radovan jelasic : dinar products and declining interest rates in serbia speech by mr radovan jelasic, governor of the national bank of serbia, at the promotion of “ pure ” dinar credit of hvb bank, belgrade, 18 october 2006. * * * dear ladies and gentlemen, my participation in this conference is motivated by two reasons : dinar products and decline in interest rates! i am happy to say that today we are all able to conclude that the national bank of serbia was right when it announced that interest rates will subside and that banks will expand their credit offer so as for it to include “ pure ” dinar credits. hvb bank has recently cut its effective interest rates on foreign currency credits and has now launched a new product – an authentic dinar cash credit, with no revaluation. some other banks have also announced their intention to reduce interest rates on credits in euros. present developments only go to confirm what the nbs has claimed, in response to criticisms purporting that the restrictive measures of the national bank are entirely to blame for the high cost of credits in serbia : inflation needs to decline first, and only then can we count on a gradual decline in interest rates. and also, a drop in inflation is an essential precondition to increasing trust in the domestic currency and its use. serbia is on the right track to achieving both these objectives! it is precisely the restrictive monetary policy of the nbs that gave a decisive contribution to a decline in inflation, and to the fact that, now that the policy interest rate on two - week repo operations amounts to 18 percent, with annual inflation dropping to 11. 6 % in september, banks are starting to reduce their interest rates on credits, even though the much criticized measure of the central bank – increase in the reserve requirement on short - term external borrowing of banks – introduced as far back as may this year, is still in force. at the same time, the share of reserve requirement on external credits with maturity of up to two years, the ratio on which was raised from 40 to 60 percent, in total calculated reserve requirement is only 17. 5 %. when this measure was first introduced, this share was 30. 3 percent. in the first eight months this year, the sum of total credits increased by over csd 100 billion, which plainly shows that measures that the nbs enacted with the aim of bringing down inflation did not have a negative effect on either lending activity

the leasing sukuk are the first of their kind to be issued by a central bank. let me turn now to the future prospects for islamic finance. the global economic crisis has forced the financial industry as a whole to reassess its growth prospects for the years ahead. the islamic financial industry has not been exempted from this reassessment, although there are those who argue that the prospects for shari ’ a compliant finance have improved as a result of the crisis. it has been pointed out that islamic financial institutions have escaped relatively unscathed from the severe downturn which is affecting most conventional financial institutions. this certainly presents the industry with an opportunity to continue its rapid and successful growth of recent decades. because interest - based transactions are prohibited, islamic finance encourages business and trade activities that generate fair and legitimate profit. the prohibition on speculative activity also helps to ensure that there is a close link between financial flows and productive activities. these intrinsic properties of islamic finance have contributed towards insulating it from the potential risks resulting from excess leverage and speculative financial activities. for example, shari ’ a compliant financial institutions were unable to invest in the cdos and other structured financial products – the “ toxic assets ” – which have been at the centre of the current crisis. this is not to pretend that the islamic financial industry does not face some important challenges. some of them are specific to global economic conditions, as the clients of islamic financial institutions are no more immune to the global recession that are the clients of conventional banks. however, some of them are more specific to islamic finance. first, islamic finance in its modern form is a relatively young industry. the first islamic banks were licensed little more than 30 years ago. of the 26 islamic finance entities operating in bahrain, nearly half have been licensed within the past 5 years, and nearly three quarters have been licensed in the past 10 years. this has several consequences : few shari ’ a compliant financial institutions have yet been able to achieve significant economies of scale. many remain comparatively small and focused on niche markets. newer entrants to the industry have also exhibited a tendency to copy the business models they see being successfully pursued by their more established competitors. as a result we have an industry which comprises many small - scale firms engaged in very similar activities and with comparatively high concentrations of risk. for the long - term health of the industry it will be important to generate greater scale and diversity. secondly, one of the major constraints on generating scale economies is the difficulty in