The Islamic Financial Services Board (IFSB) has introduced prudential standards for the Islamic financial services industry – in all key areas of capital adequacy, risk management, corporate governance and Shariah governance. Their implementation would in turn promote more consistent regulatory and supervisory frameworks across borders. Importantly, the adoption of these international prudential standards which are aligned to the core principles and standards adopted by the Basel Committee, the International Association of Insurance Supervisors (IAIS) and the International Organization of Securities Commissions (IOSCO), would serve to minimise the opportunity for regulatory arbitrage arising from cross-sectoral and cross-border differences, whilst ensuring that the regulatory requirements that are distinct for Islamic finance are effectively addressed. A survey conducted by the IFSB in 2011 indicated that 9 countries have implemented the standards issued by the IFSB and that 18 countries are expected to implement them within the next five years. Their consistent implementation will be vital. This harmonization will also facilitate consistent participation in Islamic finance across borders and contribute towards global financial stability. Whilst micro-supervision is an integral part of the toolkit for ensuring financial system stability, the recent global crisis highlighted the need for it to be complemented by macroprudential surveillance and measures. This dimension of prudential regulation involves the incorporation of horizontal assessments of risks across institutions, sectors and national borders, including the risks in asset markets. This is to address systemic risks and to take into account the interconnectedness within the financial system.

An area that Islamic finance has a major potential role is in the reorientation towards achieving a more inclusive and sustainable growth – an important post-crisis development agenda. Serving the small and medium-size enterprises (SMEs) presents huge potential for Islamic financial institutions, particularly those with the capability to deploy innovative equity-based structures and alternative forms of financing, such as private equity and venture capital. Asia is also now becoming a primary force for the global Sukuk market, with 68% or USD120 billion of the total sukuk outstanding in 2011 originating from the region, thereby providing an important investor base for sukuk issuance from different parts of the world. Whilst Malaysia has evolved a vibrant sukuk market, more Asian countries have turned to the sukuk market for financing large-scale projects including for infrastructure development. Several countries in the region are currently reviewing their legislation and taxation to enable debut sukuk issuance. The Asian sukuk market has also been progressive in the innovation frontiers. There has also been a growing trend for multi-currency sukuk issuances. This provides greater prospects for tapping a wider pool of investors, including from the Middle East and Europe. In Malaysia and more recently, in Indonesia, Sukuk issuances have also aimed at retail investors. This is to take advantage of the high levels of surplus savings in Asia, whilst providing wider investment options to retail investors that have traditionally invested in bond funds and unit trusts.