The explicit risk-sharing element between the financier and customer instils greater discipline and responsibility, given the obligation and economic incentives created for participants to the contract to evaluate the risk profile of the product or investment proposition, the underlying trends in earnings and cash flows, and its income-producing potential. Such a process strengthens safeguards against the widespread mispricing of risks. The strong incentives for financial institutions to understand the nature and level of risk and leverage that is embedded in the Islamic financial instruments would in turn lead to more responsible innovation. This ensures that the products offered are aligned in delivering real benefits for the investors. Reinforced by a combination of stronger governance, enhanced transparency and more robust risk management, the trust-based relationship that underpins Islamic finance is therefore strengthened, thereby promoting overall confidence in the intermediation process. More recently, in this decade, the greater use of equity-based models has been most evident in the sukuk market, with Shariah structures evolving from predominantly lease-based (Ijarah) and mark-up sale (Murabahah) structures to profit and loss sharing partnerships (Musharakah), as well as convertible and exchangeable trusts. The evolution of assetbacked and asset-based sukuk provides further options for investors to diversify their portfolio. Asset-backed sukuk, has profit and loss sharing elements that thus offers investment sustainability. The possibility of a default is minimised, as investors of assetbacked sukuk are not guaranteed to receive income or capital gains, and profits are paid by the issuers only when the underlying assets earn profits.

The inadequate financial buffers held by banking institutions against risk, a growing disconnect between the creation of credit and its use for productive economic activity and a highly interconnected system of financial intermediation ultimately combined to give rise to risks that disrupted credit flows to the economy. Over time, these trends were substantially amplified. The global reform agenda has made important progress in efforts to reduce the fragility of the financial system and to strengthen its resilience. Substantial work has already been advanced and largely completed on the development of global liquidity standards, the adoption of leverage ratios, and the significantly strengthened capital regulations which are important components of the reform effort. Greater focus has also been placed on strong supervision, effective resolution regimes and arrangements for the oversight of systemically important financial institutions. While the effective implementation of these reforms is crucial, the world continues to seek more enduring solutions that will place financial institutions firmly back in the service of society. In some countries, fundamental structural changes are being pursued to reduce the complexity of banking and to protect banking services from such higher risk-taking activities. The challenge however, is how this might be achieved in a sustainable manner without undermining growth and development, and erasing the important efficiencies in financial management.