The global takaful market, in particular, has also undergone positive developments at the international level. From only a single takaful company being in existence more than twenty years ago in Sudan, the takaful industry has now expanded with the establishment of more than 50 takaful companies worldwide with a total contribution estimated at about USD3 billion for the year 2005. The takaful industry is expected to grow at about 20% per annum to reach USD7.4 billion in global annual contributions over the next ten years. 5 It is also encouraging to note that the number of retakaful companies have also grown in tandem with the increased number of takaful companies. 6 The need for strong and credible retakaful operators globally is important to complement the growth and expansion of the takaful industry. Let me turn to Japan's potential participation in Islamic finance. We welcome the participation of Japanese financial institutions, authorities and corporations in Islamic finance, particularly, in the Islamic capital markets. Japan thus far has for several decades had a significant economic role in the Asian region in terms of trade and investment. Japan's investment in the region is estimated to be USD45 billion over the period of 2004-2006. 7 Japan has also been consistently ranked among the top five investing nations in Malaysia, with investment flows amounting to 25.7% of the total flows for the period of 2000 to 2006. In 2006 alone, Japan foreign direct investment inflow into Malaysia was at USD6.1 billion.

The Shariah injunctions require that the Islamic financial transaction be supported by an underlying economic activity. This requires that the financial transaction must be accompanied by a genuine trade and business related activity. Based on this arrangement, interest-based transactions are prohibited. Islam encourages business and trade activities that generate a fair and legitimate profit. In Islamic finance, there is therefore always a close link between the financial and productive flows. This intrinsic principle contributes towards insulating the Islamic financial system from potential risks of financial stress resulting from excess leverage and speculative financial activities. A further fundamental principle of Islamic finance is the risk and profit sharing feature of Islamic financial transactions. This could involve an arrangement whereby the Islamic financial institution shares profit with the investor in a Mudarabah contract or in a Musyarakah contract, both parties share in the profit or loss. These arrangements involve an explicit sharing of the risks by the Islamic financial institution and the investor, thus requiring  1  Sources: Islamic Finance News, Islamic Financial Services Board & National Authorities. 2  The trend is now to have both "Shariah savvy financial practitioner" and "financial savvy Shariah Scholars". 2  BIS Review 23/2008  the Islamic financial institution to appropriately manage the risks associated with the transaction. It entails the appropriate due diligence and the integrating of the risks associated with the investment activity into the financial transaction. The real activity is thus expected to generate sufficient wealth to compensate for the risks.