we have seen the first defaults by issuers of sukuk. these defaults have raised many complex legal questions about the rights of sukuk holders, for example whether they have the right to take ownership of the underlying assets in the event of the issuers ’ default. until these legal questions are resolved there will be a long shadow over the sukuk market, and we have already seen the impact in terms of the volume of new issuance. the further development of this market depends on finding legal certainty and developing mechanisms to deal with issuer defaults. it is now also clear that islamic financial institutions have not been insulated from the secondround effects of the crisis. their customers have been just as badly affected by the economic downturn as have been the customers of conventional banks. recent events have also illustrated the risks of concentrating too many assets in specific sectors such as real estate. the principles of sound finance – do not concentrate risk, do not rely on collateral with unrealistic valuations – apply equally to islamic institutions as to conventional ones. these recent developments are what make the sessions that are planned for the next two days so very timely. i hope that the panels will be able to draw lessons from the crisis for islamic finance and that they will be able to assess the impact of the new global architecture on the industry. there can be little doubt that new regulatory policies on such matters as capital adequacy and liquidity will have major implications for the standards that are applied to the islamic financial industry. one of the most important lessons of the crisis has been the need for good liquidity risk management by financial institutions. given the problem of liquidity risk management is one that has confronted islamic financial institutions for a long time, the events of the past two years should give a new sense of urgency to our attempts to find a solution. corporate governance is another issue that i believe is very important. although none of the panels at this summit is specifically devoted to this subject it has been a focus of the ifsb ’ s work in the past, and i am sure it will be a recurring theme during the next two days. as i have said in the past, corporate governance is especially important for banks because they have a special task – that of looking after other people ’ s money. this places a heavy responsibility on their boards of directors and senior management. in the case of islamic financial institutions the responsibility is greater still since they must take into account the interests of investment account

rasheed mohammed al maraj : challenges for islamic finance keynote address by his excellency rasheed mohammed al maraj, governor of the central bank of bahrain, at the world islamic banking european summit, london, 8 july 2008. * * * your excellencies, ladies and gentlemen : good morning. it is a pleasure to be here at the inaugural world islamic banking european summit in london. as his excellency, shaikh mohammed, has already mentioned, bahrain has been home to the world islamic banking conference for the past fifteen years. throughout that time central bank of bahrain has been – and remains – a strong supporter of the wibc. we very much welcome this inaugural european summit, which we regard as yet a further indication that islamic finance is rapidly moving into the financial mainstream. there is no need for me to repeat the facts and figures about the stunning growth of islamic finance that shaikh mohammed has already referred to. let me say, however, that i strongly endorse his view that the islamic financial industry continues to offer enormous opportunities for both muslims and non - muslims alike. we at the cbb have a continuing commitment to facilitating the development of the islamic financial services industry. we issued the first sovereign sukuk in 2001. we were the first regulator in the world to issue a comprehensive set of prudential regulations tailored to the needs of islamic financial institutions. more recently, we have introduced an innovative approach to the application of basel ii, pillar 1 requirements to our islamic banks. we will continue to ensure that all financial institutions in bahrain adhere to the very highest international standards. where necessary we will play our part in adapting those standards to the needs of the islamic financial services industry. in developing this framework we are assisted by the presence in bahrain of a number of the leading standard setting bodies for the industry. these include aaoifi, the accounting and auditing organisation for islamic financial institutions and the iifm, the international islamic financial market, which is doing sterling work in developing standard contracts and associated documentation. building sound underpinnings, in the form of an appropriate framework of regulation, accounting and contract standardization, is a very important challenge. but it is by no means the only one that the industry must confront as the result of its success. i would like to take this opportunity to look at some of the other challenges that the industry currently faces as it moves into the financial mainstream. a long - standing issue relates to the multiplicity of shari ’ a boards