heng swee keat : ensuring stability – international perspectives on creating an effective regulatory framework remarks by mr heng swee keat, managing director of the monetary authority of singapore, at the inaugural plenary session, world islamic banking conference, bahrain, 24 november 2008. * * * introduction good morning, ladies and gentlemen. i am honoured to speak at this opening plenary, following the keynote remarks by his excellency, governor rasheed al - maraj. i am also delighted to be in bahrain, recognised globally as one of the leading centres for islamic finance. besides having a core of active islamic financial institutions, bahrain also plays host to a number of organisations central to the development of islamic finance, including aaoifi, the lmc, iifm and the iira, and of course, this wibc. 1 the central bank of bahrain [ " cbb " ], a highly regarded regulator, has played a key role in spearheading the development of islamic finance. the cbb has scored many “ firsts ”, including the first central bank sukuk in 2001 2 and being the first country to develop and implement regulations specific to the islamic banking industry. the cbb has also established the waqf fund to finance research, education and training in islamic finance. there is much that the mas can learn from the cbb. the current global crisis – some root causes the theme of this session – having an effective regulatory framework – is of great relevance given the on - going financial crisis. the current financial crisis is unprecedented in terms of its scale, complexity, and speed of transmission. while the series of coordinated actions by financial authorities and governments have helped to stabilise the markets somewhat, sentiments remain fragile, and many of the underlying problems remain. many reasons have been offered about the root causes of the current crisis. let me just highlight a few of these. the first is the unprecedented levels of leverage taken on by global financial institutions coupled with very loose lending standards in the credit markets. consumers in the us were also highly leveraged. the high leverage enabled asset values and consumption to be raised to unsustainable levels. when sentiments finally turned, there was massive deleveraging. the second is that complexity magnifies risks. the proliferation of complex securities and derivatives had not diversified risk amongst different counterparties as was originally intended, but instead increased aggregate systemic risk throughout the financial system. not only banks and investment banks were affected but a whole range of

market conduct measures focus on upholding principles of fairness and transparency, for instance, through requirements on disclosure to investors and a fair - dealing sales process. the second leg of the tripartite approach is to put the primary responsibility for sound risk management and oversight of each institution on the board and senior management, which must set the right tone and culture. the third leg is to promote greater awareness among investors of their financial needs, encourage financial planning and promote deeper understanding of the risks and returns of different products, through educational programmes such as moneysense. 4 the fourth pointer from the current crisis is the importance of preventing regulatory arbitrage, and ensuring a level playing field. with regards to islamic finance, in particular, mas seeks to ensure a level playing field between the conventional and islamic financial players. where the economic substance and risks are similar, the same regulatory treatment is accorded, regardless of whether the product is a “ conventional ” or “ islamic ” product. for example, singapore - based banks treat murabaha - based 5 asset financing as a credit risk exposure to the customer for the purpose of maintaining regulatory capital. as islamic finance grows, our regulatory framework must continue to evolve to maintain regulatory consistency in managing the underlying substance of the risks. international collaboration the fifth and very crucial point that emerges from the current crisis is the importance of international collaboration. as islamic finance grows, cross border transactions will multiply. we must therefore take an international perspective in preventing and resolving problems right at the outset. allow me to suggest three areas where regulators can work closely. the first area is that legal, regulatory and supervisory frameworks that are developed should be based on internationally recognised principles and standards. the work done by international standard - setting bodies such as the ifsb, idb, aaoifi and iifm 6 is instructive in this regard. for example, “ the ten year framework and strategies ” co - issued by the ifsb and idb is a thoughtful blueprint. aaoifi has also produced standards in areas such as accounting, auditing, ethics, shariah compliance and governance. today, the applications of shariah precepts differ somewhat in certain areas. it will eventually be desirable to have some standardisation to enhance consistency and to remove one source of regulatory risk. however, our goal should be to achieve a gradual harmonisation of standards and approaches to regulation, rather than immediate convergence. even in conventional finance, regulatory approaches and standards differ across different jurisdictions.