##iguously define the conduct and governance of islamic financial institutions. it needs to recognize the distinct elements in islamic finance and identify risks and challenges associated with the different islamic contractual arrangements and the instruments for the appropriate regulatory treatment of the islamic financial transactions. there is also a need for court recognition and acceptance of the islamic contracts within the common and civil law systems, with a consistent approach of interpreting the rights of the contracting parties based on shariah principles. this will lend certainty and predictability to the financial transactions and is particularly important in evolving legal frameworks that are facilitative of cross - border transactions as islamic financial activities continue to venture beyond domestic borders. bis central bankers ’ speeches in malaysia, the new legal framework for islamic banking and takaful that will come into force this year, will pave the way for the development of an end - to - end shariah compliant regulatory framework for the conduct of islamic financial operations. this new framework provides clarity on the fundamental requirements of shariah that must be adhered to for the contractual arrangements between the financial institution and the customer to remain enforceable. the framework also outlines the operational requirements for the effective application of shariah principles in the conduct of islamic financial institutions. this aims to strengthen the risk management practices beyond the traditional credit, market and liquidity risks, to also include inventory risk, ownership risk and shariah compliance risk. the legislation also provides for the resolution of islamic financial institutions to be in line with distinctive elements of the relevant islamic contracts, thus improving the legal and procedural aspects for the orderly resolution of islamic financial institutions. another important area of priority is to achieve the further harmonization and mutual recognition of shariah interpretations across jurisdictions. the progressive harmonization will be a major driving force for the internationalization of the islamic financial system. the reduced uncertainty from differences in shariah interpretations will also contribute to safeguarding financial stability. the continuous and constructive engagement amongst scholars, regulators and practitioners within and across the regions will pave the way for greater understanding and mutual respect for the shariah views. this also needs to be supported by in - depth research and greater transparency on shariah rulings and resolutions. the international shari ’ ah research academy for islamic finance ( isra ), through its shariah research undertakings and activities in promoting constant engagement among international scholars, has been at the forefront in driving progressive harmonization of shariah at the regional and international levels. its annually organized muzakara

standards adopted by the basel committee, the international association of insurance supervisors ( iais ) and the international organization of securities commissions ( iosco ), would serve to minimise the opportunity for regulatory arbitrage arising from cross - sectoral and cross - border differences, whilst ensuring that the regulatory requirements that are distinct for islamic finance are effectively addressed. a survey conducted by the ifsb in 2011 indicated that 9 countries have implemented the standards issued by the ifsb and that 18 countries are expected to implement them within the next five years. their consistent implementation will be vital. this harmonization will also facilitate consistent participation in islamic finance across borders and contribute towards global financial stability. whilst micro - supervision is an integral part of the toolkit for ensuring financial system stability, the recent global crisis highlighted the need for it to be complemented by macroprudential surveillance and measures. this dimension of prudential regulation involves the incorporation of horizontal assessments of risks across institutions, sectors and national borders, including the risks in asset markets. this is to address systemic risks and to take into account the interconnectedness within the financial system. this is particularly relevant for the islamic financial services industry given the close link of islamic finance with the real economic sector through the various modes of islamic financing contracts. in particular, heightened surveillance is needed over developments in the real estate and commodity markets. equally important is a greater understanding of the inter - relationships between the financial and the real sector, including the potential for second round effects that are transmitted across sectors of the financial system and the economy. the increased cross - border reach of islamic finance has also underscored the importance of enhanced cross - border collaboration among the supervisory authorities. information - sharing and effective coordination among supervisors will enable a complete understanding of the entire risk spectrum of the risk taking activities undertaken across jurisdictions by the islamic financial institutions. this is especially important in crisis situations, given the serious ramifications of a delayed or ineffective response to cross - border contagion. robust institutional arrangements are therefore vital to improve the efficiency of the supervisory processes and to allow for the early detection and management of cross - border transmission of risks arising from group - wide activities. another key area is the evolution of the legal framework for islamic finance. this is to provide greater certainty and to build public confidence in the system as a whole. this necessitates a legal framework that enforces end - to - end shariah compliance in the islamic financial services industry – through provisions and mechanisms that unamb