the early years of the development of the islamic financial system, our focus of attention was on the development of the islamic banking system and to expand the number of players and volume of activity. following the introduction of the dual banking system, the pace of expansion increased significantly. in two decades, the total assets of the islamic banking industry have increased from usd97 million at the outset to usd20 billion as at end - june 2003. similar expansion also took place in the takaful industry whereby the assets have increased significantly from less than usd30 million in 1993 to usd1 billion in june 2003. the islamic capital market in malaysia also recorded significant growth whereby the outstanding islamic private debt securities accounted for usd17. 8 billion, or 65 % of the total outstanding private debt market while the new issuance of islamic private debt securities in the first eight months of 2003 amounted to usd1. 7 billion. what is more encouraging is that more than one third of the new issuance of islamic debt securities were issued by companies owned by non - muslims, some of which includes multinational companies. the evolution of an appropriate financial structure would need to take into account the role of the financial system in the economy and the objectives that need to be achieved. in the context of an emerging market economy, the financial system is a means to an end. the appropriate financial structure, particularly in emerging market economies, need to be designed to meet the requirements of the economy. the financial system needs to be in a position to support the real sector, changing and evolving with the changing needs of the economy. the strategy adopted in malaysia is to develop a comprehensive islamic financial system that is able to operate in parallel with the conventional financial system. the key constituents within the islamic financial system, which includes the islamic financial institutions as well as the capital and money markets need to be firmly reinforced by the legal and regulatory framework that adequately address the unique characteristics of the industry. these intradependent key components ultimately form the enabling environment for the islamic financial services industry to effectively play its role as an efficient conduit for mobilising resources and channelling them to productive purposes. the absence of any one of the components could reduce the effectiveness and efficiency and could affect the viability and sustainability of the system. while the islamic banking system plays an important role in mobilizing deposits and providing financing, the development of the capital market allows the corporate sector to source their long - term financing needs based on islamic principles. in addition, it would increase the

competitive position of the takaful operators, while meeting the needs of the nation. this includes providing the foundations for the development of the financial markets and strengthening the institutional development. as part of this process, the benchmarking exercise is an important tool to enhance performance and to guide the takaful operators on improvement of their business strategies. to reinforce this, a service quality index has also been initiated to promote the development of worldclass products and services. this is also complemented with a comprehensive consumer education programme so as to promote product transparency and increase accountability. the introduction of financial advisers is also a further element to facilitate consumer access to a wider range of financial products. amongst the most imminent challenges is the creation of the critical mass in the market to allow for meaningful cross - border alliances at the regional and global level. the establishment of an adequate number of takaful operators in the market is also crucial to provide the groundwork for the setting - up of more retakaful operators, in terms of sustaining business support and providing the economies of scale in order for the retakaful industry to develop. currently there is still a dearth in the number of players providing the retakaful facility, resulting in takaful operators ceding to conventional reinsurers. while this has become a common practice, ideally more competitive retakaful operators who provide reinsurance in accordance with shariah principles need to be established so that the takaful industry would not be dependent indefinitely on conventional reinsurance as the conduit to which they can mitigate risk. more importantly, retakaful operators ultimately serve to strengthen and enhance the financial capacity of the takaful industry, and the synergistic by - products emanating from the interactive business alliances would contribute towards the overall betterment and robustness of the islamic financial system. indeed, there is much to be gained by the takaful operators in particular, and the islamic financial industry in general, by having access to an adequate and competitive market of the retakaful facility. it is therefore important to increase the collaborative efforts and examine plausible ways to address this gap in the takaful industry. our quest to create a dynamic islamic financial system is to achieve the ultimate objectives of developing an islamic financial system that will be able to contribute significantly to the overall development of our economy through the intermediation process. thus, islamic banking and finance industry needs to extend its agenda towards the development of a comprehensive islamic financial system. the islamic