A model to reanchor finance to the real economy While the global financial stability efforts have made progress in generating an enabling environment for a new equilibrium of financial stability, a key consideration as we move forward is the need to redefine the fundamental character of modern finance and how it would interface and interact with the economy and the broader society. New considerations that prioritise justice and fairness, sustainability and inclusion have also become essential underpinnings of such a financial ecosystem. The recalibration of finance should aim to serve the needs of the real economy and more importantly the broader society. This would generate positive externalities that would in the medium term lead to more sustainable financial systems, and in turn contribute positively to growth and development. A core underpinning of Islamic finance is the tenet that requires Islamic financial transactions to be supported by genuine productive economic activity. Islamic finance is also a financial regime that places emphasis on risk-sharing, thereby strengthening further the link of finance to the real economy. Thus, it provides a greater understanding on the fundamental relationship between the financial sector and the real economy. The concept of risk-sharing in finance is not new. While risk-transfer activities currently dominate the conventional financial systems, risk-sharing in the form of equity has long been a cornerstone of capital markets with vibrant stock exchanges. Techniques used by venture capital financiers also have similarities to risk-sharing contracts in Islamic finance.

Another important dimension of risk-sharing that enhances financial inclusion lies in the potential for Islamic finance to become a powerful tool that can enhance financial access for emerging economies, in particular the less developed countries that have been marginalised  BIS central bankers’ speeches  3  by modern finance. Debt financing or risk-transfer activities are heavily dependent on conventional measures of financial and economic performance. In contrast, equity financing, with its risk-sharing elements, can provide the required financial solution that is not dependent on such conventional assessments. This will allow those countries which are less developed but have assets and resources to access finance. The strong emphasis on governance and risk management in risk-sharing contracts will also have an important role in catalysing broad-based improvements in standards of oversight and financial discipline in these countries as safeguards against irresponsible practices. Taken together, these elements of Islamic finance offer enormous potential for less developed countries, more so those that are rich in resources, to mobilise and channel economic resources to finance growth and development, and significantly raise standards of living for their communities. In the sukuk market, sukuk structured in profit and loss sharing partnerships (Musharakah) represents one of the majority in global sukuk issuances and outstanding. The emergence of sukuk as an alternative fund raising and investment instrument has opened up an important new source of funding for long term development projects.