The first line of protection against bank failure must be internal management’s own risk controls. The growing complexity and variety of banking business suggests that neither the authorities nor informed customers can prevent internal management from making mistakes if internal controls do not work. The best defense against mistakes and fraud are proper internal governance, or checks and balances. Internal dual controls, together with both internal and external auditors, plus a proper disclosure policy would give the best incentives for internal management to perform according to proper rules of behaviour. Public disclosure rather than private channels of information would be cheaper and reduce unwarranted expectations of what a regulator or supervisor can actually achieve. However, it is difficult, if not impossible, to guarantee full disclosure. It is doubtful whether free markets work well enough in conditions where information is partial and asymmetrically distributed and externalities exist. Thus, it is not really possible for the authorities to shift entirely to reliance on disclosure and to abandon their specialised supervisory function. Increasingly, therefore, the public oversight function is one of monitoring and surveillance, to ensure that systemic risks are not incurred at excessive public costs. When best practices and market standards are applied, any behaviour by regulatees that deviate from the norm would be subject to public scrutiny. There is therefore greater pressure for establishing international norms of performance, such as capital adequacy standards and risk management tools. The Basle Committee has recently established “Core Principles” to guide the regulation of banks.

The design of financial protection has to evolve and, for many underserved segments, financial protection has become even more pressing. Islamic finance and takaful should therefore embrace its transformative role, responding to these evolving needs, rather than merely reacting to past and existing demand. It is thus imperative for takaful industry to be agile and adapt to these changes. In my remarks today, I will outline three dimensions that offer significant opportunities for the transformative role of takaful: First, takaful can be a key enabler for the Muslim economy; Second, it can be a solution of choice for Malaysians; and Third, it can also be a game-changer in empowering financial resilience. 1/5  BIS central bankers' speeches  Takaful as a key enabler for the Muslim economy For hundreds of years, merchants and traders have relied on arrangements based on mutual assistance to protect each other against the perils of sea travels, damage to property and other forms of misfortunes. Marine protection schemes, similar to the schemes offered in Edward Lloyd’s coffee shop more than 330 years ago, can be traced back to the Islamic civilisation of the Ottoman Empire. One could argue that such protection arrangements were part of the ecosystem that made such empires the marine superpowers of their times. Fast forward to modern times, households and businesses continue to experience various risk events that could impact their lives, financial capabilities and assets. From nature-driven risks to man-made risks, these risks will directly impact those we protect and cover in increasingly significant ways.