The IFSB will also have a prominent role in facilitating the streamlining of the standards covering the cross-border supervision issues including the home-host supervisor issue. Since its establishment just over a year ago, the IFSB has attracted a wide participation. To-date, there are 13 full members, 3 associate members and 20 observers in the IFSB. This encouraging development demonstrates the keen interest towards the orderly and sound development of Islamic banking and finance. The wider participation which also includes several international and regional multi-lateral agencies will facilitate the consultation process and the adoption of these standards. Another important role to be played by IFSB is in the harmonization of the different Shariah interpretations towards a more universally accepted practice. These positive developments are expected to bring about a more robust regulatory and supervisory framework for the Islamic financial institutions to promote financial stability in the system. Second, existence of strong corporate governance It is also recognised that good corporate governance reinforces sound regulation and supervision. It contributes towards maintaining market confidence, and strengthening transparency and accountability. Its emphasis is to be value-oriented and promote fairness and justice with respect to all stakeholders of the banking institution. For corporate governance to work, good corporate practices need to be instilled and embedded in all aspects of the operations and at all levels within the organisation. Indeed, Islam strongly advocates all forms of positive governance. These values and ethical conduct have already been in built and are inherent in the community.

The standards issued by AAOIFI have contributed towards improved quality of financial statements and reporting methodology of Islamic financial institutions. AAOIFI has also issued standards on the role of the Shariah committee as well as the code of ethics that should govern the accountants and auditors of Islamic financial institutions. Efforts by AAOIFI have also accelerated the pace of transparency and corporate governance of Islamic financial institutions. Fourth, risk management framework Emphasis on improved corporate governance goes hand in hand with the need for improvements in risk management standards. Sound risk management practices will minimise adverse consequences faced by financial institutions during periods of uncertainty. Robust internal controls to provide qualitative standards are also necessary to complement the quantitative analysis of risk to provide a check and balance in the overall risk management practices. Effective risk management systems is central to supervisory efforts. The risk management system in Islamic institutions need to be able to address the unique characteristics and attributes associated with Islamic financing operations involving financial contracts and instruments which may give rise to other risks besides credit risk. The risk management infrastructure needs to be in place to facilitate the identification, measurement, monitoring and control of all inherent risks present in all the various types of financing so that the specific risks involved may be ‘unbundled’. The complexities of the respective risks in the Islamic financial instruments therefore need to be fully explored and quantified to provide for their effective assessment and management.