In the area of Islamic banking, the requirement to manage the risks becomes more important because of the unique peculiarities in the contracts. Basel II has, to a certain extent, incorporated some aspects in the identification of risks, in particular the credit, market and operational risks that can be assimilated by the Islamic banks in terms of its product offering. However, further refinement will have to be done by the Islamic financial specialists to assess the appropriateness of the capital definition in particular as outlined by the Basel committee. One of the considerations that need to be addressed in assessing the risks associated with the Islamic bank is with regard to the capital charge on its investment accounts. Basel II does not address this unique feature in its framework. Assets that are funded by monies in the investment account may not require the capital charge for the purpose of capital adequacy measurement except in the case of misconduct and negligence. Similarly, if the Islamic banking institutions were to be more engaged in the profit-sharing arrangement in its balance-sheets, it will require the Islamic bank to have a more rigorous risk management assessment and monitoring mechanism. This is an area that is being addressed by the Islamic Financial Services Board in the drafting of the standard on the overall risk management framework for the Islamic financial community that takes into account this unique requirement of Islamic banking. While risk mitigation is desirable in Islamic finance, further improvements need to be made to the existing risk management framework.

In Malaysia, our vision of the development of the financial sector over the next ten years is outlined in our Financial Sector Masterplan. The plan includes the strategic direction and strategies for the development of the Islamic financial sector. Finally, greater cooperation among the regulators is necessary in order to ensure that the Islamic financial system is not subject to vulnerabilities and abuses. In this respect, sharing of information among the regulators including across borders is important especially in a more globalised and liberalised environment where financial transactions and activities have become more complex and globalised. In this regard, there is a greater need for regulators to continuously exchange views and share information on key issues and developments faced in their own financial jurisdictions. Another important aspect is in regard to the development of the international Islamic financial market. Although this market is to be driven by the market players, a greater role is expected from the  6  BIS Review 3/2004  regulators and central banks to support its expansion. In this respect, the encouraging support shown by various regulators and central banks in making the launching and issuance of the sovereign sukuk papers a success represents an important progress that has been achieved. These initiatives will bring about a more coordinated effort in achieving market development and stability. VI. Conclusion  Our quest to develop a dynamic Islamic financial system is to achieve the ultimate objective for Islamic finance that contributes significantly toward the overall development of our economies.