Zeti Akhtar Aziz: Islamic finance – a central bank's perspective Keynote address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the Seminar on Islamic Finance "Islamic Finance: A Central Bank's Perspective", Bank of Italy, Rome, 11 November 2009. *  *  *  While not being here in person, most certainly I am here in the commitment to this conference on Islamic finance, organised by Banca d'Italia, to speak on the subject of Islamic finance from the perspective of a Central Bank. As the international financial markets and the global economy recover from the repercussions of the financial disruptions and dislocations that have occurred in the major financial systems, there have been wide ranging proposals to strengthen the foundations for financial stability, and reviews of the existing institutional arrangements in the international financial system. Despite this more challenging environment, the expansion of Islamic finance as a viable form of financial intermediation has gained momentum demonstrating its viability and resilience. The rapid growth and development of Islamic finance essentially reflects its ability to meet the changing pattern of demand by consumers and businesses, its ability to remain competitive and its ability to withstand a more challenging environment. More recently, the international dimension of Islamic finance has gained significance as it transitions from being domestic centric to becoming increasingly more internationalised. There is now increased international participation in Islamic financial markets in the different jurisdictions and more Islamic financial institutions are having presence or strategic interests in several jurisdictions.

The new normality of global growth will see a lower average rate of growth, weighed down by slower growth in the advanced economies because of the balance sheet problems of households, banks, and the government. Emerging markets, on the other hand, will see a more rapid recovery and expansion, leading to what has now been described as a two-speed global economy. Implications of this two-speed economy for emerging markets will be twofold. First, differential growth outlook will provide incentives for a reallocation of investment into emerging market assets as investors look for higher return. This will result in large and persistent capital flows to emerging markets with important implications for the exchange rate, domestic liquidity, inflation, and asset prices. Second, the two-speed economy will represent a shift in the centre of economic gravity from the advanced countries to the Asian region. But whether such shift is sustainable will depend crucially on how the transition is managed by policies in emerging markets. Chief amongst these are the exchange rate arrangement and the policy to reorient the growth driver from exports to domestic demand. Successful handling of these two issues will significantly reduce the risk and the threat to financial stability in emerging economies associated with strong and persistent capital flows. Therefore, managing this risk and growing safely in this era of new globalization will be the stake for emerging economies going forward. Let me now turn to the third and final part of my talk which is on the challenge for central banks.