zeti akhtar aziz : islamic finance a€ “ constant evolution and emerging opportunities speech by dr zeti akhtar aziz, governor of the central bank of malaysia, at the nikkei islamic finance symposium 2008 : " islamic finance : constant evolution and emerging opportunities ", tokyo, 23 february 2008. * * * it is my great honour and pleasure to be here in tokyo to speak at this islamic finance symposium organised by the nikkei. this is an important forum that provides the opportunity to foster a greater understanding and appreciation of islamic finance and its increasing role in the international financial system. we are also very honoured by the presence and participation of governor fukui from the bank of japan at this symposium. my remarks today will focus on the evolution and new emerging opportunities in islamic finance as its growth and development in the global financial system gains further momentum. my presentation will also touch on our experience in the development of an islamic financial system in malaysia which operates side by side with the conventional financial system and in which the international dimension has now become increasingly significant. evolution of islamic finance modern islamic finance was initially developed as an intermediation channel for muslims to conduct their savings and investment activities in accordance with the islamic principles. as recent as five years ago, however, islamic finance has experienced major transformations. its rapid evolution is particularly evident in five dimensions of its development. firstly, from being concentrated in muslim populated regions, islamic finance is now viewed as a competitive form of financial intermediation that has drawn significant participation by non - muslims. for borrowers, it is seen as an alternative means of financing. for investors, it is seen as a new asset class. islamic finance has thus witnessed exceptional growth, not only in the muslim world, where its growth is premised on religious and business considerations, but also across the western world where the growth is driven by commercial and business considerations. today, the total assets of the islamic financial system has surpassed one trillion us dollars, about fivefold of its magnitude five years ago. islamic finance is now among the fastest growing financial segments in the world with an estimated annual growth of 20 percent. secondly, the nature of the business of islamic finance has also evolved, from being mainly focused on retail and trade financing to the financing of other commercial business activities. with the emergence of more diverse islamic financial institutions and the development of the islamic financial markets, the scope of islamic finance business has been expanded to include private equity, project finance, the origination and issuance of su

downgraded its outlook for japan ’ s sovereign aa ratings from “ stable ” to “ negative ”. the imf, in its global financial stability report market update released in january 2010, cited japan and the united kingdom as countries under growing market pressure for an increase in their government debt issuance, as evidenced by the widening of sovereign credit default swap ( cds ) spreads. maintaining long - term rates at the current low levels. 12 as i have mentioned when explaining the second risk factor for japan ’ s economy, a rise in long - term interest rates is a major risk faced by many industrialized countries. it is important to bear in mind that, when the federal reserve and the bank of england started outright purchases of government securities in 2009, long - term interest rates in both economies soared after a temporary initial fall. 13 the bank will continue purchasing jgbs in order to ensure provision of long - term funds, while making clear that the purchases are in no way intended for government financing. 14 e. the positive and negative effects of providing ample funds : alleviating market anxiety while maintaining market functioning regarding the provision of liquidity to financial markets, it is also necessary to consider both the positive and negative effects. as i mentioned earlier, the bank has continued to supply ample funds. however, even in such a situation, the bank frequently has been asked whether it will resume the quantitative easing policy 15 it adopted in the past, and whether it will expand the size of its balance sheet. i evaluate the positive effects of quantitative easing as follows : it is effective in alleviating market anxiety and stabilizing financial markets when the financial system is under great strain, as was the case when the policy was adopted in japan in 2001. but its effects are significantly limited in terms of stimulating the spending activities of economic entities and raising the level of prices. regarding the size of a central bank ’ s balance sheet, i consider the expansion of reserves held at the central bank to be the by - product of various fundssupplying operations, and believe the total amount of reserves does not directly indicate the degree of monetary easing. 16 the more important point is how far the massive amount of long - term interest rates in japan are stable at low levels in spite of the extremely large government debt outstanding compared with other industrialized countries. this has been attributed to factors unique to japan ’ s bond market, namely, that there are ample domestic surplus funds backed by high private - sector savings, and jgb