The international community is now intensifying its efforts to strengthen the international financial system, with the aim to build the foundations for a stronger and more inclusive global economy. In this post-crisis era, the role and relevance of Islamic finance have gained increasing attention. Islamic finance emphasises on achieving socio-economic goals in congruence with the Shariah objectives, thus reinforcing the fundamental disciplines that are essential to preserve financial stability. BIS Review 129/2010  1  Overview of Islamic finance and linkages between Islamic finance and conventional financial system In this last decade, Islamic finance has evolved to become a complete and competitive form of financial intermediation that serves both Muslim and non-Muslims consumers and businesses. The Islamic finance industry is currently worth more than $ trillion and growing at a rate of 15–20 percent annually, with anticipation of further growth to reach $ trillion in the next 3 to 5 years, as more countries around the world seek to further develop Islamic finance within their jurisdictions. Its appeal as a competitive and innovative form of intermediation has led a number of established conventional players to enter the Islamic finance industry, thus widening the diversity of Islamic financial institutions and its product range. Exceptional growth in Islamic finance is registered not solely in the Muslim world, but now spans across the western world and the Asia Pacific region where the growth is driven by commercial and business considerations.

In the view of the Governing Council, the risks to the economic outlook are balanced. On the positive side, there may be stronger than anticipated effects stemming from the extensive macroeconomic stimulus being provided and from other policy measures taken. Confidence may also improve more quickly than currently expected. On the other hand, concerns remain relating to a stronger or more protracted negative feedback loop between the real economy and the turmoil in financial markets, further increases in oil and other commodity prices, the intensification of protectionist pressures, increasingly unfavourable labour markets and, lastly, adverse developments in the world economy stemming from a disorderly correction of global imbalances. With regard to price developments, annual HICP inflation was, according to Eurostat’s flash estimate, -0.1% in June, compared with 0.0% in May. As explained on previous occasions,  BIS Review 83/2009  1  the further decline in annual rates of inflation was anticipated and reflects primarily base effects resulting from past sharp swings in global commodity prices. Looking ahead, owing to these base effects, annual inflation rates are projected to remain temporarily in negative territory over the coming months, before turning positive again. Such short-term movements are not relevant from a monetary policy perspective. Consistent with available forecasts and projections, looking further ahead, inflation is expected to remain in positive territory, while price and cost developments are expected to remain dampened in the wake of ongoing sluggish demand in the euro area and elsewhere.