It needs to recognize the distinct elements in Islamic finance and identify risks and challenges associated with the different Islamic contractual arrangements and the instruments for the appropriate regulatory treatment of the Islamic financial transactions. There is also a need for court recognition and acceptance of the Islamic contracts within the common and civil law systems, with a consistent approach of interpreting the rights of the contracting parties based on Shariah principles. This will lend certainty and predictability to the financial transactions and is particularly important in evolving legal frameworks that are facilitative of cross-border transactions as Islamic financial activities continue to venture beyond domestic borders. BIS central bankers’ speeches  3  In Malaysia, the new legal framework for Islamic banking and takaful that will come into force this year, will pave the way for the development of an end-to-end Shariah compliant regulatory framework for the conduct of Islamic financial operations. This new framework provides clarity on the fundamental requirements of Shariah that must be adhered to for the contractual arrangements between the financial institution and the customer to remain enforceable. The framework also outlines the operational requirements for the effective application of Shariah principles in the conduct of Islamic financial institutions. This aims to strengthen the risk management practices beyond the traditional credit, market and liquidity risks, to also include inventory risk, ownership risk and Shariah compliance risk.

This provides immense opportunities for the region to leverage on its complementarities to boost economic growth. Being the most populous region in the world, Asia’s favourable demographic structure, comprising a significant young population and a rising middle income segment, constitutes a huge and growing consumer market. The unlocking of this potential growth has also been advanced through wide ranging policy initiatives to promote higher consumption demand. The measures have essentially aimed at strengthening the social welfare system through increased arrangements for healthcare and retirement, and improving the macroeconomic environment and reducing the income gap. These measures collectively seek to support domestic drivers of growth thus making the development process more inclusive and sustainable. In parallel with these measures is the drive towards urbanization and the infrastructure development in the region. The Asian Development Bank has estimated that Asia needs to invest a total of USD8 trillion to fund infrastructure development such as rail networks, airports, power networks and water treatment plants in the current decade to 2020. These investments, reinforced by the growing consumer market, have become an important driver of private investment activity. This trend is also well supported by the growing and resilient financial systems in the region. Intra-regional trade activity is also rapidly increasing, signifying the deepening of economic ties within the region. Intra-regional trade in East Asia has expanded from an average of 44% of total trade in 1995, to 50% in 2010. Similarly, intra-regional investment activities have been on a rising trend.