This would need to be supported by an efficient court system that can effectively deal with all Islamic banking and finance cases, whose decisions are enforceable over the range of financial issues such as contracts, bankruptcy, collateral and loan recovery all of which are essential for businesses to operate. The legal framework should also deal with supervisory issues, including the relevant regulatory agencies involved in the supervision of Islamic financial institutions and encompass the licensing and conduct of Islamic banking business. The relevant agencies should have clear responsibilities and objectives to ensure effective financial supervision. While the conventional banking system is guided by the Basel core principles which outlines the minimum requirements for the supervisory regime, these principles need to be reviewed from the perspective of Islamic banking, taking into account the unique characteristics and risks involved in Islamic banking and its products and services. A fundamental issue is the setting of prudent and appropriate minimum capital adequacy requirements for Islamic banks. Such requirements need to reflect the risks that the banks undertake. The framework devised would need to incorporate fundamental Islamic concepts. The principle of Mudharabah, for example, creates a class of depositors that can also be construed as quasi-shareholders. Similarly, risk weights assigned to individual asset components need to reflect the nature of inherent risks involved. It is not as straightforward as a debtor-creditor relationship in conventional banking but also needs to include other inherent risks arising from the investor-entrepreneur relationship that is inherent in Islamic banking.

Zeti Akhtar Aziz: Ensuring stability in the Islamic financial system Speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the 3rd Annual Islamic Finance Summit, London, 13 January 2004. * I. *  *  Introduction  “In its nascent history spanning three decades, Islamic banking and finance has undergone rapid growth and transformation. From an industry striving to fulfil the religious obligations of the Muslim community, it is now a multi-billion dollar industry driven by well-defined business considerations and profit optimisation, whilst steadfastly upholding the Islamic principles. Indeed, this progress has been achieved against a challenging global financial and economic environment. The further development of Islamic finance requires for it to be endowed with the right pre-requisites that will ensure the evolution of an intermediation system that is viable, resilient and sustainable. Of essence, is the timeliness to develop an Islamic financial industry that is comprehensive and sound, that promotes financial stability and growth through the robustness of its regulatory framework, the dynamism of its inter-connected markets, the strength of its financial infrastructure and the responsiveness and sophistication of its products and services.” It is my honour to be invited to speak before this distinguished audience at this 3rd Annual Islamic Finance Summit organized by Euromoney. In the development of the Islamic financial system, significant attention has been given to ensuring financial stability. Several initiatives have been taken to promote financial stability in the Islamic financial system and thereby strengthen its foundations.