zeti akhtar aziz : islamic finance – the new regulatory challenge introductory remarks by dr zeti akhtar aziz, governor of the central bank of malaysia, at the book launch of “ islamic finance – the new regulatory challenge, 2nd edition ”, kuala lumpur, 22 july 2013. * * * it is my pleasure to be here this afternoon to witness the launch of the second edition of “ islamic finance : the new regulatory challenge ”. as the islamic financial industry transitions into a new era of growth and development in this post - crisis world, the evolving regulatory reforms that are taking place to strengthen the resilience of the financial industry has presented wide ranging challenges in the implementation of the reforms and in also ensuring a more inclusive and stainable growth. the various dimensions of these regulatory challenges and its impact on islamic finance are captured in the publication that is being launching today. it is indeed a more challenging time for financial regulators and policymakers worldwide. priorities for strengthening financial stability and growth are now focused on achieving global financial systems that serve the needs of the real economy. driven by concerns to ensure that banking institutions are more robust against mutil - faceted and more complex dimensions of risks going into the future, regulatory efforts are being directed at significantly strengthening the capital and liquidity structures of banks, and ensuring that there is better alignment between risk - taking behaviours and long - term viability as well as ethical conduct. at the centre of the reforms have been the basel iii reform package, principles for riskaligned compensation structures and improving the consistency of regulatory regimes across the different parts of the financial system, including the shadow banking institutions. significant work is also progressing to strengthen resolution regimes and financial safety nets, particularly in a cross - border context. given the specificities of islamic financial institutions, the implementation of these reforms require a careful examination of the different implications that they present for individual institutions and the system as a whole. we are now witnessing wave of the internationalisation of islamic finance as the role of islamic finance has expanded to become significantly more globalised. this has resulted in domestic islamic financial systems to become more inter connected and with the consequence that integrated, risks are more rapidly transmitted across the financial system. building on the foundations that have been put in place with the adoption of prudential standards introduced by the islamic financial services board ( ifsb ) in the key areas of capital adequacy, risk management, corporate governance and shariah governance, the regulatory, supervisory and legal framework

dynamics. in some instances, in fact, circumvention of the prudential intervention through direct cross - border financing and / or lending from unregulated, non - bank financial intermediaries proved to be a major issue ; this was the case with direct limits on credit growth. a more effective role in containing systemic financial risks was played by measures specifically devised to build liquidity and loss - absorbing capital buffers, such as reserve and capital requirements. and when they were appropriately formulated, prudential regulations helped to curb the growth of foreign exchange loans and to keep default rates lower during the crisis. lessons learnt from the global crisis : in search of better regulation global financial deepening and international integration have resulted in greater risk sharing and made finance accessible to more countries, households and firms, thus proving instrumental in broadening economic development. but an interlinked and more closely connected financial system heightens the risks of contagion. most importantly, the crisis has shown that market participants were not capable of mastering the inherent complexity of the system that they themselves had developed. and it has highlighted the shortcomings of the idea that self - regulation and market discipline are sufficient to ensure stable financial systems. in this regard, accepting the concept of benign neglect was a critical mistake on the part of regulators. rather, financial regulation and supervision have to keep pace with developments in the financial industry. moreover, national authorities need to be aware of the risk that their powers may become narrow compared to the sphere of influence of the global financial players. the coordination of financial supervision across countries and across sectors is a key condition for the stability of the global financial system. 7 a major effort is required at the national but especially at the international level to strengthen the regulatory and supervisory framework. at the international level, under the political impulse of the g - 20, the financial stability board ( fsb ) and the basel committee on banking supervision have introduced substantial regulatory changes to prevent new financial crises and enhance the resilience of economic systems. much has been already achieved. the quantity of capital that banks need to hold has been significantly increased and the quality enhanced, in order to ensure that they operate on a safe and sound basis. international standards for bank liquidity and funding have also been instituted to promote the resilience of banks to liquidity shocks. initiatives have been taken to strengthen the for an analysis, see my lecture : “ the financial sector after the crisis ”, imperial business insights - imperial college,