Joint efforts between academia and industry to conduct research, to explore and deliberate on issues relating to the development of new Islamic financial products, such as the efforts that have led to this conference can therefore provide a point of reference for the industry in ensuring that new and better products are developed to match the diverse and discerning needs of customers, while meeting the requirements of the Shariah. The ability of Islamic finance, as a form of financial intermediation that provides a range of high quality financial products and services, reflect the innovative and dynamic nature of the industry that contributes to its role as a facilitator of economic activity. Together with the fundamental requirements in Islamic finance that an underlying productive economic activity accompanies financial transactions, a close link is formed between financial transactions and productive flows. Given that Islamic financial instruments reflect the underlying economic activities and that such instruments inherently have the potential to provide tangible returns to investors, there have been significant demands on such products. This gives rise to the competitiveness of Islamic finance, which is further spurred by the proliferation of competitively priced Islamic financial products that is more evident in this recent decade. In more recent times, there is increasing awareness and appreciation amongst the international financial community on the distinct nature and inbuilt strengths of Islamic finance. The recent global financial crisis has brought about, among others, an opportunity for Islamic finance to strategically position itself as a stable form of financial intermediation.

For if risk is spread more broadly, shocks should be absorbed with less trauma. Moreover, the system as a whole may be less vulnerable to distortions introduced by the moral hazard associated with the access that banks have to the safety net. A second issue we need to consider stems from the complexity of the new credit instruments, the challenges they present in terms of valuation and risk measurement and their short history of experience in times of stress. Even the most sophisticated participants in the markets for these instruments find the risk management challenges associated with these instruments daunting. This raises the prospect of unanticipated losses. Default rates are harder to predict where there has been a substantial change in the financial attributes of borrowers. The prices of instruments may not respond as expected to a given change in losses or in the value of the assets underlying these instruments. Hedging strategies may prove to be less effective than expected. Similarly rated instruments can behave very differently in stress events. The response of prices and volatility to the downgrades in the automobile sector in the spring of 2005 and the recent experience in subprime mortgages and related asset-backed securities and credit derivatives illustrate different types of surprises faced by the participants in these markets. They are a reminder of the dimensions of uncertainty that exist about the shape of the distribution of potential returns. This is particularly true of what we might call the adverse tail, or the negative extreme.