drawn a higher level of foreign participation in the islamic financial markets which has resulted in increased cross - border flows. this has not only contributed to enhancing international financial inter - linkages between economies but it has also contributed towards the more efficient allocation of financial resources across borders. islamic finance in 2008 and beyond remains positive despite the current challenging global financial environment. the viability and competitiveness of islamic finance is derived from several factors. it is from its ability to meet the changing demands of the economy, from its cost competitiveness and from being supported by a well developed legal, regulatory and supervisory framework. but more importantly, are the fundamental shariah requirements of islamic finance that support its viability and stability. shariah is the key pillar of islamic finance from which islamic finance derives its unique characteristics. the shariah injunctions require that islamic financial transactions be accompanied by an underlying productive activity. in islamic finance, there is always a close link between financial and productive flows. moreover, under the risk sharing principle required, islamic financial institutions will share the profit or the loss incurred by the entrepreneur. there is an explicit sharing of risk by the financier and the borrower. this arrangement will thus entail the appropriate due diligence and the integrating of the risks associated with the real investment activity into the financial transaction. in this arrangement, the real activity is expected to generate sufficient wealth to compensate for the risks. in contrast, conventional instruments generally separate such risks from the underlying assets. as a result, risk management and wealth creation may, at times, move in different or even opposite directions. conventional financial instruments also allow for the commoditisation of risks. this has led to its proliferation through multiple layers of leveraging and disproportionate distribution, in turn, which could result in higher systemic risks, thus, increasing the potential for instability in the financial system. in addition, transparency represents a basic tenet underlying all islamic financial transactions. there is an inherent obligation on islamic financial services providers to meet the appropriate standards of transparency. it is from the profit - sharing feature of islamic financial transactions that imposes a high level of disclosure in the financial contract. the accountabilities of the respective parties involved in the transaction are clearly defined in the contract. this transparency also provides a strong incentive for islamic financial institutions to appropriately manage risks. this disclosure allows the market to assign the appropriate risk premiums to the respective companies and thus the potential for the enhanced role of market discipline to take

zeti akhtar aziz : towards gaining global growth potential of islamic finance speech by dr zeti akhtar aziz, governor of the central bank of malaysia, at the seminar on islamic finance " towards gaining global growth potential of islamic finance ", hong kong monetary authority, hong kong, 15 january 2008. * * * it is my honour and great pleasure to be in hong kong today to speak at this seminar on islamic finance jointly organised by the hong kong monetary authority and the islamic financial services board. islamic finance is now at the threshold of a new dimension in which, it has now an increased potential to strengthen international financial linkages between nations. and in so doing, it would contribute towards a more optimum allocation of financial resources across borders. hong kong, with its sophisticated financial infrastructure and high level of expertise in the financial sector, has strong potential to be an important linkage and an engaging partner in the international islamic financial activity. it is exactly six years ago that we were here in hong kong as our first destination, to promote the world's first sovereign sukuk issuance. the overwhelming response we received in hong kong provided the momentum effect that resulted in the successful issuance of the pioneering usd600 million malaysian sovereign sukuk. it was more than two times over subscribed with one - third of the investors from this region. six years hence, the islamic financial landscape has been dramatically transformed into a vibrant, dynamic and competitive global intermediation mechanism that is supported by more than 300 islamic financial institutions in more than 75 countries. it also has become among the fastest growing segments in the financial services industry. in the early phase of its development, islamic finance was essentially domestic centric, focussing on retail financing, trade financing and the financing of other commercial business activities. two recent developments have however, influenced the subsequent direction of the development of islamic finance. firstly, the drive to diversify the domestic financial infrastructure so as to avoid the over dependence on the banking sector and secondly, the trend towards greater liberalisation of the financial system. these two trends have spurred the development of the islamic financial markets and its greater integration into the international financial system, thereby raising the international dimension of islamic finance. this more dynamic environment, has fostered the generation of a wide spectrum of islamic financial instruments that has ranged from instruments to manage liquidity to structures for the financing of that for financing mega investments. these developments have led to the emergence of a new asset class. it has also