In other words, a persistent acceleration (or deceleration) of M4 would be indicative of a nominal shock, jeopardising achievement of the inflation target. The world is not so simple, however. The underlying drivers of the change in the supply of bank lending, and so in broad money, may also bring about shifts in the demand for money, validating a different level for real money balances – perhaps most obviously, if investment and so the economy’s productive capacity were affected. For some underlying shocks, it is probably better to think about the effects on banking intermediation rather than simply on bank lending. Faced with a change in their costs and opportunities, bankers might sometimes be able to adjust the terms on either their assets or their liabilities (or both). Currently, banks have incurred an adverse shock to their wholesale funding (Chart 17). The evidence so far suggests that, as well as tightening terms for borrowers, they are improving rates offered on retail deposits. Where does that leave us on Money? It is clear enough from the long-run relationship between money growth and inflation that prolonged shifts in money growth can be an amber light (Chart 18). And possible liquidity effects mean that, through risk premia, shifts in the quantity of money may feed back into financial asset markets and so into broader credit conditions. But there are no “easy wins” when it comes to analysing Money demand and supply. 19 Money and credit in the current conjuncture Those challenges are certainly apparent right now.

Following these developments we are now entering a new phase in the development of Islamic financial system in Malaysia with the new initiatives to promote Malaysia as an International Islamic Financial Centre. This aims at strengthening our economic and financial inter-linkages and thus promoting greater trade and investment across borders. We are therefore entering a new phase of development for Islamic finance in Malaysia as it becomes more integrated with the international financial system. Given the surge in demand for Islamic financial products and services, several countries and financial centres are increasingly participating in the industry. The global front-runners will be those with combined strengths of having the capabilities and resources, as well as the ability to secure the confidence of the international Islamic financial community. It is against this backdrop of rising competitive environment that the potential of cumulative bilateral and multilateral strengths will become important in managing the complexities and constraints found in the Islamic financial services industry. This increasing interest by several financial centres together with their international linkages will contribute towards creating a more integrated international Islamic financial system. Such centres, such as Hong Kong, have the potential infrastructure and the ability to facilitate product offerings that will bridge the regional and international financial linkages. Strategic alliances among Islamic finance players would be a catalyst unleashing the regional and global potential of Islamic finance. BIS Review 6/2008  3  In South East Asia alone there is an immense potential market to be tapped.