Therefore, while ensuring that Islamic financial regulatory standards remain adaptive and effective in riding the evolutionary waves of financial innovation, it will be equally important to ascertain that regulatory requirements do not inhibit conducive market practices that promote the growth and development of the Islamic financial services industry. Ladies and Gentlemen: The Islamic financial system has an in-built dimension that promotes financial soundness and stability, as it resides within a financial trajectory underpinned by the forces of Shari'ah injunctions. These Shari'ah injunctions interweave Islamic financial transactions with genuine productive activities and prohibit involvement in illegal and unethical activities. This intrinsic principle of governance contributes  2  BIS Review 64/2002  towards insulating the Islamic financial system from the potential risks of financial stress triggered by excessive leverage and speculative financial activities. Indeed, the Islamic financial system derives its strength and stability from its faculty to uphold Shari'ah principles. This demands the internalization of Shari'ah principles in Islamic financial transactions, in its form, spirit and substance. This epitomizes the objectives of the Shari'ah in promoting economic and social justice. To achieve this objective, the Islamic financial regulatory and supervisory regime must always ensure Shari'ah compliance. Integral to this process is the success in achieving "unity in diversity" of the interpretations of Shari'ah injunctions in the realm of finance. In this regard, the Islamic Financial Services Board aims to strengthen the current initiatives to achieve a greater degree of convergence and harmonization.

In this connection, a more flexible capital framework that promotes an enhanced degree of capital sensitivity to actual risk intricacies is indeed appropriate for the governance of an Islamic financial institution. An Islamic financial institution's asset profile is characterized by a diverse spectrum of Islamic financing structures ranging from the low risk sales and lease-based modes of finance to the higher risk-equity-based modes. Each of these modes of finance has a distinct intrinsic characteristic dictated by its underlying Shari'ah principles and thus, entails different risk profiles. Ladies and Gentlemen: As the Islamic financial services industry ascends to maturity, it will be desirable to achieve a gradual increase in equity-based finance as this is deemed to be a more equitable financing structure in the eyes of the Shari'ah. It is therefore important to design an appropriate capital requirement that is commensurate with the associated risks. While equity-based finance may involve higher risks and therefore attract higher capital requirements, this, however, should not deter Islamic financial institutions from venturing into equity-based finance. A similar approach is needed to balance between regulatory requirements and financial innovation. Given that the Islamic financial services industry is still in its early stages of development and with the degree of flexibility accorded by the Shari'ah, there.15 vast potential for financial innovation to expand.