For example, in the case of Iceland, the three largest banks that were nationalised in early October 2008 had seen their total assets expand from 100 percent of GDP in 2004, to more than 900 percent of GDP as at end-2007. Similarly in Ireland, assets in their financial institutions with substantial domestic businesses were more than 400 percent of GDP by 2008, while in the United Kingdom, bank assets were more than 500 percent of GDP prior to the global financial crisis. The sheer size, complexity and leverage in the banking system increased the fragility of financial institutions and limited their ability to absorb even small losses, thereby resulting in widespread and deep economic dislocations. This expansion of financial activities was also in part due to the activities in the shadow banking system, which in the United States, grew to be even larger than the traditional banking sector in gross terms. At the height of the crisis, the size of gross amounts outstanding of over-the-counter (OTC) derivatives globally was estimated at over 614 trillion US dollars1, more than ten times global GDP. Despite its size, the over-the-counter market was opaque and inadequately regulated, making it more difficult to quantify the risk that had been assumed by the financial institutions. A further issue relates to financial innovation and for policy interventions not to stifle those innovations that are beneficial to society, while reining in those that are harmful. The current debate on the international financial reforms continues to reveal that this is a challenging task.

Whilst non-risk-sharing contracts will continue to contribute to the future growth of Islamic finance, the wider use of risk-sharing transactions and undertakings under participatory finance models have significant scope in evolving a broader representation of Islamic financial products that will spur the next phase of industry growth and development. This includes participatory or equity-based contracts such as Mudarabah and Musharakah that support ventures involving entrepreneurship endeavours. Greater use of equity-based models in Islamic financial solutions has been observed in the more recent period. This has been most evident in the sukuk segment, with Shariah structures evolving from predominantly ijarah and murabahah structures to musharakah partnerships as well as convertible and exchangeable trusts. 4  BIS central bankers’ speeches  The further development of participatory Islamic finance contracts on a broader scale offers particular potential in efforts to reinforce links between finance and the real economy. Several elements of risk- and profit-sharing participatory contracts support this. As profitsharing and loss-bearing are clearly identified and agreed based on the contractual agreements between the financier and the entrepreneur, strong emphasis is placed on the value creation and economic viability of productive efforts that create new wealth. In equitybased contracts, the financial intermediation is thus also directed towards promoting entrepreneurship, in that the clearly defined risk- and profit-sharing characteristics of the Islamic financial transaction provides strong incentives for both parties to contribute to the success of the investment.