But if the economy does not improve substantially due to the lack of sufficient consensus to undertake structural reforms, credit institutions will end up being damaged and will be unable to help in the recovery. For this reason I wish to devote the last part of my address to the economy and, in particular, to the other major reform required before we can start a new phase of sustained growth: labour reform. This reform is necessary not only for the obvious reason: the need to reduce substantially the disproportionate unemployment figures beleaguering the economy and Spanish society. It is also necessary, as I have said earlier, so that the rising bad debts and wholesale funding difficulties do not oblige the banking system to reduce credit more than it will already be cut by the cyclical downturn. The labour reform is also essential so that the ambitious budget consolidation programme proposed by the government can be successfully carried out. If there is no labour reform and the bloated unemployment figures persist, public finances will suffer in two ways: not only regarding expenditure, which has already reached enormous proportions, but also on the revenue side, because the millions of people who remain jobless barely contribute to public revenue. The labour reform is also vital for GDP growth, for two reasons. First, because flexibility in agreeing wages and other aspects of firms’ internal organisation is indispensable for improving competitiveness in a monetary union where devaluation is no longer an option.

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.