zeti akhtar aziz : current issues and developments in islamic banking and finance keynote address by dr zeti akhtar aziz, governor of the central bank of malaysia, at the asli ’ s conference on developing islamic banking and capital market : “ new opportunities, new market and new frontier in islamic banking and finance ”, kuala lumpur, 25 august 2004. * * * islamic banking and finance has emerged as a financial intermediation process that is competitive and resilient and that contributes to the overall wealth creation, growth and development of our nation. amidst an increasingly challenging and competitive financial environment, the evolution of a comprehensive islamic financial system seeks to meet the range of requirements of a rapidly changing economic environment, with its soundness and stability secured through the robustness of its regulatory framework supported by the strength of its financial infrastructure and the sophistication of its products and services. indeed, the strength of the respective components of the system and the interconnections of its markets will open new frontiers in islamic banking and finance and will maximize the potential and opportunities that it accords. distinguished guests, it is my pleasure to be here today at this conference organised by asli to speak on the current issues and developments in islamic banking and finance. the islamic financial system in malaysia has evolved as a viable and competitive component of the overall financial system, complementing the conventional financial system as a driver of economic growth and development. the rapid progress of the domestic islamic financial system, reinforced by significant developments in the islamic financial infrastructure, including the legal and shariah infrastructure and the regulatory and supervisory framework, has strengthened the position of the islamic financial system as an increasingly important component in meeting the changing requirements of the new economy. the financial sector masterplan launched three years ago provides the strategic direction envisioned for the development of the islamic financial sector looking beyond the near term and taking a longer - term perspective into the needs and requirements of the future. the strategies outlined in the plan have emphasized the development of the respective building blocks of the various parts of the financial sector that need to be put in place to form the solid foundation on which sustainable future progress can be achieved. the expansion of the islamic financial system in malaysia has therefore taken place with attention given for the development of a comprehensive system. towards a more diversified islamic financial system at the onset of our journey in the development of a comprehensive islamic financial system that is progressive, efficient, dynamic and sustainable, due attention was thus given to the development of the key

2009 o tax relief to boost demand o increased expenditure on public projects to create employment and public assets o cost 3. 5 % of gdp – rs. 1. 86 trillion ( $ 37 billion ) o net borrowing during 2008 - 09 rose from budgeted rs. 1 trillion ( $ 20 billion ) to rs. 2. 29 trillion ( $ 46 billion ) o increase in fiscal deficit from 2. 7 % of gdp in 2007 - 08 to 6. 2 % of gdp in 2008 - 09 o net borrowing during 2009 - 10 budgeted at rs. 3. 97 trillion ( approx $ 80 billion ) potential fallout of increased market borrowings and rbi ’ s response o the increased market borrowing programme of the government has the potential to put upward pressure on interest rates with unintended consequences for growth as well as borrowing cost for the government. to mitigate this, rbi has been conducting open market operations ( omos ). from mid - february 2009 till date, rbi has purchased government securities worth rs. 765 billion ( $ 15 billion ) as part of its open market operations. these measures have had the desired effect of lowering deposit and lending rates of banks and increased credit flow to the real economy. besides, recent quarterly figures of corporate earnings have been quite healthy and encouraging. further, india has well developed liquid and efficient derivative markets like interest rate swaps, currency futures, otc forward contracts which afford businesses instruments to hedge their financial risks. moreover, exchange traded interest rate futures are due for launch shortly which will further increase the choices to market participants. also, at usd 255 billion, foreign exchange reserves provide more than adequate comfort. exchange rate of the rupee is market determined and rbi intervenes at the margin only to contain excessive volatility and to ensure orderly conditions in the foreign exchange market. significantly, indian foreign exchange market is very deep and liquid as reflected in bid offer spreads which compare with the major international currency pairs such as $ - euro, $ - sterling and $ - yen. in addition, as against the net outflow of portfolio investment in 2008 - 09, net foreign direct investment ( fdi ) was substantially positive in 2008 - 09 at $ 18 billion underscoring the confidence of foreign investors in the growth prospects of the indian economy. this was the consequence of liberal and transparent policy on fdi. even the overseas direct investment ( odi ) policy is also very liberal which has resulted in an annual average odi outflow during the last 3 years of usd 17 billion. here