ISLAMIC FINANCE HAS STRENGTH TO DEAL WITH EMERGING RISK

KUALA LUMPUR, Nov 12 (Bernama) -- The strengths in Islamic finance are
derived from the principles of syariah that require financial transactions be
accompanied by an underlying productive economic activity thus resulting in a
close link between financial and productive flows, Malaysia's Central Bank
Governor Dr Zeti Akhtar Aziz said.

She said this requirement reduced the prospect for over exposure to risks
associated with excessive leverage and imprudent risk taking.

"While the inherent strengths of Islamic finance have contributed to its
viability and resilience, going forward, the foundations for its sustainability
as a competitive form of financial intermediation continues to be strengthened,"
she said in her keynote address at the Banca D'Italia seminar on Islamic Finance
in Rome Wednesday night. Her speech text was released here Thursday.

Dr Zeti said concerted efforts were also underway to further focus on the
development of the Islamic financial markets, the financial infrastructure, and
research and development to support innovation and enhance further the legal,
regulatory and supervisory framework.

Fundamental to Islamic finance is the profit and risk sharing which
explicitly requires the appropriate due diligence and ensures that the profit
commensurates with the risks.

She said efforts were also underway to put in place a comprehensive
infrastructure to deal with the new challenges confronting the international
financial system.

"Also important are the institutional arragements for resolution of troubled
Islamic financial institutions," she said.

Dr Zeti elaborated that Malaysia have in place a mandated resolution
mechanism to provide for expedient, effective and cost efficient resolution of
Islamic financial institutions.

The domestic Islamic financial also operates in parallel with the
conventional financial system.

"In such a dual system attention needs to be given to avoid the potential
for regulatory arbitrage that may result in distortions that undermines the
environment of a level playing field between conventional finance and Islamic
finance," she said.

She also spoke of the importance of developing the Islamic financial
markets.

"As the international dimension of Islamic finance gains momentum, it is
necesary to facilitate the potential for liquidity management across borders.

"A further area of international collaboration is towards promoting
value-added investment in human capital building as a long term solution to
sustainable growth of the Islamic financial industry," she added.
-- BERNAMA