a comprehensive adjudicative system to deal with disputes involving islamic finance. in addition, the new islamic finance arbitration rules of the kuala lumpur regional centre for arbitration provides a customised mechanism for the resolution of disputes in the islamic financial services sector. the development of an efficient and vibrant islamic financial market equally important to the development of islamic finance is not only the financial intermediaries but also the islamic financial markets. the demand for islamic financial products and instruments is expanding at increasingly significant rates in predominantly muslim countries in the middle east and asia as well as in the non - muslim economies in the west. the rapid growth of the islamic financial markets has seen the development of a wide range of products including money, debt and capital market instruments. such markets are important for the effective management of investment portfolios and for the diversification of risks. today, the global demand for islamic capital market products is served by the existence of the dow jones islamic index whose market capitalisation now exceeds usd 10 trillion. about 350 shariahcompliant funds have already been established across the globe. in malaysia, the sukuk market has been a leading segment of growth in the domestic bond market accounting for half of our domestic bond market and two thirds of the total global outstanding sukuk. a wide range of new islamic financial instruments has been developed including the bank negara malaysia sukuk ijarah, bank negara malaysia monetary notes, the islamic residential mortgagebacked securities and most recently the commodity murabahah programme for managing short - term liquidity in the inter - bank money market. while islamic finance practitioners and scholars continue to draw from the source of fiqh muamalat to create new and innovative instruments, the legal framework however, needs to be further strengthened to ensure continued acceptance and utility of the financial instruments. in malaysia, the progress in this area has been facilitated by the common law which forms the foundation of the legal system. more specifically, the concept of " trust " under the common law has facilitated the issuance of islamic securities such as sukuk and islamic real estate investment trust ( reit ). since " trust " as an inherent notion embedded in the common law system is not generally found in the jurisprudence of civil law, some civil law countries have enacted specific legislation to provide for the introduction of trust so as to align their legal systems with the requirements of islamic finance. the challenges brought by the integration of islamic finance with the international financial system while legal issues within a domestic financial

short - term money market rates to long - term government bond yields. the low interest rates had an impact on investor behaviour. in particular, many institutional investors were bound by nominal or real return objectives. including acharaya, viral v, richardson, matthew : restoring financial stability new york 2009 ; fox, justin : the myth of the rational market, new york, 2009 ; tett, gillian : fool´s gold : london 2009 ; wessel, david : in fed we trust, new york 2009, see also gylfason, holmstrom, korkman, soderstrom, vihriala ; nordics in global crisis, vulnerability and resilience, helsinki 2010. as it was no longer possible to achieve these objectives by means of traditional investment instruments, investors began to look for higher - yielding assets. insurance companies, pension funds and other institutional investors, public and private alike, reverted to riskier investments. as the demand for riskier investments grew, risk premia fell to historic lows. so, money was cheap, nor was much compensation demanded for risk. the second element underlying the crisis was a lack of financial market transparency. interest rates were low and financial markets full of money looking for higher yields. because there was an inadequate supply of traditional, safe investment options, financial innovations – especially securitisation – came to rescue of investors. securitisation was the midas touch that turned even low - grade raw materials, such as subprime credits, into securities with the top ratings. in part as a consequence of securitisation, in part on account of capital adequacy regulation, increasing use was made of another type of financial innovation, ie derecognition and transfer of securities from financial institutions ’ balance sheets to special purpose vehicles. the “ shadow banking sector ” ballooned. securitisation and special purpose vehicles weakened the regulation of banks ’ capital adequacy and the quality of available information on financial markets. investors were unable to adequately assess the risks inherent in securitised assets, and risks were not always widely understood inside the banks either. similarly, bank balance sheets shed less light on banks ’ real exposures, as the bulk of the risks had been transferred to special purpose vehicles. impaired information quality led to the third element of the financial crisis, a variety of agency problems and moral hazard. because of the inability to assess the risks of securitised loans, the discipline needed to enforce credit