As Islamic finance facilitates greater financial and economic interlinkages between jurisdictions, this enhanced international dimension will bring about a new set of challenges presented by the fundamentally different operating environment of heightened competitive dynamics, greater uncertainty, and more complexity. This will require greater collaboration and cooperation at the global level in the endeavour to preserve global financial stability. The recent crisis has highlighted that financial integration across borders needs to be accompanied by international cooperation and coordination to prevent regulatory arbitrage across borders and the risk of implications for contagion. A stronger collective effort needs to ensure that Islamic finance is subject to consistent, high-quality regulation across borders through the application and enforcement of the international prudential standards promulgated by the IFSB. This would reduce the opportunities for regulatory arbitrage, which in turn, will contribute to a more successful international integration of Islamic finance. Beyond the prudential standards, a higher level of cross-border vigilance is pivotal to allow for appropriate and decisive actions to be taken pre-emptively to deal with any imminent financial distress. This underscores the importance of adequate coordination and cooperation among supervisors across borders in strengthening their responsiveness to risks associated with markets interconnectedness. In particular, more transparency is essential towards understanding the ramifications of national actions or inaction and the potential spillover effects from one country to another, whilst equally important is to recognize that financial regulation and intervention are subject to country-specific circumstances and hence, must fall within remit of national autonomy.

A careful assessment needs to be made of the potential medium and longterm effects of the proposed reforms on market structures and behaviour. These considerations are equally relevant in the context of Islamic finance. The assessment on the aims and relevance of each of the proposed reform measures needs to take into account the two important considerations in Islamic finance; the need to support sustainable and responsible innovation, and secondly, to leverage on its inbuilt strengths that set Islamic finance apart in performing its role in supporting the efficient mobilisation and allocation of resources to generate real economic activities. Given the damaging effects of complexity and opacity associated with the recent unfettered innovative activities in the conventional financial markets, it has resulted in a reassessment of the role and benefits of financial innovation. In Islamic finance, innovation is key in pushing the frontier of market development to generate the range of products and services, processes and functions. The key lies in preserving the benefits of innovative initiatives and activities whilst ensuring that they do not result in negative externalities. In considering the relevance of the global regulatory reform to Islamic finance, there is therefore a need to consider the underlying elements that guide the process towards sustainable and more socially-responsible financial innovation. This comes in the forms of its strong paradigm in governance, disclosure and transparency, as well as its emphasis that innovations are anchored in the objectives of Shariah and thus are for the benefit of the people.