While regional financial integration will further facilitate the already strong trade and investment linkages in the region, a more important aspect of the increased financial integration in Asia is the more efficient intermediation of funds in Asia. This includes the recycling of some part of the sizeable savings in Asia to productive investments in the region. The average savings rate in Asia is 35% of GDP and Asia as a group has a total of USD 4.8 trillion in foreign reserves. With greater liberalisation of the financial sector and the capital account, and the increased linkage of the national payments systems in Asia, there are increased financial flows within the region. This trend is reinforced by the increased presence of regional institutions in the individual domestic financial systems and Asia’s favourable economic prospects and more developed financial markets. This has already resulted in volatile capital flows to the Asian region. Going forward, papers issued out of Asia will also likely assume greater importance as an asset class. It will serve to facilitate the further diversification of risks and thus, contribute to stability of the international financial system. It will also expand the options for investors and borrowers and thus, contribute to more efficient allocation of financial resources across borders. Asia’s economic and financial integration, however, extends beyond its own region to the traditional markets in the developed economies, and more recently to other emerging economies in other parts of the world. Today, the economic and financial linkages between the emerging economies have also gained significance.

While world trade has, on average, expanded by 16% over the period 2004–2008, Asia’s trade with the Middle East and Latin America has increased on average by about 30%. Asia’s trade with other emerging economies now stands at 13% of Asia’s total exports. A further recent development is the increasing international dimension of Islamic finance which is also influencing the global patterns of financial and trade flows. Islamic finance today has contributed to increasing the financial and economic ties between Asia and the Middle East. The emergence of new financial centres in Asia and the Middle East has seen stronger investment and financial flows between the two regions. With the greater internationalisation of this form of financial intermediation, it has also opened up the prospects for the developed economies to forge stronger financial linkages with these dynamic growth regions of Asia and the Middle East. The inherent features of Islamic finance require that financial transactions are supported by an underlying economic activity, thus ensuring that there is a close link between financial and productive flows. Islamic finance is also based on the principle of profit-sharing and therefore risk sharing. Islamic financial transactions clearly define the arrangements at the outset, and  BIS Review 94/2010  3  provides the incentive for the appropriate due diligence to be undertaken by the Islamic financial institutions to ensure that the profits are commensurate with the risks being assumed. Aspects of governance and risk management are therefore strongly emphasised in the arrangements.