For example, index-tracking strategies, including through ETFs, will tend to increase asset correlations and herding in investment flows (Bolognesi and Zuccher (2008)). The use by asset holders of a small pool of consultancies for investment advice may also generate correlated investment strategies. And the use of short-term performance mandates for fund managers is also likely to amplify pro-cyclical swings in asset allocation and asset prices. Accounting Rules: The 2000s saw the introduction of Financial Reporting Standard (FRS) 17 in the UK and Statement of Financial Accounting Standard (SFAS) 158 in the United States. This fundamentally changed companies’ accounting practices in respect of their pension obligations. In particular, companies were required to value pension assets at fair (that is, mark-to-market) values, with liabilities typically discounted using a corporate bond rate. Pension surpluses and deficits then needed to be recorded on balance sheet. This change in accounting rules reshaped company and pension fund behaviour. For example, in a downswing, risky asset prices and safe rates tend to fall, raising measured deficits. Faced with this, pension funds will have an incentive to sell risky assets and purchase bonds to better match their assets and liabilities (Amir et al (2010)). But this will  BIS central bankers’ speeches  5  itself tend to drive down yields further, boosting market-valued liabilities and thereby encouraging further matched bond purchases in a pro-cyclical spiral (Plantin et al (2008)). A similar dynamic affects insurance companies. Between them, FRS 26 and 27 specify valuation conventions for measuring insurers’ assets and liabilities.

Similarly, a majority of SMEs in Africa are unbanked and access to finance is a major obstacle. Only 20 percent of African SMEs have a line of credit from a financial institution. This gap provides abundant opportunities for those who are willing to tap into very promising African financial market by providing Shariah-compliant financing facilities to the retail and SME clientele. Islamic microfinance facilities can also enhance financial inclusion in Africa. The role of Government and the central bank. The government has an important role to play. Any new industry requires harnessing and nurturing. Government’s commitment is key but commitment must commensurate with substantive action. For new entrants to the Islamic financial industry, sovereign sukuk issuance by government would be a bold and strategic move. Naturally, the private sector will follow suit as there is already readily available pricing benchmark. In the first quarter of this year, 81 percent of the USD31 billion new issuances in the global primary sukuk market were by sovereign and quasi-sovereign issuers. Several more debut sovereign issuances are in the pipeline including issuances from United Kingdom, Luxembourg, Hong Kong and countries in Africa, namely South Africa, Tunisia, Mauritania, Senegal and Oman. Our own experience in 2003 showed that the private sector would start issuing their own sukuk once the government had shown the lead. The act of government issuing its own sovereign sukuk is the single most important initiative to prove its commitment to Islamic finance. Start with local currencies and follow up with non-domestic currencies when the timing becomes suitable.