being reinforced by a financial safety net framework that comprises the lender of last resort facility and a deposit insurance system. these financial arrangements are now in place in malaysia. also important are the institutional arrangements for resolution of troubled islamic financial institutions. in malaysia, we have in place a mandated resolution mechanism to provide for expedient, effective and cost efficient resolution of islamic financial institutions. yet to be put in place however, is a mechanism for cooperation between regulators within and across jurisdictions for resolution to contain potential systemic risks beyond the national boundaries. in 2008, the taskforce on “ islamic finance and global financial stability ” was formed by the islamic development bank ( idb ) and the ifsb, together with the industry leaders and international expertise to examine further the building blocks in the islamic financial infrastructure that need to be put in place to ensure financial stability. among the areas covered by the report are for the effective implementation and enforcement of the prudential standards and the supervisory framework, and the recommendation for the establishment of a financial stability forum to address issues of financial stability in the islamic financial system. in malaysia, the islamic financial system operates in parallel with the conventional financial system. in such a dual system attention needs to be given to avoid the potential for regulatory arbitrage that may result in distortions that undermines the environment of a level playing field between conventional finance and islamic finance. the development of the legal and regulatory framework for islamic financial services industry is therefore grounded on the principle of neutrality in ensuring no worse off treatment when compared to conventional finance in terms of the taxation, laws and regulations. equally important in the building of the financial infrastructure is the development of the islamic financial markets. malaysia has now developed a comprehensive islamic financial system that includes the banking and takaful industry, other specialised financial institutions and the islamic money and capital markets. the supporting financial infrastructure includes a robust regulatory and supervisory framework reinforced by the legal and shariah framework, the payment and settlement systems, the development of the pool of expertise and talent to support the industry. the sukuk market that is, the islamic bond market is fast emerging as the most significant form of financing that continues to receive strong interest as a means for raising funds and for investment. the global sukuk market has been increasing at an average annual rate of 40 percent, with 90 percent of the issuances by the corporate sector. in malaysia, the issuance of sukuk has now surpassed the issuance of conventional bonds. strong demand for suku

over - exposure to risks associated with excessive leverage and imprudent risk taking. fundamental to islamic finance is the profit and risk sharing which explicitly requires the appropriate due diligence and ensures that the profit is commensurate with the risks. the risk associated with the real investment activity is therefore explicitly integrated into the financial transaction. there is thus an explicit emphasis on the economic viability of the underlying assets and on good governance, ethics and transparency. it is these very elements of islamic finance that provides an in - built mechanism that enhances the prospects for its soundness and stability. as islamic finance evolves to meet the changing requirements of businesses and consumers, innovation is integral to the development of new islamic financial products and services. it is recognised, however, that unfettered financial innovation can become a major source of instability. in islamic finance, innovation must be tested against the objectives of the shariah, where the primary objective is the realisation of benefit to the people. this demands the internalisation of shariah principles in islamic financial transactions, both in form and substance. indeed, shariah - based innovation brings with it a shariah - compliant culture in the islamic financial institutions that serves to ensure that the product development process incorporates ethical value propositions. a central bank's perspective from a central bank's perspective, ensuring financial stability of the islamic financial system is the paramount objective. integral to the efforts in the development of islamic finance, is therefore, the strengthening of the regulatory and supervisory framework. the islamic financial services board ( ifsb ) which was established in 2002 has been instrumental in developing and issuing global prudential standards and guiding principles for the industry. this has included capital adequacy requirements, to governance and risk management standards. the ifsb has also contributed to the harmonisation in the development of islamic finance across different jurisdictions. while the basic legal, regulatory and supervisory framework that takes into account the distinctive features of islamic finance are already in place, efforts are now underway to put in place a comprehensive infrastructure to deal with the new challenges confronting the international financial system. looking beyond the current crisis, an integrated crisis management framework will be part of this infrastructure. it is recognised that a more facilitative and modernised legal framework is also required and that the boundaries of the regulatory framework for islamic finance would also have to be regularly adapted to keep pace with the evolution and transformation of the financial system. finally, the supervisory framework for islamic finance is also