The explicit risk-sharing element between the financier and customer instils greater discipline and responsibility, given the obligation and economic incentives created for participants to the contract to evaluate the risk profile of the product or investment proposition, the underlying trends in earnings and cash flows, and its income-producing potential. Such a process strengthens safeguards against the widespread mispricing of risks. The strong incentives for financial institutions to understand the nature and level of risk and leverage that is embedded in the Islamic financial instruments would in turn lead to more responsible innovation. This ensures that the products offered are aligned in delivering real benefits for the investors. Reinforced by a combination of stronger governance, enhanced transparency and more robust risk management, the trust-based relationship that underpins Islamic finance is therefore strengthened, thereby promoting overall confidence in the intermediation process. More recently, in this decade, the greater use of equity-based models has been most evident in the sukuk market, with Shariah structures evolving from predominantly lease-based (Ijarah) and mark-up sale (Murabahah) structures to profit and loss sharing partnerships (Musharakah), as well as convertible and exchangeable trusts. The evolution of assetbacked and asset-based sukuk provides further options for investors to diversify their portfolio. Asset-backed sukuk, has profit and loss sharing elements that thus offers investment sustainability. The possibility of a default is minimised, as investors of assetbacked sukuk are not guaranteed to receive income or capital gains, and profits are paid by the issuers only when the underlying assets earn profits.

Thomas Jordan: Monetary policy and financial markets – what may we expect in 2008? Summary of a speech by Mr Thomas Jordan, Member of the Governing Board of the Swiss National Bank, at the Messe Fonds 2008, Zurich, 31 January 2008. The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch). *  *  *  The problems linked to the US housing and mortgage market dominated international financial markets in 2007. Despite the difficulties on the financial markets in the second half of the year, the global economy was robust last year. For 2008, the outlook for global economic growth has deteriorated and become more uncertain. The turbulence in the financial sector led to a considerable increase in risk premiums in 2007. In the past few years, these premiums had been very low, and even after the recent increase they remain modest by historic standards. Due to the higher level of economic uncertainty in 2008, the process of adjustment in risk premiums looks set to continue in various markets. From the current standpoint, the Swiss National Bank anticipates a somewhat slower pace of growth for Switzerland in 2008, although the economy should remain robust. However, the risks have increased in the recent period. As a result of the oil price hikes, inflation in Switzerland is likely to rise above 2% in the first half of 2008. Despite raised stock exchange volatility, the SNB does not judge that any additional actions are necessary at present.