luis m linde : islamic finance – growing importance and regulatory challenge welcoming remarks by mr luis m linde, governor of the bank of spain, at the european forum on islamic finance, organized by the islamic financial services board ( madrid ), madrid, 24 may 2016. * * * mr. jaseem ahmed, secretary - general of the islamic financial services board ( ifsb ) ; mr. guillermo de la dehesa, chairman of the international advisory board of ie business school ; colleagues, ladies and gentlemen : it is a pleasure for me to welcome you all to the european forum on islamic finance. this is the fifth european forum since 2005, after the previous fora in luxembourg, germany, france and italy. following the tradition established by other european central banks, we are glad to support this event, organised by the ifsb. i would also like to thank the ie business school for their hospitality in hosting the forum in madrid today. the purpose of this european forum is to gain a better grasp of the specifics of islamic finance and its development, which has been particularly noticeable in the last decade. in this respect, i would like to stress two relevant aspects of islamic finance in my opening remarks : first, its growing importance in international finance ; and second, the ongoing regulatory efforts to facilitate its insertion in international markets. the growing importance of islamic finance indeed, islamic finance has grown most significantly in the last decade, posting double - digit rates since 2007, at close to 20 %, compared with growth of 4 % in the “ conventional ” financial sector. it has now reached a volume of us $ 2 trillion, which is a very significant figure that represents around 1 % of total global bank assets. the surge of islamic finance is apparent both in islamic countries and also, in european markets, with the establishment of islamic banks and the development of the sukuk market for private and official issuers under some european jurisdictions. the prospects for islamic finance are also positive, given the extensive scope for the financial inclusion of a population in a number of countries, with very low rates of bank access and usage. the regulatory challenge of islamic finance the further development of islamic finance will nonetheless depend on implementing the necessary financial reforms to ensure its integration into the wider financial system. here, i think that the challenges are twofold : first, in islamic jurisdictions the challenge is to continue developing the architecture of islamic finance in areas such as payment systems and supervisory and resolution regimes. in particular, it would seem vital to

##al and sterilized way in order to preserve our policy - making capacities intact and avoid becoming ourselves a source of volatility. importantly, this purchase of international reserves has been intended not only to reduce exchange rate tensions, but also to strengthen our international liquidity position. evidence shows that a strong international reserves position helps shield the economy from the adverse effects of external financial shocks. the level of reserves we pursue with this program will put us on a good standing to deal with a more pronounced global decline. as i said, at the beginning of the year the macroeconomic scenario suffered major changes. the increase in commodity prices and the closing of output gaps stoked fears of a resurgence of inflation comparable to that of 2007 – 2008. our communique of the future course of monetary policy changed significantly in just a few months. since march, the bank accelerated the withdrawal of the monetary impulse, with greater intensity than foreseen by analysts ’ consensus, bringing the mpr to a level within the normal range. this, coupled with the changed external macroeconomic scenario due to the drop in commodity prices, managed to contain inflation expectations ( figure 11 ). while in mid - year we expected inflation to be around 4 % for much of the second half, the data have shown inflation hovering around 3 %. the propagation of specific shocks has been similar to the historical average, but lower than that of 2007 and 2008. today, in chile and in a large part of the emerging world, inflation forecasts have been lowered and the risk of overheating has lost relevance ( figure 12 ). for the same reason, while in mid - year we foresaw that the mpr would end the year 2011 close to 6 %, in recent months we said that there will probably be no more increases, an opinion we have reaffirmed in our latest communiques and i will come back to shortly. but first let me take a look at what is going on in the developed world. the 2008 crisis is not over yet the crisis of 2008 was not a typical recession because it originated in a financial meltdown, whose effects are deeper and its recovery, slower. this we know first - hand in emerging countries. in chile we had one in the early 1980s. the financial stress episodes of the past few weeks are part of a growing uncertainty regarding the strength of the recovery in the developed world. in this context, two phenomena occurred that triggered the current fragility. first, between july and august we