zeti akhtar aziz : islamic finance speech by dr zeti akhtar aziz, governor of the central bank of malaysia, at the official launch of affin islamic bank berhad, kuala lumpur, 6 june 2006. * * * islamic finance has become one of the most dynamic growth areas in international finance. while islamic finance has become an increasingly important form of financial intermediation in several countries, more recently, we have seen the international dimension gain significance. the malaysian islamic financial system is now well positioned to become internationally integrated with the international islamic financial system. the progress and development of the islamic financial services sector in malaysia is evidenced by : • the rapid expansion in new and innovative islamic financial products and services ; • the enhanced competitive environment in which islamic finance has developed ; • the progressive development of the prudential, regulatory and supervisory framework for islamic financial institutions ; • the active issuance of both corporate and sovereign islamic financial instruments ; • the progressive liberalisation for foreign participation ; and • the strengthened financial and non - financial institutional infrastructure, including the development of the domestic money and capital markets, and the establishment of institutions to promote human resource development in islamic finance to ensure the pool of talent that is necessary to sustain the long term growth of the industry. our domestic islamic financial system is one of the most developed, with its diversity of players and financial products and services in islamic banking, takaful and the islamic capital market. today, we are witnessing the establishment of another dedicated islamic banking subsidiary that will contribute towards further strengthening the islamic financial institutional infrastructure in malaysia the launch of affin islamic bank berhad as an islamic banking subsidiary of affin bank berhad. with the domestic islamic financial infrastructure in place, the emphasis is now to become more internationally integrated with the international islamic financial system, thus increasing our economic and financial linkages with other parts of the world. our efforts are to position malaysia as an international islamic financial centre and thus facilitate this international integration process. in this regard, the establishment of an islamic subsidiary also increases the opportunity for entering into strategic partnerships with foreign interests, thereby increasing the potential for greater interface with more extensive markets beyond our domestic borders. on the domestic front, while tremendous progress has been achieved, much more needs to be done. the islamic financial industry needs to allocate more resources toward investment in research and development to create more innovative products. consumer awareness and consumer education also needs to be enhanced to support the growth of the islamic financial industry. in

- affected advanced economies continue to face rising unemployment, weak financial systems, ongoing de - leveraging of households and financial institutions with weak balance sheet. although financial markets have begun to stabilise following extensive policy support, the progress of financial sector resolution and reforms in the advanced economies is far from complete. many of the financial institutions are still being constrained by large nonperforming assets, and despite injection of capital and massive liquidity support, financial intermediation is still not fully functional. on the fiscal front, the continuation of large fiscal deficits and rising public sector debt are increasingly placing a limit on fiscal flexibility while quantitative easing and very low interest rate environment globally are fuelling some asset prices to rise. given these challenges, it will be a mistake to believe that the world is on the mend. in many ways, the global economic structure and the character and governance of the international financial system will be fundamentally different. first, overall global growth will, for a prolonged period, remain below its past trend, with the growth trajectory in advanced economies lower than its average in the decade before the crisis. several structural weaknesses in the advanced economies will require considerable time and resources to be resolved. while the advanced economies address these issues, the global economy will increasingly be driven by the emerging market economies, particularly china, brazil, russia and india. despite asia ’ s large potentials and as a growth leader, it is unlikely that in the immediate term, asia and other emerging economies would be able to lift global growth in the short - term back to the pre - crisis level. in the short to medium term, the emerging economies will take time to fully compensate for the weak growth in the advanced economies. second, major shifts in the management and conduct of financial institutions and financial markets can be expected in order to address the pro - cyclical nature of international financial system and the many weaknesses that have surfaced. tighter regulation and supervision of financial institutions to prevent large financial leverage and accumulation of excessive risks will be in place. the challenge for regulators is to ensure that greater regulatory activism do not curtail the ability of the financial system to innovate and intermediate capital allocation efficiently. third, given greater regulatory guidance and less leverage, global financial markets pricing of capital can be expected to be higher. similarly, as corporations restructure their operations to adapt to slower growth in global demand, foreign direct investment ( fdi ) is likely to be lower, while competition for fdi will become more intense. on the other