Recognising this, Malaysia has established the International Centre for Leadership in Finance (or ICLIF) as part of our commitment to spearhead the development of a new generation of world class leaders who can steer the financial services sector to high performance and excellence in the industry. Secondly, significant investment in the infrastructure that supports research and development will enhance the capacity for innovation. Financial support for advanced research at universities and research institutes will increase research opportunities. In addition, increasing the workforce involved in research and development will also increase the potential for innovation. Thirdly, extensive education of the consumer and business community would increase the outreach resulting in increasing demands for new and innovative products and approaches. Malaysia has implemented a ten year structured consumer education programme to increase the level of consumer awareness on the unique characteristics of Islamic financial products and the product choices offered by Islamic financial providers. Increased awareness will drive the demand for a broader range of Islamic products and services customized to their requirements at more competitive prices and through more convenient channels. The outreach has also been for small businesses on the Islamic products and services. This process prompts the financial industry to increase innovation to strengthen their competitive position. This can be reinforced by market research to enhance the understanding of customers’ distinct financial needs and their risk tolerance and therefore enable the design of Islamic financial instruments that offer tangible benefits and value to customers.

Let me follow up this brief summary by focusing my remarks this morning on four main areas where lessons from the recent East Asian crisis may be found. First, it was the countries’ ongoing exchange rate policies that contributed to the build up of crisis conditions. The countries of the East Asian region chose to pursue a fixed exchange rate policy, or one pegged to the US dollar, for about a decade after the Plaza Accord. In the beginning these policies contributed to stronger growth and low inflation in these BIS Review 50/1998  -2-  countries. But starting in 1995, the appreciation of their currencies had begun to threaten their balance-of-payments positions. Second, to offset the weakness of their economies, the authorities relied heavily on much short-term financing, which concealed the weaknesses of their macroeconomic policies. The nature and direction of the flow of short-term international capital had not been properly analyzed. The ratios of short-term debt to usable foreign exchange reserves were in the range of 170-200 percent for Indonesia, Korea and the Philippines, much higher than the average ratio of 70 percent for the other major emerging market economies. Third, transparency of banking systems, including central banks, is essential for analyzing ongoing developments in countries’ financial sectors. In particular, trends in their off-balance-sheet items, cross-border interbank funding and their transactions with offshore centers should first of all be transparent and second should be available for making judgements about the system.