The standards on capital adequacy and risk management that have now been approved by the Council of the Islamic Financial Services Board in December in 2005 is scheduled for implementation in 2007. Islamic financial institutions must therefore be equipped with the required capacity and infrastructure to capture the respective risk weights and assign appropriate amount of regulatory capital at each of the different stages of the Islamic financial transaction. The exclusion of risk-weighted assets funded by the profit-sharing investment accounts from the calculation of regulatory capital requirement places critical emphasis on a comprehensive infrastructure in the Islamic financial institutions to clearly segregate the restricted and unrestricted profit-sharing investment accounts from the non-profit-sharing accounts and shareholders funds and to track their respective flows in financing and investment transactions. BIS Review 4/2006  3  Strategic investments in the state-of-the-art IT and risk management systems are integral to this process. Supervisory authorities need to be equipped with the specialized skills necessary to have the right assessments on the level of risks that the Islamic financial institutions are exposed to and the effectiveness of the risk management infrastructure in the Islamic financial institutions in mitigating these risks. The development of a sufficient pool of talent in Islamic finance Finally, the development of a sufficient pool of appropriately skilled Islamic finance practitioners needs to be accorded the highest priority. The required skill set in Islamic finance is unique. It needs to have the right blend of knowledge of finance with the understanding of the Shariah as being central.

To foster greater international linkages and cross-border transactions, the level of development of Islamic finance needs to reach a certain threshold of development and sophistication. It requires the development of a robust Islamic financial system which encompasses both the banking and the nonbank Islamic financial intermediaries, the Islamic financial markets, offering the range of Islamic financial products that is supported by a developed Islamic financial infrastructure. The formulation of the ten-year masterplan for the Islamic financial services industry by the Islamic Development Bank and the Islamic Financial Services Board, marks an important step in setting the blueprint for leading the development of Islamic finance in a systematic and synchronized manner across jurisdictions to achieve the common goal of a vibrant and comprehensive Islamic financial services industry. Malaysia had five years ago launched our own Financial Sector Masterplan which includes the strategic direction for the development of Islamic finance forward in Malaysia. It has now culminated in the progress that Malaysia has achieved today. 2  BIS Review 4/2006  Malaysia has now evolved a comprehensive domestic Islamic financial system that is diversified in terms of its institutions, markets and players. The strategy has been to institute the entire financial system chain to ensure the smooth functioning of the system. The initiatives include building the required financial institutions including, the Islamic banking institutions, the takaful industry, the nonbanking institutions and developing the Islamic money and capital markets. These respective components have recently been progressively liberalized to become internationally more integrated.