zeti akhtar aziz : legal & shariah issues in the islamic financial services industry opening remarks by dr zeti akhtar aziz, governor of the central bank of malaysia, at the third ifsb seminar on legal issues : surveys on legal & shariah issues in the islamic financial services industry, kuala lumpur, 28 march 2007. * * * professor william blair qc, chairman of the international monetary law committee of the international law association ( mocomila ), professor rifaat ahmed abdel karim, secretary general, islamic financial services board, distinguished guests, ladies and gentlemen, i would like to join professor rifaat in welcoming you to this 3rd ifsb seminar on legal issues. i would also like to take this opportunity to extend a special welcome to the many of you who have travelled long distances to join us for this important event. ladies and gentlemen, a strong legal and shariah framework as a pillar to islamic finance the need to continually strengthen the legal framework for the financial services industry is imperative given the powerful forces of change continually transforming the functioning of the global economy and the international financial system. a legal framework which is aligned with market developments lends certainty and predictability to financial transactions and innovative products and instils public confidence in the financial system. the legal and shariah framework is a vital pillar in the sustainable development of islamic finance. it provides the legislative framework that unambiguously defines the conduct of islamic financial institutions. it also gives due protection to the consumers of islamic finance, ensures the enforceability of islamic financial contracts and provides an effective mechanism for legal redress. the legal framework for islamic finance also needs to address any specific elements that could result in a comparative disadvantage to the industry. more specifically, in a world in which finance has long been defined by conventional practices and laws, the features that are unique to the requirements of islamic finance need to be taken into account to ensure neutrality of treatment. in malaysia, the rapid evolution of islamic finance has been supported by the development of a comprehensive legal infrastructure. a series of legislation since 1983 has provided the foundation for a regulatory regime for islamic banks, takaful operators, the shariah council for islamic finance, islamic finance windows in conventional banks and the various forms of bond and money market instruments. in addition, the corporate, securities and insolvency laws and guidelines are compatible with the shariah. these legislation have been reinforced by the establishment of a dedicated high court bench to provide

a comprehensive adjudicative system to deal with disputes involving islamic finance. in addition, the new islamic finance arbitration rules of the kuala lumpur regional centre for arbitration provides a customised mechanism for the resolution of disputes in the islamic financial services sector. the development of an efficient and vibrant islamic financial market equally important to the development of islamic finance is not only the financial intermediaries but also the islamic financial markets. the demand for islamic financial products and instruments is expanding at increasingly significant rates in predominantly muslim countries in the middle east and asia as well as in the non - muslim economies in the west. the rapid growth of the islamic financial markets has seen the development of a wide range of products including money, debt and capital market instruments. such markets are important for the effective management of investment portfolios and for the diversification of risks. today, the global demand for islamic capital market products is served by the existence of the dow jones islamic index whose market capitalisation now exceeds usd 10 trillion. about 350 shariahcompliant funds have already been established across the globe. in malaysia, the sukuk market has been a leading segment of growth in the domestic bond market accounting for half of our domestic bond market and two thirds of the total global outstanding sukuk. a wide range of new islamic financial instruments has been developed including the bank negara malaysia sukuk ijarah, bank negara malaysia monetary notes, the islamic residential mortgagebacked securities and most recently the commodity murabahah programme for managing short - term liquidity in the inter - bank money market. while islamic finance practitioners and scholars continue to draw from the source of fiqh muamalat to create new and innovative instruments, the legal framework however, needs to be further strengthened to ensure continued acceptance and utility of the financial instruments. in malaysia, the progress in this area has been facilitated by the common law which forms the foundation of the legal system. more specifically, the concept of " trust " under the common law has facilitated the issuance of islamic securities such as sukuk and islamic real estate investment trust ( reit ). since " trust " as an inherent notion embedded in the common law system is not generally found in the jurisprudence of civil law, some civil law countries have enacted specific legislation to provide for the introduction of trust so as to align their legal systems with the requirements of islamic finance. the challenges brought by the integration of islamic finance with the international financial system while legal issues within a domestic financial