proliferation through multiple layers of leveraging and disproportionate distribution. it reduces the potential for information gaps and for mispricing of risks and thus avoids the elements that could contribute to uncertainty and disruptive market conditions. the islamic financial system derives its strength and stability from its faculty to uphold shariah principles. the islamic financial system thus has an in - built dimension that promotes financial soundness and stability, as it resides within a financial trajectory underpinned by the forces of shariah injunctions. these shariah injunctions interweave islamic financial transactions with genuine productive activities and prohibit involvement in illegal and unethical activities. this intrinsic principle of governance contributes towards insulating the iclif leadership competency model – syed naquib al - attas & wan mohd nor wan daud. islamic financial system from the potential risks of financial stress triggered by excessive leverage and speculative financial activities. equally important is that the key components of the islamic financial system, comprising the financial institutions, the markets and the financial infrastructure, has demonstrated its viability and robustness as a form of financial intermediation, with a mutually reinforcing role in enhancing the overall stability of the financial system. its growing role in mobilising and channeling the funds to productive investment activities across borders brings significant benefits to the global economy. firstly, it has the potential to contribute global growth and contributing towards some rebalancing of the global growth given that it brings about a more inclusive financial integration. secondly, the strengthened international financial linkages allows for the potential for greater diversification of risks. the increase in the islamic financial products, the growing number of assets classes being offered, the increased cross ownership of assets have all expanded the possibilities for greater diversification of risks and the potential for return. the intrinsic nature of islamic finance encourages risk management and provides confidence through explicit disclosure and transparency of the roles and responsibilities defined in the contract. the transparent nature of the islamic financial contracts and the need for underlying economic transaction reinforces the stability of the islamic financial system. a vital challenge going forward is however to build a stronger, competitive and dynamic islamic financial system that better reflects the internalization of shariah principles in financial transactions, in its form, spirit and substance. this epitomizes the objectives of the shariah in promoting economic and social justice. while developing islamic financial system with products and services mirroring the conventional counterpart is acceptable as a pragmatic approach, it needs to

emes have substantially improved their fiscal and monetary policy frameworks while adopting more flexible exchange rates, a policy that recent research shows provides better insulation from external financial shocks. 6 corporate debt at risk - - the debt of firms with limited debt service capacity - - has been rising in emes, as shown in figure 7. 7 but this rise has been relatively limited outside of china and has begun to reverse as stronger global growth has pushed up earnings. ghosh and others ( 2012 ). these papers generally conclude that many factors, including both “ pull ” and “ push, ” affect eme capital flows. see, for example, obstfeld, ostry, and qureshi ( 2017 ). the results in imf ( 2017 ) also indicate that while global financial conditions explain a significant portion of countries ’ domestic financial conditions, domestic monetary policy changes also play an important role in economies with flexible exchange rates. the interest coverage ratio ( icr ) is the ratio of earnings before interest, tax, depreciation, and amortization to interest expense. a value of 2 or less is typically associated with an increased likelihood of distress. for example, just before the asian financial crisis, firms in korea, thailand, and indonesia had an average icr of 2 ; see pomerleano ( 1998 ). for more on evolution of eme debt at risk and vulnerabilities, see powell ( 2017 ). - 5all that said, i do not dismiss the prospective risks emanating from global policy normalization. some investors and institutions may not be well positioned for a rise in interest rates, even one that markets broadly anticipate. and, of course, future economic conditions may surprise us, as they often do. moreover, the linkages among monetary policy, asset prices, and the mood of global financial markets are not fully understood. some observers have argued that u. s. monetary policy also influences capital flows through its effects on global risk sentiment, with looser policy leading to more positive sentiment in markets and tighter policy depressing sentiment. 8 while those channels may well operate, research at both the fed and the imf suggests that actions by major central banks account for only a relatively small fraction of global financial volatility and capital flow movements. 9 nevertheless, risk sentiment will bear close watching as normalization proceeds around the world. what can the federal reserve do to foster continued financial stability and economic growth as normalization proceeds? we will communicate our policy strategy as