put in place by central banks are aimed to ensure the soundness and efficiency of the system and the protection of the interest of depositors and investors. before proceeding further, i would like to touch some aspects of the regulatory framework instituted for the islamic banking industry in malaysia. in malaysia, we have embarked on the concept of dual banking where the islamic banking system operates in parallel with the conventional banking system. in our context, the islamic banking system comprises the islamic banks and the conventional banks offering islamic banking products and services. in this regard, the main challenge to the regulator is to formulate a regulatory framework for islamic banking that is in line with syariah principles. our approach is two - fold, firstly to adopt the existing international regulatory standards where it complies with syariah, and secondly to develop a separate regulatory framework to address the unique characteristics of islamic banking. as far as the first approach is concerned, the islamic banks and the conventional banks with islamic windows observe similar international standards as well as the prudential and supervisory concerns such as the basel concordat on minimum rwcr of 8 %, statutory reserve requirement, corporate governance standards, risk management standards, financial disclosure and know your customer policy. they are also subject to similar supervision, surveillance and monitoring by the central bank. these policies have been implemented efficiently as most of these requirements, if not all, are not against the injunctions of syariah. the second approach refers to the implementation of islamic banking within the conventional set - up. bank negara malaysia has advocated for the “ bank within a bank ” concept for the conventional banks with islamic windows to enable the islamic banking divisions in the conventional bank to provide the strategic focus and autonomy, maximise synergy for economies of scale and capitalise on cost efficiency. these measures would also act as a firewall to ensure strict compliance to syariah. to achieve this objective, we have made it mandatory for the conventional banks to establish a dedicated islamic banking division within the bank, create and observe a minimum islamic banking fund, opening separate clearing account with the central bank to facilitate effective separation in the payments system as well as to have a separate accounting disclosure. having these policies and infrastructure in place, we have been able to operate the dual banking system in a structured and systematic manner. ladies and gentlemen, although the regulations are in place, close oversight and updated statistical reporting, supported by close monitoring through the early warning system, are necessary as measures to avoid banking failures. the global

zeti akhtar aziz : corporate governance and aspects of the regulatory framework instituted in malaysia special address by dr zeti akhtar aziz, governor of the central bank of malaysia, at the 2nd seminar for central banks and monetary agencies on aaoifi ’ s accounting standards, kuala lumpur, 29 may 2002. * * * assalamu ` alaikum warahmatullahi wabarakatuh and good morning malaysia is indeed honoured to host this annual seminar organised by the accounting and auditing organization for islamic financial institutions ( aaoifi ) for central banks and monetary agencies on aaoifi ’ s accounting standards for islamic financial institutions. since its establishment in 1990, aaoifi has made a significant contribution in formulating and issuing accounting and auditing standards for islamic financial institutions. the standards issued by aaoifi have contributed towards the improved quality of financial statements and reporting methodology of islamic financial institutions. aaoifi has also issued standards on the role of syariah committees as well as the code of ethics that should govern the accountants and auditors of islamic financial institutions. undoubtedly, efforts by aaoifi have accelerated the pace of transparency and corporate governance of islamic financial institutions globally. ladies and gentlemen, a well functioning and efficient banking system is vital for achieving robust economic performance. within the context of the economy, the banking institutions perform the important function of mobilising funds that are channelled to productive investments thereby generating economic activity. in performing their intermediation function of channelling funds between the savers and investors, depositors need to be assured of the safety of their deposits and the efficiency in the manner in which the funds are mobilised and channelled to productive investment. through their extensive branch network, and now through internet banking, banking institutions are able to efficiently reach an extensive customer base nationwide. as a custodian of public funds, maintaining integrity and confidence in the banking sector is vital towards ensuring the stability and soundness of our financial system. the trust of the public in banking institutions is inspired by the confidence in the safety and security of deposits, and that these funds will be professionally managed. banking business involves risks and these risks need to be rigorously managed if public confidence in the banking system is to be secured. these risks involves credit risks, market risks, sovereign risks and foreign exchange risks, to name a few. there is therefore no room for negligence. this emphasize that the business of banking is too important to be left to self regulation. the regulatory framework