In line with Malaysia’s aspiration to be a leading international Islamic financial hub, flexibility is granted for nonresidents to raise ringgit through issuance of sukuk in Malaysia as part efforts to attract higher level of foreign participation and promote diversity of market players and products in the Malaysian Islamic financial markets. The sukuk market now accounts for more than fifty percent of our bond market and has drawn participation from a wide range of international corporations and multilateral agencies in raising funds and investing in sukuk issuances out of Malaysia. BIS Review 151/2010  3  Myth 5: FEA rules are restrictive on accessibility to ringgit offshore by foreign investors for settlement of their investments in Malaysia Many may not have realised that since 2007, non-residents have been allowed to access ringgit offshore through any appointed overseas branches within the same banking group of the onshore banks to purchase or sell ringgit on a spot or forward basis based on firm underlying commitment for investments in ringgit assets. This was to maximise the potential and seamless opportunities through the widening of international investors’ participation into the Malaysian capital market. As onshore banks, you should capitalise on these opportunities to reap the benefits and at the same time, contribute to the enhancement in the development of the domestic financial market. These FEA rules were also designed to facilitate investment by foreign companies into the real sector. It is our intention that the FEA rules will facilitate and ease foreign investment into the country.

Therefore, the banking sector failed to fulfill its core function as a provider of resources for the economy. At the same time, risk management principles were not put into practice in the banking system and the consequences were apparent in the 2000-2001 crises. Another unfavorable impact of high and chronic inflation on the economy in our country is that economic units became used to operating in a highly inflationary environment. To put it more clearly, backward indexing behavior became common in pricing activities. Thus, wall of inertia evolved in inflation, which was difficult to break. Here “inflation inertia” simply refers to the situation of, yesterday’s inflation designating today’s inflation and today’s inflation designating future inflation. Hence, as inflation increased, inflation expectations increased with it and a self-nurturing inflation cycle began. In a period of high and chronic inflation, consumers were not inclined to control price and quality less and were also less concerned about diversity in selecting products. At the same time, producers were less concerned with cost and efficiency while pricing and were willing to determine profit margins freely, and invest less on increasing product diversity. As a result of this behavior created by the inflation process, goods and services could be sold at any price since consumers did not control prices, while producers did not control cost. Thus, this attitude provoked a resistance against anti-inflationary policies that were introduced at intervals and significantly slowed down the decline of inflation.