rasheed mohammed al maraj : managing the challenges of industry globalization keynote address by his excellency rasheed mohammed al maraj, governor of the central bank of bahrain, at the 18th world islamic banking conference, manama, 22 november 2011. * * * your excellencies, ladies and gentlemen : “ salaam alaikum ” it is a pleasure to welcome you once more to the world islamic banking conference. over the years the conference has become firmly established as a landmark event not only in the calendar of bahrain, but also in that of the global islamic financial services industry. i would like to congratulate the organisers for once again having assembled such a strong list of speakers at this year ’ s event. a special word of thanks is due to the many distinguished speakers who will be appearing during the conference. their contributions are vital to its success. no less important are the contributions made by the sponsors, who have again been generous in their support. collectively, your contributions are the reasons for the great success of the wibc. the topic of this year ’ s inaugural session is that of managing the challenges of industry globalization : strengthening regulatory frameworks to accelerate the international development of islamic finance. this is an immensely important topic. as i have pointed out in several speeches since the global financial crisis began over three years ago, it is essential for the future development of the islamic financial industry that it learns from the mistakes of interest based finance. this includes making sure that it is based on secure regulatory foundations. in the past 30 years we have seen the growth of a truly global financial system. financial markets and institutions no longer stop at national borders. for example, the amount lent by banks cross - border in 1983 was $ 703 billion. by 2008, the year that the financial crisis became global, that figure had risen to $ 20 trillion. the trends in the banking market were followed by trends in other sectors of the financial industry. a globalised financial system delivered many benefits. capital was free to flow where it could obtain the best investment returns. in many parts of the world, foreign capital was responsible for creating new businesses and factories that raised rates of economic growth and provided employment to millions of people. as a result, the process of capital allocation that the global financial system made possible was responsible for lifting countless millions of people out of poverty. it is important for critics of the global financial system to remember this achievement. it is far from insignificant. at the same time, however

ways of diversifying its risks and of reducing its reliance on real estate backed assets. finally, on the subject of regulation, it is important that we fully incorporate the lessons of the global financial crisis into regulatory frameworks that apply to islamic financial institutions. although some people in the industry believe that it escaped relatively unscathed from the global financial crisis, and therefore has nothing to learn from the recent experience of the conventional industry, i do not share this point of view. although the islamic financial industry was relatively insulated from the first round effects of the crisis because it did not invest in “ toxic ” structured financial products, it has not been able to avoid the second round effects. these have included sharply reduced liquidity in all markets, and the effect of the global economic downturn on the credit - worthiness of all borrowers, including those who are customers of islamic financial institutions. the principles of sound finance – do not concentrate risk, do not rely on collateral with unrealistic valuations – apply equally to islamic institutions as to conventional ones. the current prudential framework that applies to islamic financial institutions is based closely on that developed for conventional ones. although adjustments have been made to reflect the special nature of islamic financial institutions, the basic framework is similar to that of the basel ii capital adequacy standards and other prudential rules that the basel committee has developed over the years. in consequence, as the international standard setting bodies develop new prudential standards that reflect the lessons of the crisis we need to be ready to revise the prudential framework for islamic financial institutions accordingly. we will need to adapt the new capital adequacy and liquidity standards for conventional institutions to reflect the specific circumstances of the islamic financial industry. in conclusion, it should be clear that there is a great deal of work to be done to ensure that the foundations of the islamic financial industry are sufficiently strong to support the very much bigger structure that now stands upon them. even so, i strongly believe that if we can ensure that the foundations are sufficiently robust, the islamic financial industry has a great and profitable future ahead of it. thank you for your attention.