Against this backdrop, Islamic banking and finance, which is still at its infancy, needs to be ahead of these developments in order to remain a viable and competitive form of financial intermediation. The challenge, therefore, in the Islamic banking industry, is to evolve the development of an Islamic financial system, one which is dynamic, responsive and sustainable. The development of an Islamic financial system, indeed would include the respective sets of the key components comprising the Islamic banking industry, the Islamic money and capital markets, and the takaful market, given the strong linkages, inter-dependence and synergies among these components in the system. In addition, the development of the non-bank financial intermediaries such as development financial institutions, savings institutions and housing credit institutions need to be developed to meet customer demands. These specialised institutions are important in meeting the requirements of the economy which are not met by the nascent Islamic banking institutions. Although the Islamic banking industry may be the core to an efficient Islamic financial system, it would need to have in place the supporting financial infrastructure. Of importance is the Islamic money market. Given the different needs of individual economies, the development of the structure of the Islamic financial system needs to include, at the early stage, the development of the Islamic capital market to provide an alternative source of financing, as well as to create broader and diverse Islamic financial instruments for investors.

The players in the Islamic financial industry must therefore, have in place robust risk management practices and system. In this regard, the establishment of the Islamic Financial Services Board has been timely. The IFSB has the important mandate of developing the prudential standards in accordance with the unique features of the Islamic financial institutions. Given that the IFSB and the existing standard setting body embraced common objectives, l do not see any difficulty in integrating the international standards with the Islamic prudential standards. This will contribute towards the development of a robust and resilient Islamic financial system that can effectively preserve financial stability and contribute to balanced growth and development. This will also facilitate the integration of the Islamic financial system as a viable component of the global financial system. Over the years, the Islamic financial industry has adopted the adaptation approach in the formulation of Islamic financial products and services. Although there are Islamic financial instruments that are distinct from the conventional financial instruments, the numbers are still few. In most instances, the Islamic financial products are repackaged along the features of the conventional financial products, while eliminating the elements that are not in-compliance with the Shariah. While this adaptation can continue, the downside risk is that Islamic financial instruments will always have to “catch-up” with the pace of product development in the conventional system. Efforts should therefore be intensified to develop new financial products that embodied the virtues of Islamic banking. This would evolve Islamic financial instruments into distinct, innovative and cutting-edge products.