New ancillary players such as money brokers have facilitated the development of this market. Islamic finance as a sustainable intermediation process in this more challenging environment has been characterised by powerful forces of change that have brought significant implications on both the domestic and global financial systems, and marked by turbulent financial conditions. This requires the development of robust and resilient financial institutions. Institutional capacity enhancement is a central strategy towards this objective. This requires having a high calibre workforce and management teams with the required expertise, leveraging on the technology, strengthening research and development, and instituting risk management systems. A structured consumer education programme has increased awareness of the Islamic financial system and the advances it offers. The Islamic capital market essentially comprises the equity market and the debt market. Phenomenal growth has been recorded in both these markets. In the debt market, the outstanding Islamic debt securities as at-end June 2003 were 45.5% or RM68.2 billion of the total outstanding private debt securities. In 2002, the new issuance of Islamic debt securities surpassed the conventional private debt securities amounting to RM13.8 billion. It is interesting to note that one-third of the issues have been by multinationals. In the equity market, more than 80% of the counters in the Kuala Lumpur Stock Exchange are Shariah-compliant. The takaful market has also shown impressive growth and the four takaful companies now offers a broad range of products in both family and general business which is comparable to the conventional counterparts.

Against this backdrop, Islamic banking and finance, which is still at its infancy, needs to be ahead of these developments in order to remain a viable and competitive form of financial intermediation. The challenge, therefore, in the Islamic banking industry, is to evolve the development of an Islamic financial system, one which is dynamic, responsive and sustainable. The development of an Islamic financial system, indeed would include the respective sets of the key components comprising the Islamic banking industry, the Islamic money and capital markets, and the takaful market, given the strong linkages, inter-dependence and synergies among these components in the system. In addition, the development of the non-bank financial intermediaries such as development financial institutions, savings institutions and housing credit institutions need to be developed to meet customer demands. These specialised institutions are important in meeting the requirements of the economy which are not met by the nascent Islamic banking institutions. Although the Islamic banking industry may be the core to an efficient Islamic financial system, it would need to have in place the supporting financial infrastructure. Of importance is the Islamic money market. Given the different needs of individual economies, the development of the structure of the Islamic financial system needs to include, at the early stage, the development of the Islamic capital market to provide an alternative source of financing, as well as to create broader and diverse Islamic financial instruments for investors.