have devised a variety of different types of financial contracts which have, as their common characteristic, the concept that risks and rewards are shared between the institution and its customers. in the past decade an important innovation has been the development of an islamic “ bond ” market. these tradable securities – known as “ sukuk ” – differ from conventional bonds in that the coupon payments on them represent profits on real economic activities rather than the payment of interest. sukuk are flexible financing instruments that have attracted a wide range of investors and issuers, both muslim and non - muslim. these structures have been used by the governments of the gulf cooperation council, as well as by indonesia, malaysia and pakistan, the german state of saxony - anhalt, the world bank and other governments and corporations. because japan does not have a significant muslim population of its own, it would be tempting to assume that islamic finance is therefore of no interest – if you will excuse the pun – to japanese financial institutions. but this would be to take too narrow a view of the subject. in global terms islamic finance may still be a relatively small part of the international financial system, but it is one that is rapidly growing. it also provides an opportunity to engage with a very broad investor and issuer base. for example, financial instruments that are structured in a sharia - compliant manner appeal not only to muslim investors, for example those based in the countries of the gulf cooperation council, but also to non - muslim investors as well. the potential investor base for sharia - compliant instruments is therefore very broad. from the point of view of japanese financial institutions, therefore, islamic finance should be viewed as an important financial innovation comparable to earlier innovations in conventional finance such as the euromarkets or the derivatives markets. moreover, given the large muslim population in south east asia, a focus on islamic finance could also form part of your strategies for the region. in summary, there is a strong business case for you to develop the capacity to originate sharia - compliant financial products. let me turn now to consider the experience of the kingdom of bahrain as a centre for islamic finance. in bahrain, the birth of the islamic financial sector dates back to 1978 when bahrain islamic bank was established. islamic banking in bahrain gained momentum in the early 1980s, with the issue of four new licenses, one of which was an offshore banking unit license, with the remainder being investment banking licenses. during the 1990 ’ s, a total of eight licenses were issued to

a neighbouring jurisdiction. islamic financial products need some level of harmonisation in terms of product features to gain mass acceptance. we at the central bank of bahrain are working with the international islamic financial market to set certain standards on some capital and money market products, but banks themselves could work more closely to establish common disclosure standards for the costs of financing. additionally, we at the central bank have noted the continuing need for high quality human resources within islamic banks. islamic banking has been growing so fast that it has been difficult for banks to find enough skilled or qualified staff. this is why the cbb has participated with islamic institutions in bahrain in setting up the waqf fund to provide financial and technical support in upgrading current training programs and introduce new ones. it is hoped that we will begin to see a larger number of financiers qualified in sharia – related subjects in the near future. such initiatives can only be to the benefit of islamic banking and i urge more institutions to participate in the funding and support of the fund and its works. i think at this point i should talk about governance challenges facing islamic financial institutions. a major issue which is growing in importance is sharia compliance and how to provide a satisfactory framework to assure investors and other stakeholders that the activities of the bank are within the permitted scope of sharia. islamic banks have various mechanisms to ensure sharia compliance in the products and activities of the institution. the first and most obvious body is the sharia supervisory board. this body produces judgements or fatwas on products or structures that the bank intends to provide. the next body is the internal sharia review function which performs post - facto reviews of the activities of a bank. the last body is the external auditor which, in addition to verifying the accounts of the bank, also checks to ensure that the bank correctly followed aaoifi sharia standards. there are differing perceptions about the respective scope of authority of these three bodies and therefore there is a need to reach consensus on the functions of these respective bodies. this is clearly an area where the institutions, sharia scholars and the standard setters need to agree upon what constitutes best practice and set an agreed set of standards. the next challenge is that of accounting standards. there are currently some 60 aaoifi accounting, auditing, governance and sharia standards. this body of work is testimony to the commitment and continuing efforts of aaoifi since its establishment in 1990 to the development of accounting and auditing standards for islamic institutions. however