Significant progress was achieved in the area of Islamic money and capital market where the volume traded in the Islamic money market reached RM340 billion, while the outstanding amount of Islamic private securities was amounted to RM75 billion or 44 percent of the total outstanding private securities. In the stock market, more than 80 percent of the counters in the Kuala Lumpur Stock Exchange are Shariah-permissible counters. This year the Islamic banking sector will be liberalised to include up to three foreign Islamic banking institutions as the system becomes more integrated with the global financial system. V.  Positioning the Central Bank to meet the challenges ahead  My remarks on pre-requisites to a stable and comprehensive financial system would not be complete without a few words on the role of the central bank. To stay at the forefront in dealing with the new challenges and to effectively perform our responsibilities, the Central Bank’s efforts have also been focused on strengthening its capacities and capabilities. Central Banks in emerging market economies have a much broader mandate than our counterparts in the more advanced and mature economies. Of importance, is our developmental role in charting the development of the financial system, institutional development and the overall economic management. This is over and above the objectives of achieving monetary and financial stability and ensuring the sound and efficient functioning of the payments system. The Central Bank also has the important role of developing the financial infrastructure, developing the financial markets, the legal framework and driving the institutional development.

Pre-requisites to a stable Islamic financial system  Despite a more challenging environment, the development of Islamic finance as a viable form of financial intermediation has moved forward. It is while Islamic finance is still at its early stage of development that the opportunity has been taken to strengthen its foundations and put in place the pre-requisites that will pave the way for its development and safeguard the stability of the system. Not only has closer attention been given to the supervisory, regulatory and legal dimension but also to the development of the financial infrastructure and the markets as well to institutional development. In essence, the prudential regulatory design has been complemented by concurrent efforts to develop Islamic financial markets, the Islamic institutions and the financial instruments. Allow me to highlight the key areas that are important to this objective. First, effective regulatory and supervisory framework The hallmark of a well-developed financial infrastructure is an effective legal, regulatory and supervisory framework which would underpin the stability of the financial system. The regulatory and supervisory function is an indispensable and vital component of the financial infrastructure. For the Islamic financial system, this framework also needs to be consistent with the requirements of the Shariah principles, including the establishment of a Shariah council, which provide assurance that the strategic direction, the formulation of policies and the conduct of financial transactions are in compliance with the Shariah principles.