zeti akhtar aziz : the future prospects of the islamic financial services industry speech by dr zeti akhtar aziz, governor of the central bank of malaysia, at the ifsb interactive session, bali, 31 march 2004. * * * our endeavour is to develop an islamic financial system as an intermediation process that will contribute to overall wealth creation, growth and development and a greater shared prosperity. as the pace of globalization and liberalization accelerates, securing financial stability and confidence have increased demands for more robust and resilient financial systems. the challenge is therefore to evolve strategies that will promote a competitive, dynamic and sustainable islamic financial services industry. central to this common vision, to create a comprehensive islamic financial system that will be able to respond to meet the requirements of the domestic economies and also to become an integral component of the international financial system. distinguished guests, assalamu ’ alaikum warahmatullahi wabarakatuh, it is my pleasure to be here today at this conference organised by the islamic financial services board to discuss the future prospects of the islamic financial services industry. malaysia ’ s experience in the development of our financial system is outlined in our ten year financial sector masterplan. the masterplan represents the blueprint that provides the strategic direction for the development of the sector that looks beyond the near term and takes a long - term perspective into the needs of the future. the aim of the plan is to provide clarity of the vision and objectives that are to be achieved in the context of a more challenging environment that is driven by rapid change in a world that is becoming increasingly more integrated and more technology and knowledge - based. in the development of our islamic financial system, a comprehensive approach has been adopted. malaysia has given emphasis to the development of a comprehensive financial infrastructure that includes the islamic financial markets, islamic financial instruments, contract law and law enforcement procedures, shariah governance framework, islamic accounting practices and valuation standards, appropriate disclosure requirements as well as an efficient and secure payment and settlement system. attention has also been directed to develop the prudential regulatory and supervisory framework that underpins the stability of the islamic financial industry. today, my remarks will focus on three key areas in which greater attention is needed in order to secure a promising future for the islamic financial services industry. these areas include accelerating the pace of financial innovation, strengthening risk management capabilities and leveraging on information technology. accelerating the pace of financial innovation as we advance forward in the development of islamic

future earnings and apply shariah - compliant risk mitigation techniques at an early stage so as to manage the volatility in returns to ensure stable and competitive income to depositors. similarly, applications of risk - based models allow islamic financial institutions to conduct stress testing, sensitivity analysis and simulations based on multiple scenarios to take into account all possible potential outcomes that may occur. this will enhance the capacity of islamic financial institutions to better anticipate the possible impact of financial shocks on future earnings and hence formulate contingency plans leading to a more effective and efficient asset and liability management. in addition, it - based risk management systems would strengthen the capacity of islamic financial institutions to effectively manage the segregation of demand deposits, restricted and unrestricted investment accounts and shareholders funds in accordance with their distinct investment objectives and risk tolerance. the mapping of financial performance of assets with risk - adjusted returns to these specific classes of investors will lead to enhanced accuracy and transparency in the determination of returns. in addition, as returns in islamic banking are uncertain and can only be ascertained on an ex - post basis, well - developed it systems can equip islamic financial institutions with the ability to make projections on future returns to reduce the degree of uncertainty in the returns to be paid to the depositors. this would enhance credibility and strengthen the competitiveness of the islamic financial industry. conclusion the future prospects of the islamic financial services industry will be the result of the combined efforts of all the relevant entities in the financial sector - the industry, the regulators, the market participants and the international community. these collective efforts need to be galvanized as a coordinated and concerted effort to maximize the potential for the industry. evolving the shared vision and common goal to be achieved will be an important first step. of greater importance will be the actions that need to be taken to make this happen. it will be our actions and initiatives taken today that will contribute towards determining the future that we aspire.