However, the fact that we presently cannot see any general overvaluation in the housing market does not rule out the possibility that some households may have based their decisions on overly optimistic estimates. For example, they may have interpreted the currently very low interest rates as a more or less permanent state, rather than as an exception. These households could of course run into problems when interest rates normalise. One question that might at least be worth reflecting on in this context is whether such over-optimism among some households could be an undesirable “side-effect” – albeit a temporary one – of the successful low-inflation policies in many countries. What has happened in the past ten years is that interest rates have come down fairly dramatically at the same time as the real economic performance in many areas has been remarkably good compared with previous periods. It presumably cannot be ruled out that this situation has lulled some households into a false sense of security, causing them to make overly optimistic investment decisions that subsequently prove to be less well-founded. To the extent such over-optimism exists, though, it should, as I mentioned, be a temporary phenomenon that disappears as households gain more experience of how the economy functions under a low-inflation regime. That households – and lenders – must endeavour to base their decisions on realistic estimates is something that we have recommended many times recently, but it is worth repeating.

These sukuk issues have attracted foreign investors, thereby strengthening our inter-linkages with other international financial markets. Profits or income received by non-residents for investments in ringgit and non-ringgit Islamic securities issued in Malaysia are also exempted from withholding tax. In addition, the Government has granted tax neutrality measures to accommodate the sukuk issuance. To further enhance Malaysia's international financial linkages with other parts of the world, the domestic Islamic banking sector was liberalised further in 2004 with the issuance of new licenses to foreign Islamic financial institutions. In addition, the allowed foreign shareholding in Islamic financial institutions was raised to 49 percent of the total equity in existing Islamic  4  BIS Review 121/2007  financial institutions. New licenses are also extended to entities to conduct Islamic banking business and takaful and retakaful business in international currencies. These institutions, which may have up to 100% foreign equity ownership, are given operational flexibility to be established as a branch or subsidiary and enjoy a tax holiday for 10 years under the Income Tax Act. Concluding remarks The foundations for the sustainable global development of Islamic finance have now been put in place. Going forward, three key elements will be important in sustaining the current momentum. These include the investment in research and development and hence promote innovation, the development of the pool of talent, and the greater use of technology in Islamic finance. Islamic finance as an emerging form of financial intermediation would require tremendous investment in research and development to promote innovation.