Without claiming to be exhaustive on such an ambitious subject, particularly in front of an audience of  1  Source: La finance islamique : une solution à la crise ? (2009), E. Jouini and O. Pastré, Economica. 2  Monitor Group and Fondazione Eni Enrico Mattei (August 2009), Analysis of Sovereign Wealth Fund Transactions During Q1 2009. 3  Monitor Group and Fondazione Eni Enrico Mattei (August 2009). 4  An IFOP survey, disclosed at the end of 2008, on the basis of interviews with 530 people of Muslim origin from various backgrounds, considered a representative sample of the French Muslim community. 2  BIS Review 118/2009  distinguished Islamic finance specialists, it seems to me nevertheless useful to briefly recall the following points: •  The fundamental principles of Islamic finance can be seen in different ways as far as financial stability is concerned. As you well know, Islamic finance prohibits the payment and receipt of interest at a fixed or predetermined rate. Instead, profit-and-loss sharing arrangements, purchase and resale of goods and services, and the provision of services for fees are the basis of Islamic finance contracts. Islamic finance is therefore systematically backed by real assets. Moreover, it prohibits speculation and the financing of production or trade in specific sectors. On the one hand, these principles can be considered to provide stability for the financial system. Indeed, in Islamic finance, unbacked expansion of credit is precluded, and banks cannot initiate or accentuate a speculative process.

These capital flows—a significant portion of which are non-resident activities—are more sensitive to global financial conditions which have been dictated largely by monetary policy stance of AEs and global investors’ sentiment rather than textbook-determinants like macroeconomic conditions in EMs and interest rate differentials. Moreover, due to the large foreign-exchange activities by non-residents relative to the size of domestic foreign exchange markets and increases in derivatives and algorithmic foreign exchange trading activities, exchange rate could at times act as an amplifier as opposed to a stabilizer of shocks and capital flows, especially in EMs with strong external positions that are considered as safe haven like Thailand. While capital flows in and out of EMs might be small relative to global financial activities, they could have real and significant impacts on the EM economies through the exchange rate channel. Concerning volatile exchange rate movements that could undermine financial stability, capital flows could affect EMs’ monetary policy stance. For example, in the low-for-long interest rate environment, EMs may need to follow AEs in delaying or reversing normalization of monetary policy to avoid appreciation of their currencies. Because of spillovers, monetary policy of EMs could be distracted from their core domestic policy mandates. The delayed normalization in the low-for-long or negative-for-long interest rate environment further exacerbates financial stability risks. Debts—both household and corporate— are now reaching historic highs. Emerging nations, often with nonbank financial activities outside the regulatory perimeter, are more susceptible to risk buildups. Financial spillovers need to be addressed at multiple levels.