Innovation in the financial services industry has enabled financial institutions to obtain better insight into customer needs and correspondingly, develop new and better products to match their diverse needs, make significant improvements in operational efficiency by improving processes and business models as well as ensure more effective risk management. It has facilitated greater financial inclusion by allowing broader access to financial services in many emerging and developing countries. But the abilities to innovate will very much depend on the ability to get the necessary talent: the creativity to develop new ideas, the capacity to absorb knowledge and the capacity to acquire the new skill to turn ideas into results. This requires a talented workforce as the driving force of innovation. Building such a workforce would thus become a constant challenge for the Islamic financial services industry. In the context of Islamic finance, human capital development is all the more important given that the Islamic finance industry is still relatively in a nascent development phase. There is no doubt that the Islamic financial services industry in Malaysia has experienced an exciting and phenomenal growth. The proliferation of competitively priced Islamic financial products to match the diverse and discerning needs of customers particularly in this recent decade is quite evident. But we cannot be complacent. What has served us well in the past is unlikely to serve us well into the future. We must be mindful that being innovative in this environment of constant change and heightened complexity in itself is a challenge.

Along with technological advancements which bring about more efficient ways of conducting financial services, globalisation and liberalization of markets are amongst today’s major forces of change that are transforming the global financial landscape, blurring the geographical borders in doing business and increasing competition in the financial sector. Moreover, the recent global financial crisis has brought about several important developments that are shaping the global financial landscape. One that is relevant is the increasing awareness and appreciation amongst the international financial community on the distinct nature and inbuilt strengths of Islamic finance. The crisis thus has provided an opportunity for Islamic finance to strategically position itself as a stable form of financial intermediation. A few challenges stood before us – ongoing global reform that is going to change the contour of financial regulation, challenges associated with a general public distrust on the financial sector, general suspicion on  BIS Review 87/2010  1  financial innovation, and constant competition from other financial centers aspiring to take advantage of opportunities in Islamic finance as a new area of growth. Against these developments, we need to rise above these challenges whilst transitioning into the next level of its development. This will require rethinking of existing product structures and formulating new ones. New products being developed must also be competitive, meet the greater sophistication of customers’ needs and distinct from financial solutions offered by conventional banks. As new players enter the industry, the competition for the best talent would become more intense.