It must contribute to creating a framework which promotes a balanced economic development, meaning adequate real growth, low unemployment and modest inflation. Ensuring price stability is the primary goal of monetary policy. Our definition of price stability is a consumer price index below 2%. This is obviously not an end in itself, but a means to an end. An economic system which relies on the forces of the free market must be able to count on price stability for its smooth functioning. In particular, price stability prevents undesirable distortions in the social area. Economic teaching and experience leave no doubt as to the connection between the money supply and price stability. As economists tend to say: money matters. Whether the supply of money is adequate depends on its relation to real economic development. Monetary policy is therefore able to make its best possible contribution if it succeeds in bringing the supply of money basically in line with real growth in the long term. Three main problems have to be contended with in the conduct of monetary policy: the difficulty of assessing the economic situation, the limited knowledge of the way a modern economy works and  BIS Review 106/1999  2  foreign influences, over which we have little control. While knowing that these uncertainties exist should not paralyse our ability to make decisions, it should nevertheless lead us to exercise appropriate restraint.

The IFSB now has 137 members that include 35 regulatory and supervisory authorities, five international inter-government organisations including the BIS, World Bank and the IMF, and 97 market players and professional firms from 22 jurisdictions. Of significance to note is that the membership of the IFSB comprises several authorities and international institutions from the non-Muslim countries. The IFSB complements the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) which was established earlier in 1991, to set the accounting standards to ensure that the true and fair value are reflected in the financial transactions and to ensure greater accountability and responsibility of the financial institutions. Finally, these developments have been reinforced by greater liberalisation to increase the international dimension of Islamic finance. With increased international participation in Islamic financial markets, it has prompted increased cross-border Islamic financial flows. In addition, Islamic financial institutions that had previously operated only in their own domestic jurisdictions have begun to venture abroad to tap new growth opportunities in other regions. This new international dimension of Islamic finance has enhanced further the international inter-linkages in this more globalised environment. Islamic finance: operating in a challenging and evolving environment The evolution and expansion of Islamic finance has occurred in a fast changing and dynamic international environment. In the context of a more challenging and competitive environment, the issue of financial stability, viability and competitiveness are paramount. This is particularly evident in the recent developments experienced in the international financial system.