In my address today I shall be pointing out discernible trends in the development of the financial system and how this process is being reinforced by the coming European Monetary Union. In conclusion I shall consider what this requires of economic policy, its decision-makers and various authorities. A financial revolution It is hardly an exaggeration to say that a revolutionary process of financial transformation and development has got under way in the past decade, with consequences that we probably cannot yet fully foresee. Deregulation, globalisation, advanced information technology and new methods for valuation and risk management have initiated a dynamic process in which financial markets, institutions and instruments are interacting. There are clear similarities with the expansion of real economies in the past hundred years; a stream of new, more efficient and specialised production processes and new communication facilities are leading to a growing volume of trade. Basically, the financial trend and its internationalisation are a natural development of the market economy, a logical consequence of persistently rapid economic transformations that call for new financial solutions for households and firms. Challenges for banks The foreseeable developments will alter or at least affect the future role of banks. New trends in traditional banking are already discernible. Competition for bank deposits is growing in that people are increasingly choosing to place assets in securities, either directly or via mutual funds. Specialised agents of various types, such as niche banks, have also entered this field.

A dedicated high court of common law has been assigned to adjudicate Islamic finance cases more expeditiously, giving due recognition on issues surrounding Shariah. For a complete dispute resolution on Islamic finance, the Kuala Lumpur Regional Centre for Arbitration (or KLRCA) has introduced the i-Arbitration Rules. The first of its kind, the rules incorporate a reference procedure to a Shariah Advisory Council or Shariah expert for professional opinions whenever the arbitral tribunal has to form an opinion on a point related to Shariah principles. Thirdly, is to develop a strong governance framework for Islamic financial institutions. We introduced a dedicated governance framework in 2010 that outlined the requirement for the Shariah governance structures, processes and arrangements to ensure that all the operations and business activities are in accordance with Shariah. This framework ensures that talent in lead arranging of sukuk, among others, have the expertise and Shariah knowledge to ensure that the sukuk structures are in compliant with the necessary rules and principles. Areas of collaboration between Hong Kong and Malaysia There are a few areas where Hong Kong and Malaysia can collaborate for mutual benefit. Firstly, is to have both Hong Kong and Malaysian expertise to work together in the quest to launch the first sukuk out of Hong Kong. We look forward to sharing our Islamic finance marketplace with Hong Kong in terms of expertise in structuring, managing and distributing the sukuk, as well as providing advice on legal and Shariah matters.