The reform effort has many moving parts, and further efforts are clearly needed to ensure that those parts fit together, and that the various parties work together. And these reforms are yet to be fully implemented, let alone tested over a full credit cycle. Of course, building a stronger system is not just about regulatory reform. Changes in institutional governance and culture are also needed. Many of the problems that surfaced during the crisis and more recently reflect a culture that emphasizes short-term gain over institutional sustainability – a culture in which regulation is viewed as an obstacle to be arbitraged or circumvented, rather than as an additional check on broadly shared objectives. That needs to change if progress is to take root. Making sure that happens will require a realignment of incentives, and strong leadership from the top. All of this will take time. The question is, how much time do we have? While risk-taking has been somewhat constrained in the aftermath of the crisis and the resulting uncertainties in the macro environment, we are beginning to see signs of things heating up in some areas of the markets: e.g., record issuance of junk bonds and emerging market debt, including enthusiastic take-up for issuers from “frontier markets” with little to no prior presence in the capital markets; increased leveraged buyouts; weakening covenants; and a rebirth of the collateralized loan obligation market. Complacency at this point would not be a good thing.

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.