Recognising this, Malaysia has established the International Centre for Leadership in Finance (or ICLIF) as part of our commitment to spearhead the development of a new generation of world class leaders who can steer the financial services sector to high performance and excellence in the industry. Secondly, significant investment in the infrastructure that supports research and development will enhance the capacity for innovation. Financial support for advanced research at universities and research institutes will increase research opportunities. In addition, increasing the workforce involved in research and development will also increase the potential for innovation. Thirdly, extensive education of the consumer and business community would increase the outreach resulting in increasing demands for new and innovative products and approaches. Malaysia has implemented a ten year structured consumer education programme to increase the level of consumer awareness on the unique characteristics of Islamic financial products and the product choices offered by Islamic financial providers. Increased awareness will drive the demand for a broader range of Islamic products and services customized to their requirements at more competitive prices and through more convenient channels. The outreach has also been for small businesses on the Islamic products and services. This process prompts the financial industry to increase innovation to strengthen their competitive position. This can be reinforced by market research to enhance the understanding of customers’ distinct financial needs and their risk tolerance and therefore enable the design of Islamic financial instruments that offer tangible benefits and value to customers.

In addition, as there is greater disclosure and transparency in the manner in which Islamic financial transactions are being conducted and Islamic financial contracts are being executed as well as on the risk and return profiles of Islamic financial products, this will strengthen the role of market discipline in driving Islamic financial institutions towards ensuring Shariah compliance in the operations, improving operational efficiency, strengthening risk management infrastructures and instituting sound and dynamic risk management practices. These developments will create spin-off effects to increase innovation in developing hedging instruments that are Shariah compliant. While innovation in conventional banking has led to the development of a number of derivative instruments to hedge risks, there is still considerable debate amongst Islamic scholars about the acceptability of the various forms of derivative products from the perspective of Islamic jurisprudence. Towards this end, there is a need for more investment in intellectual capital and greater collaborative efforts among Shariah scholars, Islamic financial engineers and researchers to accelerate innovation that can integrate Shariah principles in the process of designing risk mitigation techniques and products. The Shariah should therefore be viewed as an enabler to innovation rather than a constraint. Leveraging on the true potential and wisdom of the Shariah would evolve Islamic financial instruments into distinct innovative and cutting-edge products. Fourth, the environment and the incentive structure are also important in providing an enabling environment that promotes innovation. In particular, the regulatory framework and the tax structure are important to the innovation process.