Financial reporting and accounting issues  It is equally important for banks to take care of the financial reporting framework, be it international accounting standards or local accounting standards given that Basel II requires financial reporting on international accounting standards. Most banks in Sri Lanka will have to apply local accounting standards and make necessary adjustments in their financial accounts to comply with Basel II principles. The Institute of Chartered Accountants is proposing to adopt the International Financial Reporting Standards (IFRS), in particular IAS 39 and 40. CBSL will monitor the impact this will have on the regulatory capital of banks and formulate policies in this regard taking into consideration the international developments and practices of other regulators. IV. Single borrower limits and other sub-limits  Should the regulators and supervisors continue with the regulations imposed on single borrower limits, group borrower limits and aggregate limits that are in operation under Basel I, when they proceed to Basel II from 2008 onwards? and when will the supervisors lift sub-limits such as the single borrower limits that are currently in place and give more flexibility to the financial intermediaries? There is no clear answer to this, but we hope that some of the commercial banks which are conscious of the fullscale risk mitigation would be able to put in place appropriate processes and convince the supervisors of their ability to move to advanced approaches of risk mitigation. At that point we need to adopt more flexible attitudes towards limits and sub-limits in lending.

There is therefore little time to spare, in the run up to a revival of the sukuk market and the lead time it takes to promulgate tax exemption rules for Islamic finance transactions; financial market players in Hong Kong must gear themselves up to embrace the change coming your way. Secondly, there is in general a greater awareness of Islamic finance within the local financial community, particularly among banks. Banks in Hong Kong are in the position of being both investors in, and suppliers of Islamic finance products. Instruments, ranging from retail  BIS Review 19/2009  3  Islamic investment funds and Islamic treasury placements at the interbank and corporate level, to Islamic loan syndication, have started to emerge in Hong Kong within the past year. Financial market participants have also set up Islamic banking windows here to signal their readiness to cater for these types of activities. But even with all the significant developments achieved here in such a short period of time, more still needs to be done. While the recognition of Islamic finance as a viable fund-raising and investment alternative is gradually making its way to the corporate sector in Hong Kong, the pace of development is still rather slow. Furthermore, this market awareness should also be promoted beyond banks and other types of financial institutions to all related service industries, such as investment managers, asset managers, securities and brokerage houses, exchanges and commodity firms, pension funds, insurance agencies, solicitors, accountants, and trustees.