many in the pipeline to be issued. They were held back by the widening of spreads and increased costs. We understand a number of them are going to come forward and others have made submissions.

II: There is a feeling that there was a real opportunity for Islamic finance in the global financial crisis to establish itself as a credible alternative to the conventional world. Do you think that opportunity was taken, particularly in Malaysia?
We’ve always seen, with the development of the Islamic financial infrastructure in our system, that there has been great momentum: it attracted the participation of Muslims and non-Muslims quite early on. The first sukuk was issued here in the early 1990s by Shell, a multinational. And when we liberalised our market it became still more vibrant and it will continue to grow.

II: Has the Malaysia International Islamic Financial Centre (MIFC) achieved what you wanted?
Yes indeed. We want to promote Malaysia as an Islamic financial hub – a meeting place where those who need funds raise their funds in our market, and those with surplus funds invest in the financial instruments offered. We have liberalised much more aggressively to allow players to have more major stakes in our domestic financial institutions, and the international dimension of Islamic finance has increased significantly.

II: Are the multinationals bringing money in with them?
Yes, they contribute to the inflows of funds.

II: A year ago central bankers were dealing with inflation pressure and slowing growth at the same time, plus various countercyclical complications. It looks an appalling time to be a central bank governor.
Malaysia is not an inflation-targeting central bank, and we were very often criticised for that. The argument was: how do you anchor expectations when prices are rising? We have adopted a different approach. Our objective is the same – price stability – but the framework and approach is different. That is why I think it is very important to afford countries the flexibility to assess what they think to be effective. [Last year the central bank declined to raise rates as other countries did so, then declined to again after a fuel price subsidy that was expected to raise inflation.] That brought in tremendous criticism, and the central bank was made to feel highly uncomfortable. But we explained we expected growth to slow down in the second half of the year. We did not raise rates. And we were better off for it. Then, in November and December, we saw the state of affairs internationally and we lowered rates – we front loaded the interest adjustment [by 75 basis points to 2.5%].

II: For the first time in its modern history Malaysia faces the prospect of political change. How does that affect you?
The central bank remains very focused on its mandate, and our new legislation articulates that even more clearly. We have tried to be an SFO, a strategically focused organisation, where we want everyone to be aligned to knowing what we want to achieve, and where we evaluate how successfully or badly we have done in any specific area. When you become such an organisation you don’t get distracted by developments. In fact, if there were any kind of development that generated uncertainty, we believe we have a more important role in providing information about what is going on in our economy.