Whilst non-risk-sharing contracts will continue to contribute to the future growth of Islamic finance, the wider use of risk-sharing transactions and undertakings under participatory finance models have significant scope in evolving a broader representation of Islamic financial products that will spur the next phase of industry growth and development. This includes participatory or equity-based contracts such as Mudarabah and Musharakah that support ventures involving entrepreneurship endeavours. Greater use of equity-based models in Islamic financial solutions has been observed in the more recent period. This has been most evident in the sukuk segment, with Shariah structures evolving from predominantly ijarah and murabahah structures to musharakah partnerships as well as convertible and exchangeable trusts. 4  BIS central bankers’ speeches  The further development of participatory Islamic finance contracts on a broader scale offers particular potential in efforts to reinforce links between finance and the real economy. Several elements of risk- and profit-sharing participatory contracts support this. As profitsharing and loss-bearing are clearly identified and agreed based on the contractual agreements between the financier and the entrepreneur, strong emphasis is placed on the value creation and economic viability of productive efforts that create new wealth. In equitybased contracts, the financial intermediation is thus also directed towards promoting entrepreneurship, in that the clearly defined risk- and profit-sharing characteristics of the Islamic financial transaction provides strong incentives for both parties to contribute to the success of the investment.

In the current more uncertain environment, in the aftermath of the recent global financial crisis, the role of the Islamic Development Bank will continue to be important, given that the goal of sustainable growth and development in the world economy has now become even more challenging. As the conventional financial system currently confronts what is perhaps its most defining period, several important lessons can be drawn for our collective efforts to build more resilient financial systems. Important considerations need to be accorded to the issues that have emerged, and on the policy directions affecting growth and stability. My address today will discuss several of these issues, and discuss how Islamic finance, given its nature and inherent features, can contribute to the process of enhancing the discipline that contributes to ensuring growth and financial stability. At the core, the financial system needs to serve the real economy. The purpose of the financial system is intermediation – that is, to match savings and investments for the purpose of generating economic growth. Yet, in recent decades, a number of factors have contributed to the weakening of the link between financial intermediation and productive economic activity. Deregulation opened up new opportunities for financial institutions to enhance performance and expand the scope of their activities. Greater competition, reinforced by significant advances in technology, intensified the pace of innovation. And, the extended period of low inflation and low interest rates incentivised greater risk-taking. Cumulatively, these developments contributed to a dangerous build-up of financial imbalances.