of different pressure groups, it is best to consistently pursue policies with a precisely defined objective that best serve society as a whole in the medium and long - term. there is a general tendency to believe that the bank of mauritius is not concerned with growth and employment. this is a mis - perception. the bank is not insensitive to the unemployed. indeed, the bank does take into account these considerations in policy - making, not with a short term but with a medium and long - term view. monetary policy does not directly promote growth and help create employment ; it does it indirectly through the achievement of sustained price stability. durable growth can only be achieved, inter alia, within a framework of monetary stability. this is what central banks can be reasonably expected to deliver. in the bank of mauritius act 2004 this is what is expected of the bank. there are however several underlying and fundamentally important assumptions for monetary policy to succeed. rather than enumerating the assumptions, let me set a few questions and leave them to you for reflections. are there serious imperfections in the determination of prices of goods and services in the domestic market? why prices of goods and services do not positively respond in both directions to movements in the exchange rates of the rupee? how rational are consumers in making decisions? is the labour market flexible? how many traders, producers, exporters and importers have reliable annual balance sheets on the basis of which banks make decisions to lend? have our financial markets attained a level of development that facilitates transmission of monetary policy impulses readily? years ago we had less national savings and more investment. today we have are flushed with funds but investment is sluggish despite a panoply of investment incentives. indeed, national savings exceed investment by far. haven ’ t we overstretched the “ welfare state ” for too long a time to a point that has suppressed entrepreneurial instinct, blunted creativity, inventiveness, and undermined work effort? hasn ’ t the “ welfare state ” been overstretched to a point that has given rise to a society of free riders? the more free riders there are in a “ welfare state ” the heavier is the burden on government finance and the more difficult is the task of monetary policy in achieving the desired objective. the point i want to make here is that monetary policy does not operate in a vacuum, independent of a host of other critical factors, and it alone cannot perform miracles. deprived of a number of allied factors, the achievement

project while conventional banks tend to rely more on collaterals. this is one of the features of islamic banking that could be of tremendous assistance to small - scale businesses. conventional banking requires comprehensive criteria that need to be satisfied for an applicant to become eligible for loans. smallscale enterprises throughout the world generally face greater difficulties in obtaining finance than large - scale enterprises do. the services sector is made up of a large number of small entrepreneurs who usually do not have ready access to finance. it is a matter of fact that small entrepreneurs who were able to obtain credit facilities on the basis of collateral in the past are now finding it difficult to raise funds for their operations. with the implementation of basel ii in the years ahead, there does exist a potential risk that conventional banks would be less inclined to lend to small - scale enterprises. given the characteristics of islamic banking, the small and medium enterprises is an economic sector where islamic banking could play a central role in giving a fillip to entrepreneurship. in short, islamic banks can play a catalytic role in fostering economic development although it has been observed that, in practice, islamic banks tend to favour short - term projects and trade finance which are less risky. this is principally due to a lack of adequate techniques for project appraisals in an islamic banking 4 context. because of these weaknesses, it is advisable to address the need for having staff with the required skills to learn the new processes for operating islamic banks. the provision of islamic financial products and services has expanded beyond the market for households, businesses and institutions to governments. they have made inroads into capital markets. the sukuk bonds – which differ from ordinary bonds to the extent that they are shariahcompliant – have gained prominence. the market for sukuk bonds is expected to register rapid growth in the years ahead as more and more conventional financial institutions are expressing keen interests and are actually participating in it. the expansion of islamic banking across the world has inevitably drawn the attention of central bankers and regulators in the middle east and elsewhere to the risk factor associated with it. like conventional banks, islamic banks also need to be effectively regulated and supervised. their strength and soundness are unequivocally as critical as for conventional banks. however, the nature of risks associated with islamic banking business brings forward an array of issues in risk measurement, income recognition, adequacy of collateral and disclosure standards. effective prudential supervision for islamic banks the world over is still in