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.

Islamic banking operations therefore need to be governed by its own standards and best practices in parallel with the international best practice. The establishment of the Islamic Financial Services Board (IFSB) in 2002 as an international prudential standard-setting body to promulgate the international regulatory and supervisory standards for Islamic financial institutions is aimed towards achieving this objective. In this regard, the IFSB has already made progress in developing the prudential standards on the capital adequacy and risk management framework. These standards are expected to be completed in 2005. In addition, the IFSB will commence work on developing standards on corporate governance. At present, some countries have adopted the Basle Accord standards in their regulatory and supervisory framework for their Islamic banking industry. However, these standards do not adequately  2  BIS Review 3/2004  address the requirements of Islamic banking operations and transactions, resulting in gaps in the standards. Therefore, these gaps will be taken into account with respect to the capital treatment and risk associated for the different types of Islamic financial contracts to truly reflect their features and characteristics. While certain products in Islamic finance by their nature may not attract capital, the Islamic financial institutions need to have a more rigorous risk management systems in managing the funds placed under this arrangement. In this regard, the risk management standard needs to specifically address this concern. The Islamic financial institutions can expect to be better regulated and supervised following the adoption of the standards to be issued by the IFSB.