The Islamic financial system in Malaysia operates in parallel with the conventional system. Following the establishment of Islamic banking was the establishment of takaful or Islamic insurance to provide the coverage for Islamic housing mortgages. As these two segments progressed, Malaysia expanded its implementation approach by allowing the conventional banking institutions to offer Islamic banking products and services on a window basis. To preserve the integrity of the system,  BIS Review 3/2004  5  firewalls between the conventional and Islamic funds were put in place. It was made mandatory for the Islamic banking operations in these institutions to be separated from the conventional banking operations, either electronically or through other designated means. This move created more players in the Islamic financial system and provided the platform for the establishment of a vibrant Islamic money market. The Islamic money market served as a platform for the Islamic financial institutions to manage their short-term portfolio adjustments. Recognising the importance of the capital market, Malaysia initiated the development of a private Islamic financial securities market in the early nineties. The Islamic financial system today has emerged as an important component of the overall Malaysian financial system that contributes to the growth and development of the Malaysian economy. Malaysia has also adopted legal reform, self-regulation and measures to encourage market-based regulation. New measures have been introduced to further improve the level of governance among banking institutions.

My address this morning will focus on these initiatives. Allow me to also take this opportunity to share with you Malaysia’s experience in this endeavor. II. Current trends in the international financial landscape  The international financial landscape is constantly being reshaped and transformed by the rapid pace of globalisation, financial liberalisation and the advances in technology. Globalisation has manifested itself with the geographic expansion and consolidation of financial establishments beyond national boundaries and the massive flow of financial resources across borders. This has unleashed a greater volume of resources through the financial system, increasing the importance of the financial sector. These trends have been reinforced by the advances in technology, which has radically changed the way we do business and the structure of markets and their dynamics in the national and global economy. This has resulted in an environment in which businesses, markets and economies are becoming internationally more integrated and inter-dependent. Financial liberalisation and deregulation of the financial services industry has also resulted in increased competition and the proliferation of new financial products and services. Also, the business operations of global financial conglomerates now span over multiple jurisdictions. Against these developments, regulators have reassessed existing prudential rules and have adopted a consolidated supervision framework to prevent regulatory gaps that could become a source of systemic concern. While deregulation of the financial sector has expanded the range of opportunities, it has also increased the incidence of instability in the financial markets.