need for the reinvention of the business model of islamic financial institutions is just as great. for about 12 months after the crisis first reached this region, there was an understandable tendency to believe that it would be just a temporary interruption to a story of strong growth. many believed that after a short period of adjustment the abundant liquidity conditions and the easy access to credit that islamic financial institutions had enjoyed in the years prior to the crisis would quickly return. the funding would be obtained to complete the major projects and end - investors would again open their cheque books. as the dust begins to settle on the global financial crisis it should now be clear this assumption of a temporary blip can no longer be sustained. it is no longer wise to base business models on the hope that the era of cheap and plentiful liquidity will soon return. the industry and regulators need to recognise that the crisis has produced a fundamental change in the global financial system. one clear result has been to make participants in the global financial markets much more cautious and risk - averse. there now seem little doubt that the days of cheap and abundant liquidity will not return for a very long time. inevitably this means that the business models of many islamic financial institutions will need to be rethought. they will need to build a more broadly - based franchise than in the past. it is very likely that there will be less scope in future for smaller niche players that provide only a limited range of services. instead, islamic financial institutions need to build diversified sources of revenue, relying not only on placement and performance fees, but also on the steady stream of income generated by such an unglamorous but essential activities as advisory services, asset management, and providing financial services to retail clients. diversification of the industry will need to go hand in hand with its consolidation. larger, more broadly - based financial institutions will be key to the emergence of an industry with more sustainable business models. as a regulator, there are a number of things that we can do to encourage this process. increasing the attention that we give to the sustainability of business models in our supervisory assessments is one of them. new regulatory requirements, modeled on the new basel iii framework, will place greater limitations on the use of leverage as well as requiring more attention to be paid to the way that illiquid assets are funded. finally, new accounting standards may bring back onto the balance sheet of financial institutions assets which have previously been treated as having been securitized

imprudent business conduct had been crossed. by now i am sure you will be asking what relevance do these comments on the conventional industry have for shari ’ a - compliant institutions. my answer is : a great deal. if we examine carefully the trends in islamic banking in the years prior to the crisis, we can see that there are important similarities between the practices of islamic financial institutions and those of conventional ones. this should not be surprising because high returns require high risks, and the high returns achieved by islamic banks could only be generated by taking on a corresponding degree of risk. it is not difficult to see the parallels between conventional and islamic finance during the years prior to the crisis. just like conventional institutions, islamic financial institutions increasingly funded long - term assets with short - term funding. although the assets and liabilities were structured in a shari ’ a - compliant manner, the degree of maturity mismatching was just as great as practiced by conventional institutions. in some cases, for example where the asset involved a long - term development project, the degree of maturity mismatching was significantly greater than that practiced by conventional financial institutions. islamic financial institutions did not invest in cdos or other structured financial products, and thus were saved from exposure to the “ toxic ” debt that triggered the financial crisis. nonetheless, the assets in which they did invest were just as illiquid as structured financial products, and in the past two years have been just as difficult for them to sell. thirdly, like their conventional peers, islamic financial institutions also greatly increased their leverage. they did so in a shari ’ a - compliant manner, but balance sheets expanded on the back of static capital levels, just as they had done in conventional banks. despite the extraordinary returns earned during the period of rapid expansion, capital was not retained in the institution but was distributed to shareholders in the form of dividends and to staff in the form of bonuses. although the parallels between conventional finance and islamic finance in the years prior to the crisis are not total, there are enough of them to suggest that many of the lessons are the same. conventional banks are being forced by market pressures and by regulators to rethink the business models that they developed in the years prior to the crisis. regulators are forcing them to pay more attention to leverage and the need for high quality liquid assets. market pressures are also forcing these banks to become less ambitious in their growth strategies and to concentrate on their core businesses of deposit - taking and lending. the