functions. the key lies in preserving the benefits of innovative initiatives and activities whilst ensuring that they do not result in negative externalities. this comes in the forms of its strong paradigm in governance, disclosure and transparency, as well as the emphasis that innovations are anchored in the objectives of shariah and thus are for the benefit of the people. importantly, islamic finance has the disposition to facilitate financial deepening without financial excesses through the fundamental shariah requirement for islamic financial transactions to be supported by an underlying economic activity and for socially - responsible financial innovation. moreover, the profit - sharing and risk - sharing characteristics of islamic financial transactions strengthen the incentives for islamic financial institutions to undertake the appropriate due diligence on the islamic financial transactions to ensure that the profits are commensurate with the risks assumed. the shariah board of islamic financial institutions additionally serve as a rigorous process of endorsement of the experts, thus representing a vital institutional safeguard to ensure that the inherent strengths of islamic finance are fully realised. this ensures that the products are offered with the intention to achieve real benefits for the investors. it would therefore reduce the tendency for extreme behaviour in the financial system. more recently, the world ’ s attention had shifted from troubled banks to troubled countries with rising sovereign risks, leading to further rescue packages and increased anxieties over contagion to financial markets in other parts of the world. whilst these challenges continue to be addressed by the developed economies, the emerging economies have emerged from this crisis with stronger growth performance. the asian region in particular, has entered the crisis with solid economic fundamentals and more resilient financial systems and institutions. this has in turn substantially limited the consequences of the contagion. with the internationalisation of islamic finance in this decade, it has further reinforced the trend of greater financial integration in emerging economies. this has reinforced the changing global pattern of financial and economic integration as financial and economic linkages strengthened between the emerging economies. in the more recent period, with the enhanced international dimension of islamic finance, it has become an increasing form of intermediation that has facilitated economic linkages between emerging economies. in addition, it has also drawn the participation by the more established financial centers to forge stronger financial linkages with the dynamic growth regions of asia and the middle east. indeed, this would contribute towards more efficient mobilisation of funds across regions, reinforcing the significance of islamic finance as an increasingly important channel for a globally more inclusive economic development. in the aftermath of

lessons can be drawn from this crisis in our efforts to strengthen further the islamic financial infrastructure for a more resilient and stable financial system. in 2009, a task force on islamic finance and global financial stability was formed by the idb and the ifsb to undertake an assessment of islamic finance during the global financial crisis and to identify the further building blocks that are necessary to further strengthen the foundations of the islamic financial system. the report examines the conceptual elements inherent in islamic finance and their effects on financial stability and considers eight further areas of development in the islamic financial architecture to enhance its ability to deal with a more challenging future operating environment. this report completed in april this year aims to support the international efforts towards providing a strong foundation for financial stability in the global financial system. the eight areas for strengthening the financial infrastructure of islamic finance address the institutional capacity both at the national and international level with the aim of contributing to global financial stability. these building blocks which address the core foundations for the development of islamic finance include, first, ensuring the effective implementation of the prudential standards ; second, the development of systemic liquidity management infrastructure ; third, the establishment of strong financial safety nets ; fourth, putting in place an effective crisis management and resolution frameworks ; fifth, strengthen further the accounting, auditing and disclosure standards ; sixth, having an effective macro prudential surveillance in place ; seventh, having credible credit rating institutions and processes ; and finally eighth, enhancing close international cooperation and coordination among countries including in capacity building and talent development to support efforts at the national level to ensure financial stability. islamic finance does not exist in isolation and as it becomes an increasingly important component of the global financial system, it will inevitably be impacted by the changing global landscape of financial regulation. this is particularly important as its growth gains momentum both in terms of number of service providers and in terms of business volume and as the internationalisation process continues. the global call for improved regulation and increased oversight in an international financial environment that is fundamentally different will thus also require us to intensify the efforts that have already been undertaken to strengthen the financial regulation for islamic finance. the financial reforms in islamic finance to support sustainable and responsible innovation, in particular, need to leverage on its inbuilt strengths that set islamic finance apart in performing its role in the mobilisation and allocation of resources to generate real economic activities. in islamic finance, innovation is key in pushing the frontier of market development to generate the range of products and services, processes and