##s ”. in such an environment, traditional checks and balances may become inadequate and easily lead to excessive risk 4. we have seen numerous examples where periods of exuberance were accommodated by the financial system, reflected by increasing leverage and asset price inflation, followed by a correction. without any doubt, the best example in dutch financial history is the tulip mania, which took place around 1635. this episode is especially known for its incredible price increases. at the peak, 14 thousand guilders were paid for a single tulip bulb – more than a workman earned in his entire life those days. less known is that the speculative bubble was largely driven by financial innovation. in the years before the tulip mania, new financial markets evolved in the netherlands, including a stock exchange and futures markets. sophisticated trading techniques were developed, allowing short selling and the use of put and call options. derivative contracts allowed massive trading in tulips that were not even planted yet – a genuine financial innovation at the time. many investors did not realise that these new instruments were inflating a speculative bubble on an unprecedented scale and lost all their money when the market collapsed after two years. the tulip mania illustrates how imbalances can develop when previous constraints are lifted – in this case by new financial tools allowing investors to take large speculative positions. but it also illustrates the role of naive optimism and even greed. 5. misguided incentives are often also at the root of growing imbalances, because of conflicting micro and macro perspectives. this is because at the micro level, market participants tend to take the environment in which they operate as given, for instance prices and the behaviour of other market participants. but factors that are considered exogenous at the micro level may become endogenous for the financial system as a whole. at the macro level, this easily leads to fallacies of composition. for example, for an individual investor, increasing leverage is a way to boost returns. but if everybody does this, without sufficient profitable investment opportunities, it can only be counterproductive by reducing long - term yields and raising risks. pro - cyclicality 6. a closely related issue is the financial system ’ s inherent pro - cyclicality. we all know that with a favourable economic outlook and upbeat financial markets, balance sheets look strong for both financial firms and their counterparts in the real economy. in such an environment, it is understandable that banks ’ lending criteria become looser and, for instance, pension contributions are

to bring together the industry practitioners, issuers and investors, the regulators, scholars as well as those in related services, including the it services, legal, accounting and auditing professionals and those in human resource development. it is our hope that the deliberations today will play a catalytic role in building greater collective efforts through multistakeholder dialogues and network - building activities whilst discovering opportunities and also improving our understanding on important areas in islamic finance. ladies and gentlemen, as we know today, there are already clusters of cross - border collaborative activities taking place on several fronts that serve to contribute towards increasing the international integration process of islamic finance. these activities have taken many forms ranging from equity and non - equity business collaboration, regulatory cooperation in setting the global development blueprint, information exchange and building consensus on issues for international prudential standards development, to intergovernmental memorandums of understanding for collaborative developmental initiatives in islamic finance, and many others. ladies and gentlemen, as islamic finance continues to make significant inroads in the international financial markets with expanding scale, growing magnitude and greater sophistication, a critical need emerges for an expanded discourse on the developments and emerging issues with its global relevance and impact, of interest to all its major stakeholders. this is the first time that bank negara malaysia has organized a full - scale, multi - disciplinary, international event of this nature on islamic finance. these sessions include the annual investors & issuers forum, and financial regulators forum and the biannual banking and financial law school. it is our hope that participants will benefit from any of the parallel sessions of their interests and have increased opportunities for network building among the widening groups of stakeholders participation in the forum. these forums have been designed to provide dynamic and interactive formats to encouraging open and inclusive dialogues that foster a greater collective understanding in islamic finance. let me record our appreciation to the many distinguished speakers from various international institutions, financial practitioners, legal fraternity, regulatory bodies and other prominent thought leaders in islamic finance. it is our sincere hope that this global forum will be rewarding and may the collective wisdom derived from the deliberations lead to more collective actions that will be to our increased mutual benefits. let me once again express our appreciation to yang amat berhormat dato'seri abdullah badawi for his presence here this afternoon and for accepting to deliver the keynote address at our forum today. thank you.