This “procyclical systemic instability” of the system is itself a complex concept which calls for analysis of the interplay between diverse  BIS Review 161/2009  3  phenomena such as: herd behaviour, contagion from common or correlated exposures, counterparty relationships, and undesired procyclical effects of prudential rules, of accounting rules, of behaviour of credit rating agencies, etc. Another important domain in assessing systemic risk is the analysis of the inter-linkages between the financial sector itself, taken as a whole, and the real economy. Financial imbalances often mirror real-economy imbalances. The adverse feedback loop between a fragile system, prone to procyclicality, and the real economy might be devastating, as has been demonstrated by the recent crisis experience. This means that unsound macro-policies over time, including macro imbalances, can themselves trigger financial imbalances, which in turn would aggravate instability and fragility in the real economy. Sources of systemic risk are particularly difficult to assess. By definition, they stem from the interrelations between the various elements in the system and are hence inherently complex. We know that the evolution of systems under stress is particularly difficult to capture. Furthermore, the materialisation of a risk is very often a sharp, abrupt and rapid non-linear phenomenon which calls for non-standard analysis. For example, in a very large and highly complex financial system, the channels through which risks are propagated are very difficult to capture comprehensively. A deep understanding of leverage, correlations and concentrations of exposures is key in this respect.

Abdul Rasheed Ghaffour: Islamic finance and the Fiqh of crisis management Keynote address by Mr Abdul Rasheed Ghaffour, Deputy Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the 16th International Shariah Scholars Forum (ISSF) "Islamic Finance and the Fiqh of Crisis Management", 6 October 2021. * * * Assalamualaikum w.b.t and a very good afternoon to all distinguished guests and fellow participants. It is a pleasure and honour for me, to be part of what I believe will be another stimulating and thought-provoking dialogue. I would like to record the Bank’s appreciation to ISRA for hosting this annual platform, and also more broadly, for its continued dedication in advancing the frontiers of applied Shariah knowledge in Islamic finance towards greater heights and prominence. The chosen theme “Islamic finance and the fiqh of crisis management” is very apt and timely. With the persisting rage of the Covid-19 pandemic, our economic and financial backdrop is gripped with unprecedented challenges that emerged within a very short period of time – priced with great health, economic and social costs. The forecasted statistics are rather staggering, sparing no countries from economic fallout and social regress. With as many as 150 million people globally estimated to be pushed into extreme poverty by 20211, exacerbated with the fact that global unemployment is expected to hit more than 200 million people by 20222, the impact from the crisis has disproportionately affected the most vulnerable.