ISLAMIC FINANCE REMAINS VIABLE AND COMPETITIVE

KUALA LUMPUR, Oct 7 (Bernama) -- Against the backdrop of an increasingly uncertain global environment, Islamic finance, as a form of financial intermediation in the international financial system has continued to be viable and competitive, said Dr Zeti Akhtar Aziz, the governor of Bank Negara Malaysia, Malaysian central bank.

In future, greater global participation in this developmental process
both directly and indirectly, would enhance the potential role of Islamic
finance in contributing towards better global financial stability, she
added.

"The Islamic financial services industry has during this decade
transitioned into a dynamic, fast growing and competitive form of financial
intermediation servicing the global community," she said in her keynote address
titled, "Islamic Finance: A Global Growth Opportunity amidst a Challenging
Environment" at the State Street Islamic Finance Congress 2008 in Boston, United
States Monday.

"The strengths in Islamic finance are derived from Shariah principles,
the key pillar of Islamic finance that has contributed towards its overall
stability and resilience.

"The Shariah injunctions require that financial transactions be
accompanied by an underlying productive activity thus giving rise to a close
link between financial and productive flows," explained Zeti.

Zeti also highlighted that in addition, under the risk sharing arrangement,
the Islamic financial institution will share the profit or loss incurred by the
entrepreneur.

"Under this arrangement, there is an explicit risk sharing by the financier
and the customer with the real activity expected to generate sufficient wealth
to compensate for the risks," she said.

This arrangement, she pointed out, entails appropriate due diligence and
the integration of the risks associated with the real investment activity into
the financial transactions.

According to Zeti, Shariah principles also prohibited excessive leverage
and speculative financial activities thus insulating the parties involved from
too much risk exposure.

"The intrinsic principle of profit and risk sharing provides an in-built
check and balance to the Islamic financial transactions. Explicit in this
arrangement is the element of risk management and governance practices," she
said.

Going forward, she said there was therefore tremendous upside potential for
Islamic finance.

"As the pace of development of the Islamic financial services industry
accelerates, the increasingly more complex and challenging environment will
continue to shape its advancement.

"Central to this will be the expansion of the business parameters and
innovative product offerings.For this, there is increased investment in research
and development to yield new instruments and structures to meet the changing
requirements of the international community," she added.

She told the audience that a related area of focus in particular,was the
development of mechanisms for risk mitigation and liquidity management.

She also said that increased innovation called for greater emphasis
on the implementation of best practices and a higher standard of risk management
with the need to leverage more on IT applications as well as the strengthening
of the management capabilities of Islamic financial institutions.

"With the increased awareness and understanding of Islamic finance,
the
role of market discipline will become more important in driving Islamic
financial institutions towards ensuring Shariah compliance in operations,
improving operational efficiency and in instituting sound and dynamic risk
management practices," she added.