Complementing these three components is Islamic insurance or takaful, that provides the necessary risk protection to its policy holders and to serve as an efficient mobiliser of long-term funds. The spectrum of participants and the diversity of instruments are among the key attributes in creating the enabling environment for a dynamic Islamic financial system. This has been the approach adopted by Malaysia at the very onset of our journey in the development of a comprehensive Islamic financial system that is sustainable and progressive. In the initial stage during the early years of the development of the Islamic financial system, the focus of attention was on the development of the Islamic banking system and to expand the number of players and the volume of banking activity. This has increased significantly when the dual banking system was introduced. This was subsequently expanded to the specialised non-bank institutions, including the development financial institutions, and the savings banks and housing credit institutions, where Islamic financial products and services are being offered. The other core components of the Islamic financial system comprised the Islamic money market, the Islamic capital market and the takaful market. Today, the Islamic money market has become an integral part of the Islamic financial system, with transactions of more than RM2 billion  BIS Review 43/2003  1  a day and a broad spectrum of instruments, among which included the Government Investment Issues, Bank Negara Negotiable Notes, Islamic accepted bills and the Islamic private debt securities.

The players in the Islamic financial industry must therefore, have in place robust risk management practices and system. In this regard, the establishment of the Islamic Financial Services Board has been timely. The IFSB has the important mandate of developing the prudential standards in accordance with the unique features of the Islamic financial institutions. Given that the IFSB and the existing standard setting body embraced common objectives, l do not see any difficulty in integrating the international standards with the Islamic prudential standards. This will contribute towards the development of a robust and resilient Islamic financial system that can effectively preserve financial stability and contribute to balanced growth and development. This will also facilitate the integration of the Islamic financial system as a viable component of the global financial system. Over the years, the Islamic financial industry has adopted the adaptation approach in the formulation of Islamic financial products and services. Although there are Islamic financial instruments that are distinct from the conventional financial instruments, the numbers are still few. In most instances, the Islamic financial products are repackaged along the features of the conventional financial products, while eliminating the elements that are not in-compliance with the Shariah. While this adaptation can continue, the downside risk is that Islamic financial instruments will always have to “catch-up” with the pace of product development in the conventional system. Efforts should therefore be intensified to develop new financial products that embodied the virtues of Islamic banking. This would evolve Islamic financial instruments into distinct, innovative and cutting-edge products.