zeti akhtar aziz : islamic finance and global financial stability keynote address by dr zeti akhtar aziz, governor of the central bank of malaysia, at the seminar on islamic finance : during and after the global financial crisis – " islamic finance and global financial stability ", istanbul, 5 october 2009. * * * " the unfolding events during this global financial crisis have brought to the forefront the issues concerning the stability of financial systems and the robustness and resilience of the international financial architecture. at the heart of the crisis is the breakdown of the functioning of the financial intermediation process and the loss of confidence in the financial system. as the world continues to struggle with the consequent global economic recession and the continued fragile financial system, it has intensified the search for solutions. indeed, wide ranging reforms are now currently being discussed. the future financial landscape in the aftermath of this crisis is, therefore, likely to be significantly different from the present. in the search for the appropriate reforms, there is a general consensus that we need to return banking to its basic functions – to provide financial services that adds value to the real economy. this in fact represents the very essence of islamic finance. these are the very elements that are espoused in the shariah principles that underpin islamic finance and which explains its resilience during this international financial crisis. as the role and relevance of islamic finance in the global financial system gains significance, it will not only increase its potential to contribute to global financial stability but also towards strengthening global growth. " it is my honour to be invited to speak at this seminar on islamic finance : during and after the global financial crisis, jointly organised by the world bank, the islamic financial services board ( ifsb ), the islamic development bank ( idb ) and the institute of international finance ( iif ). this seminar takes place at a time in world history that is characterised by an unprecedented global financial instability, that has now precipitated a synchronised global economic recession. although signs of an impending recovery in the world economy have appeared in the horizon, the pervasively virulent and far reaching repercussions unleashed by the crisis has shaken the foundations of the global financial system. this damage has yet to be repaired and rebuilt. this has sparked the international call for the reform of the financial architecture to one that will best serve the world economy, to one that is more resilient to shocks and to one that would

and across borders, a liquidity management task force has been established by the ifsb and the idb early this year. this work is being further supplemented by ongoing market initiatives by the international islamic financial market ( iifm ) which focus in the advancement and the standardisation for islamic financial instruments for the islamic capital and money markets. more recently, malaysia established the bursa suq al - sila'under the concept of commodity murabahah. this multi - currency and multi - commodity is an electronic exchange traded platform to facilitate the trading and settlement of commodity using crude palm oil ( cpo ) for liquidity management between islamic financial centres. although malaysia already has a well functioning islamic inter - bank money market, this platform provides a further alternative for liquidity management, through which global interlinkages in the international islamic financial system can also be further enhanced. integral to the efforts in the development of islamic finance has been the strengthening of the regulatory and supervisory framework for islamic finance. in the area of international prudential standards for islamic finance, the ifsb that was established in 2002 has developed a number of standards ranging from capital adequacy requirements to governance and risk management to assist the islamic financial institutions in adopting international best practices and standards. while the basic legal, regulatory and supervisory framework that takes into account the distinctive features of islamic finance are already in place, there is a need to have a more comprehensive infrastructure to meet the present challenges. looking beyond the current crisis, there needs to be an integrated crisis management framework as part of this infrastructure to ensure that any emerging crisis in the islamic financial system will be promptly and efficiently managed. more facilitative and modernised legal framework is also required to make business more conducive for islamic finance. in addition, the boundaries of the regulatory framework for islamic finance would also have to be regularly adapted to keep pace with the evolution and transformation of the financial system. in the case of malaysia, the comprehensive legal, regulatory and supervisory framework for islamic finance is further supported by a financial safety net framework that encompasses the lender of last resort facility and a deposit insurance system. moving forward, in the aftermath of this global financial crisis there is also a need to have in place the institutional arrangements for resolution of troubled international islamic financial institutions. in malaysia, we have also in place a mandated resolution mechanism to provide for expedient, effective and cost efficient resolution of islamic financial institutions. the current crisis, however, has highlighted the need to have