THERE is all-round consensus and agreement that the world finance system is broken and needs mending. It is not just governments and regulators that are vulnerable to the risks created in "shadow banking" but investors, intermediaries and society at large.
Raja Muda of Perak Raja Dr Nazrin Shah summed up the current situation clearly when he said that "all of us would like to believe in the system of finance, but it seems to have let us down".
The system is damaged and needs to be repaired urgently. Regulations, including those in the United States, are outmoded and need to be revamped. The conventional financial system has been found wanting. The question now is: how should the world move forward and pull itself out of the current global economic crisis?
Raja Nazrin offered an answer: "Let's put faith back in finance." There is a need for all "to work together to rebuild the trust in finance... the cornerstone of modern finance".
The challenge, he said, was "to break the vicious cycle of mistrust and greed and give the world an alternative that they can put their trust in".
In an interdependent and globalised world, countries cannot work in isolation to rebuild the system and trust. Prime Minister Datuk Seri Najib Razak said a clear and shared vision was needed as modern markets had become too big, too interconnected and too complex to operate on laissez faire.
By some accounts, the worst may be over. Eminent economists, including Nobel laureate Paul Krugman and economic adviser to President Barack Obama, Laura Tyson, agree that the world has pulled back from the brink. But a lot of work still needs to be done to rebuild the trust that has been lost and remodel the system.
"Trust begets trust", said Raja Nazrin, who is also "financial ambassador" for the Malaysia International Islamic Finance Centre, adding: "We must ensure that the investments we make and allow are sustainable, that they will fuel real economic activity and that the commitment of capital is met with an intention of creating real value in the economy and benefit for society."
In moving forward and seeking alternatives, the lessons from the current crisis must not be forgotten or ignored. Krugman listed five lessons: bubbles happen; the financial system is not safe; monetary policy has its limits; in a crisis, deficits can be your friend; and, Keynesian policies work.
The prime minister added a sixth: over-reliance on self-regulation is a mistake.
He stressed that global regulators should "err on the side of investor protection and financial stability rather than rely on a 'buyer beware' regulatory regime".
The conventional financial system and the regulatory system need to be re-examined. Status-quo reversion to the old system is unacceptable.
Even as there are signs of "green shoots" in the global economy, and that Keynesian policies and stimulus packages around the world are beginning to produce results, it is too early to stop government spending.
In fact, Krugman said, there was still room for Washington to increase spending to boost growth despite concerns over its swollen budget deficit.
Alternatives must be considered. Islamic finance, which has not been impacted by the ongoing crisis, offers one. Raja Nazrin noted that Islamic finance had borrowed from conventional finance in terms of products and "the time has come where the flow of information and knowledge can and should flow the other way".
Islamic finance can help create an infrastructure of honesty, fairness and integrity -- qualities that have taken a severe beating in the current crisis.
"At its heart, Islamic finance is an inspiration towards good finance (and) good finance is about trust," Raja Nazrin said, "and trust is a cornerstone of stability... Islamic finance can help break the vicious cycle of boom and bust that has come to characterise global finance".
Trust must be restored. The centuries-old motto, "my word is my bond", must ring true again. In today's interdependent world, "finance is not delineated by the boundaries of a city or even a country".
The challenge and the goal of the Islamic finance industry, if it is to play an important role, should be to integrate into the global financial system.
At the same time, global finance must open its doors to Islamic finance.
Republished from NST