did not carry a high priority with the bp senior management who regarded it as an unnecessary overhead expense. the result was the near collapse of the company after suffering billions of dollars in losses, which a stronger risk management framework might have helped to prevent. the third, and final issue which i would like to discuss this evening concerns compensation practices. as i am sure you are aware, a major contributory factor to the financial crisis was that the staff of financial institutions were rewarded for short - term risk - taking. the incentive structures created by bonuses paid over a limited time horizon encouraged traders to focus on short - term profitability and financial engineers to design new financial instruments that could generate immediate profits, while the risks were pushed off to some indefinite future date. in its principles the basel committee recommends that the board should review the design and operation of the compensation system and monitor it to ensure that it operates as intended. compensation should be effectively aligned with prudent risk - taking, including the time horizon over which risks materialize and should also be symmetric with risk outcomes. this last statement means that compensation practices should avoid paying out large bonuses on the basis of short - term profits, when there is a possibility that the transaction could result in significant losses to the firm in two or three years ’ time. bonuses should, therefore, reflect the overall financial impact of a transaction, the results of which may not be known for several years. as with the other principles, this one is also of general relevance. all firms, and not just banks, need to avoid a situation in which their compensation practices reward employees for taking excessive short - term risks. this is not to say that bonus systems are undesirable. they clearly have a role to play in providing incentives to employees to perform well and reduce the fixed element in employee compensation, thus giving more flexibility in cost control. but remuneration systems need to balance risks and rewards. the common theme through each of the issues i have talked about this evening is the importance of avoiding short - termism. the conclusion with which i would like to leave you this evening is that the greatest risk to a business arises from an exclusive focus on the short - term, whether it is the next quarter ’ s results or an employee ’ s end - of - year bonus. successful businesses are those that plan for the long - term, that understand the risks of their industries and sectors, and which invest and build for the future. high standards of corporate governance are an essential mechanism to

of shari ’ a scholars which includes some of the industry ’ s most prominent and widely respected scholars. while the iifm documentation brings a more rigorous and robust architecture to the development of islamic derivatives, it should be seen as merely the beginning of the process. much more work will be required to ensure that standardised contracts for other islamic financial products can be developed which have the support of the great majority of shari ’ a scholars. within the past 12 months, a new dimension to the legal uncertainty of islamic financial contracts has arisen. since the global financial crisis began, we have seen the first defaults on sukuk. these defaults have raised a number of difficult legal questions which are currently before the courts. in particular, they raise questions about the rights of the sukuk holders in the event of a default by the issuer and in particular whether they have a claim on the underlying asset. it is important that these cases are resolved rapidly and that they create clear precedents and mechanisms for handling defaults in future as otherwise the lack of legal certainty will act as a drag on the development of the sukuk market. the second set of issues relate to risk management. this has a number of different dimensions, but two in particular are worth highlighting. the first relates to liquidity risk. the conventional financial industry received a wake - up call during the crisis concerning the importance of understanding, monitoring and controlling liquidity risks. the islamic financial industry must recognise that it too needs good liquidity risk management. how islamic financial institutions can manage their liquidity risk given the relative absence of short - term money market instruments has been a problem for the industry for some time. however, the events of recent years should give a greater sense of urgency to resolving these problems and we need to redouble our efforts to find a solution. a second area of risk management to which islamic institutions need to give some attention is the problem of limiting the concentration of risk in particular economic sectors or asset types. the industry ’ s preference for a real asset to back financial transactions has, unfortunately, resulted in a relatively high concentration of risk in real estate. as a result, many islamic financial institutions have asset portfolios which are concentrated on this potentially very volatile sector. the performance of real estate markets in north america, europe, and in certain parts of the middle east in recent years have highlighted the risks of excessive concentrations of lending to this sector. it is important that in future the islamic financial industry should find