element in sourcing of funds. the establishment of the accounting and auditing organisation for islamic financial institutions ( aaoifi ) has made a significant contribution in formulating and issuing accounting and auditing standards for islamic financial institutions. the standards issued by aaoifi have contributed towards improved quality of financial statements and reporting methodology of islamic financial institutions. aaoifi has also issued standards on the role of the shariah committee as well as the code of ethics that should govern the accountants and auditors of islamic financial institutions. efforts by aaoifi have also accelerated the pace of transparency and corporate governance of islamic financial institutions. fourth, risk management framework emphasis on improved corporate governance goes hand in hand with the need for improvements in risk management standards. sound risk management practices will minimise adverse consequences faced by financial institutions during periods of uncertainty. robust internal controls to provide qualitative standards are also necessary to complement the quantitative analysis of risk to provide a check and balance in the overall risk management practices. effective risk management systems is central to supervisory efforts. the risk management system in islamic institutions need to be able to address the unique characteristics and attributes associated with islamic financing operations involving financial contracts and instruments which may give rise to other risks besides credit risk. the risk management infrastructure needs to be in place to facilitate the identification, measurement, monitoring and control of all inherent risks present in all the various types of financing so that the specific risks involved may be ‘ unbundled ’. the complexities of the respective risks in the islamic financial instruments therefore need to be fully explored and quantified to provide for their effective assessment and management. 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

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. this is achieved through the intermediation process to facilitate trade, business and investment. this will facilitate the integration of the islamic financial system as a viable component of the global financial system. it is the ability of the islamic financial industry to build institutional capacity, intensify the collaborative efforts to strengthen the effectiveness of the islamic financial infrastructure, and the acceleration of its global integration that will provide the synergies and opportunities for the islamic financial industry to evolve into an important component of the international financial system that can contribute to greater global financial stability and enhance the prospects for a more balanced global growth.