mohd razif bin abd kadir : brief overview of islamic banking and finance speech by mr mohd razif bin abd kadir, deputy governor of the central bank of malaysia, at the official launch of kuala lumpur international islamic finance expo 2006, kuala lumpur, 24 november 2006. * * * it is indeed an honour to be here this morning at the launching of the kuala lumpur international islamic finance expo 2006, organized by the association of islamic banking institutions malaysia ( aibim ). it was exactly five years ago that all of us witnessed the launching of the first islamic banking and takaful week by the then deputy prime minister, dato'seri abdullah ahmad badawi. and now, after those years, alhamdulillah, we are pleased with the positive impact of the comprehensive awareness campaign in the year 2001 as it has paved the way to subsequent nationwide annual campaigns on financial awareness in islamic banking and finance. in this regard, i wish to congratulate all financial institutions involved for providing their unwavering support in this virtuous endeavour. before i proceed, allow me to take this opportunity to welcome our exhibitors, both local and foreign, who will be participating in the kuala lumpur international islamic finance expo 2006. we believe that your participation will benefit the patrons to this expo. i hope you will exploit this platform to disseminate as much information on islamic banking and finance as possible so as to provide an opportunity for the public to learn more on the products, services and benefits of islamic banking and finance. this year's islamic financial expo presents a different appeal altogether with various differentiated activities and events organised for the diversified target groups and consumers. i note that various activities have been arranged for the next five days including islamic banking and finance exposition, the annual islamic finance forum, colloquium on islamic finance, convention on takaful and islamic unit trust advisors and muzakarah for shariah advisors. this is indeed an excellent opportunity for exchanging ideas as well as providing relevant information to the public on islamic finance. it is also timely and augurs well with the recent announcement of the initiatives to position malaysia as the international islamic financial centre. the islamic financial industry in malaysia has experienced rapid transformations particularly in the past ten years. the malaysian islamic banking system registered strong performance with higher profitability and positive trends in all key indicators. profitability surpassed the rm1 billion mark for the first time in 2005, and this year the industry

to respond by matching it with an investment of its own on the same scale. the inflow of capital was enormous. as if this was not enough, public sector involvement in housing finance was reformed around the same time ; this structural reorganisation had unexpected multiplier effects when the recently privatised commercial banks eagerly followed that lead and ran ahead along the same path even faster than the policy makers had expected. at the same time, icelandic banks and financial institutions have been establishing their influence in neighbouring foreign markets and, to some degree, more distant ones. the banks have expanded rapidly and are now very large relative to iceland ’ s domestic economy, and in fact by any measure. their international activities have also created a new situation that has sometimes been called “ the problem of explaining the icelandic economy ”. although i feel that this problem is overstated because it must surely be temporary, it cannot be denied that the icelandic currency itself, and its small size, are recurrent themes. the economic factors i mentioned earlier have driven strong inflationary pressures in iceland, which have partly appeared in the form of higher measured inflation, but have to some extent been contained by central bank policy rate decisions, which in turn have affected the exchange rate of the icelandic krona, at least for some while now. and in combination, these two factors have raised yet another question that is relevant to this conference. that is to say, these special conditions have inspired new investors, the carry traders, to venture to our shores. these modern - day vikings try their fortune in distant places in the hope of quick gain and handsome returns, which they can no longer find closer to home. what will happen when these bold hunters of yields and expectations suddenly lose their nerve? or their appetite? regardless of whether this is caused by events that have occurred somewhere else and under completely different conditions from here, or due to persistent rumours, speculation and theories about the situation in iceland and risks that have little or no foundation at that time. will they load everything aboard and sail off, like the vikings in the past, with what they have managed to gather up, and look for shelter with their bounty against real or imaginary threats? if this happens, might the high - yield countries suffer a shock? and if so, will that shock be felt the most by the smallest countries, where investors naturally have the least knowledge and confidence? then the question will arise about the impact that all this will have on the effectiveness of the central bank ’ s policies for controlling