To ensure the soundness and stability of the Islamic financial system the regulatory and supervisory framework has also been improved for the Islamic financial institutions, with the incorporation of stronger standards for corporate governance, transparency, disclosure, accountability, market discipline, risk management and customer protection. In addition, the payment system has also been continually upgraded to ensure efficient and effective clearing and settlement of payments. It is now highly automated with the ability to handle scriptless debt securities trading, processing and settlement. By providing a real time settlement system for inter-bank fund transfers, the credit and settlement risk in the Islamic financial system has been minimised. Attention has also been given to human talent management to create a sufficient pool of competent bankers essential to spearhead innovation in Islamic financial products and services. To meet the increasing manpower requirements, institutions of higher learning and the Islamic banking and finance institutes have also initiated new programmes on Islamic finance. Leading initiatives in the global integration Islamic finance in Malaysia has now taken on a new dimension to become more internationally integrated. This is part of the strategy to evolve Malaysia as an integrated international Islamic financial hub that will have a greater role in facilitating international economic and financial flows. 2/5  The liberalisation of the Islamic financial system in Malaysia commenced in 2004 with the issuance of three new Islamic bank licences to foreign Islamic financial institutions.

In nearly all cases considered to date, this leads to the conclusion that expectations of economic agents are identical or will converge over time. While this approach has given us invaluable insights in a multitude of models and applications, it faces a major empirical problem: in practice, economic agents hold widely  1  Guiso, Jappelli, and Terlizzese (1994). 2  Guiso and Parigi (1999). 3  Manski (2002). BIS central bankers’ speeches  1  differing views about the future path of economic variables, as I will illustrate throughout these remarks. Thus, recent research has focused on alternative assumptions regarding the nature of expectations held by economic agents. Measuring subjective expectations directly can inform our modeling assumptions on the information sets available to agents, and on the nature of the expectations formation and updating process.4 There are many Bayesians in the audience today. However, for the benefit of those who are not as familiar with Bayesian terminology, let me quickly define what I mean by “subjective expectations” or beliefs. This term refers to the personal probability distributions that individuals hold over uncertain events. Apart from the laws of probability and rules about how beliefs are updated with the arrival of information, there are no restrictions on these probability distributions, hence the use of the word “subjective.”5 Further, individuals might act according to their subjective beliefs without being able to fully articulate in standard forms their underlying probability distribution. Thus, a need arises to elicit these views in order to understand behavior more fully.