More recently, there has been a growing diversity in the range of products and services being offered and in the markets that have been developed. The sukuk market, that is the Islamic bond market denominated in international currencies, has registered a remarkable growth, having doubling in size to amount to USD28 billion compared to a year ago. Including sukuks denominated in domestic currencies, the size of the market is now about USD82 billion. This market is expected to continue to expand significantly given the massive financing requirements for infrastructure investment and other private sector investment by countries that have shown interest in Islamic funding. There has also been significant innovation in Islamic financial products. This has been especially evident in the sukuk products. Following the Malaysian Government issuance of the world's first global sovereign sukuk in 2002, there has been several other sovereign  BIS Review 121/2007  1  sukuks issued by other countries. This development has also encouraged the issuance of international corporate sukuks by multinational and domestic corporations. Innovative instruments that have been developed include the landmark issuance in 2006 of the exchangeable sukuk by Khazanah Nasional, the Malaysian sovereign wealth management entity. In this arrangement, the sukuk can be exchanged for other shares held by Khazanah. In the same year, a convertible sukuk, in which the sukuk can be converted to the issuer's own shares upon initial public offering, was issued by a Middle Eastern-based corporation.

These sukuk issues have attracted foreign investors, thereby strengthening our inter-linkages with other international financial markets. Profits or income received by non-residents for investments in ringgit and non-ringgit Islamic securities issued in Malaysia are also exempted from withholding tax. In addition, the Government has granted tax neutrality measures to accommodate the sukuk issuance. To further enhance Malaysia's international financial linkages with other parts of the world, the domestic Islamic banking sector was liberalised further in 2004 with the issuance of new licenses to foreign Islamic financial institutions. In addition, the allowed foreign shareholding in Islamic financial institutions was raised to 49 percent of the total equity in existing Islamic  4  BIS Review 121/2007  financial institutions. New licenses are also extended to entities to conduct Islamic banking business and takaful and retakaful business in international currencies. These institutions, which may have up to 100% foreign equity ownership, are given operational flexibility to be established as a branch or subsidiary and enjoy a tax holiday for 10 years under the Income Tax Act. Concluding remarks The foundations for the sustainable global development of Islamic finance have now been put in place. Going forward, three key elements will be important in sustaining the current momentum. These include the investment in research and development and hence promote innovation, the development of the pool of talent, and the greater use of technology in Islamic finance. Islamic finance as an emerging form of financial intermediation would require tremendous investment in research and development to promote innovation.