The technical committee of the IFSB is now in the final stages of the formulation of the prudential standards on capital adequacy and risk management. The IFSB has also commenced work on standards for corporate governance. Whilst appropriate regulations and standards are vital to mitigate the risks involved, of equal importance is the oversight and monitoring of the Islamic financial institutions through effective supervision by the regulatory authority to ensure that the prudential requirements are observed. Lack of oversight, inadequate check and balances, and over exposure to risks are amongst the factors that may result in vulnerabilities to the system. The best of regulations and financial safety nets would not be able to avoid vulnerabilities if early warning systems are not in place. To effectively perform the supervisory function it is important to not only identify the risks involved in the various Islamic financial  BIS Review 47/2004  3  transactions but also to be able to detect any contravention of Shariah principles in financial transactions and operations. A central feature of the regulatory framework for Islamic financial institutions is financial transparency and disclosure. This is particularly pertinent for Islamic financial transactions. For example, investment depositors in the Islamic banking institutions have the role of quasi shareholders that are not only entitled to share the profits of the Islamic banking business but are also exposed to the risks of losing their capital in the event of losses.

The rapid progress of the domestic Islamic financial system, reinforced by significant developments in the Islamic financial infrastructure, including the legal and Shariah infrastructure and the regulatory and supervisory framework, has strengthened the position of the Islamic financial system as an increasingly important component in meeting the changing requirements of the new economy. The Financial Sector Masterplan launched three years ago provides the strategic direction envisioned for the development of the Islamic financial sector looking beyond the near term and taking a longer-term perspective into the needs and requirements of the future. The strategies outlined in the Plan have emphasized the development of the respective building blocks of the various parts of the financial sector that need to be put in place to form the solid foundation on which sustainable future progress can be achieved. The expansion of the Islamic financial system in Malaysia has therefore taken place with attention given for the development of a comprehensive system. Towards a more diversified Islamic financial system At the onset of our journey in the development of a comprehensive Islamic financial system that is progressive, efficient, dynamic and sustainable, due attention was thus given to the development of the key structural components of the Islamic financial system, comprising the Islamic banking industry, the takaful industry and the Islamic money and capital markets. The intra-dependency of these key components creates the enabling environment for the Islamic financial system to effectively perform its role as an efficient conduit for mobilizing resources and channeling the funds to finance productive economic activity.