mohd razif bin abd kadir : islamic banking products – theory, practice and issues opening remarks by mr mohd razif bin abd kadir, deputy governor of the central bank of malaysia, at the 2nd foundations of islamic finance series conference : “ islamic banking products – theory, practice and issues ”, kuala lumpur, 8 march 2011. * * * i am delighted to be here today and would like to thank the organisers for inviting me to deliver the opening address at this 2nd foundations of islamic finance series conference. following the success of the inaugural conference held last year in dubai, this years event is a commendable collaboration between the organisers ; the international centre for education in islamic finance ( inceif ), the international shariah research academy for islamic finance ( isra ) and the university putra malaysia, to provide an avenue for discussions on various literatures in islamic finance by eminent practitioners and scholars, with the aim to produce quality publications for the industry. the theme of this years conference, “ islamic banking products : theory, practice and issues ” is most timely as waves of innovation are pervasive in islamic finance in the recent years, fostering the generation of a wide spectrum of islamic financial products and services. as the next frontier of development in islamic finance evolves through innovation, we have to be mindful that innovation within an environment of constant change and increasing uncertainties is indeed a challenge. joint efforts between academia and industry to conduct research, to explore and deliberate on issues relating to the development of new islamic financial products, such as the efforts that have led to this conference can therefore provide a point of reference for the industry in ensuring that new and better products are developed to match the diverse and discerning needs of customers, while meeting the requirements of the shariah. the ability of islamic finance, as a form of financial intermediation that provides a range of high quality financial products and services, reflect the innovative and dynamic nature of the industry that contributes to its role as a facilitator of economic activity. together with the fundamental requirements in islamic finance that an underlying productive economic activity accompanies financial transactions, a close link is formed between financial transactions and productive flows. given that islamic financial instruments reflect the underlying economic activities and that such instruments inherently have the potential to provide tangible returns to investors, there have been significant demands on such products. this gives rise to the competitiveness of islamic finance, which is further spurred by the

. in malaysia, there is a greater foreign institutional presence and substantial foreign participation in malaysia ’ s islamic financial system. similarly, there has been an increased of foreign participants to raise and invest funds in malaysia ’ s financial markets. the global sukuk market, growing at an average annual rate of about 40 percent has also been a significant platform for such investors, as it effectively intermediates funds across borders, thereby fostering international financial and economic inter - linkages. as the internationalisation of islamic finance widens the spheres within which islamic finance operates in, there are growing opportunities and challenges in the business environment that sets the current backdrop for islamic finance. continuous capacity and capability measures will be pursued to provide an enabling environment for industry players to remain competitive and innovative. given that the recent financial turmoil has highlighted the importance of strong liquidity risk management, an important recent development to assist in the liquidity management of islamic financial institutions is the establishment of the international islamic liquidity management corporation ( iilm ). the iilm has begun its operations in kuala lumpur from early february this year, following its official launch in october 2010. the iilm is tasked to issue short - term multi - currency liquidity instruments that would facilitate the cross - border liquidity management between financial centres, and by doing so, would enhance financial inter - linkages. the first issuance of liquidity instruments is expected to take place later during the year and is very much anticipated as it would contribute to more efficient management of financial flows across borders, thereby leading towards more efficient internationalisation of islamic finance. the islamic finance industry is at a stage of growth in terms of products and services, which requires innovation to remain as the driving force behind the progress of the industry. in the pursuit of innovation, it is paramount that the islamic banking and takaful industry achieve full shariah compliance in the development and application of their products and services. a robust shariah governance framework is therefore an important foundation for the islamic financial institutions to ensure that its objectives and operations are in accordance with shariah principles. in malaysia, there have been recent enhancements to the shariah governance that aim to further strengthen the existing shariah governance process, decision making, accountability and independence of shariah advisories. reinforcements of the shariah compliance functions include the requirements for internal shariah review and audit, supported by an appropriate risk management process and research capability. it is envisaged that with a more robust and sound sha