The rapid and profound changes that have occurred in the Islamic financial system in the recent five years have strengthened its position as an integral component of the overall financial system, as has been envisaged in the Financial Sector Masterplan. The strong growth in Islamic financial assets has been sustained to constitute 10.5% of the total assets of the banking system today. The Islamic financial system has now entered into the third strategic phase of institutional development where a number of domestic banking groups are now in the midst of strategically participating in the transformation process from Islamic banking windows into Islamic subsidiaries. The entry of foreign Islamic banking players will also contribute toward further increasing the level of innovation and competition in the Islamic financial system. Indeed, Islamic financial products have become more diversified to include variable rate and equity based mechanisms as well as hedging instruments that strengthen the risk management capabilities of Islamic financial players. The participation of multilateral institutions in the issuance of Islamic securities further diversifies the asset classes and the investment alternatives available to investors, expanding the breadth and depth of the Islamic financial market and enhancing its liquidity. The comprehensive Shariah and legal infrastructure that has been put in place has also increased the level of confidence in conducting Islamic financial transactions.
How should we view financial bubbles, what causes them and what can we do about them? What drove the latest bubble, what can we learn from it and what is needed more generally to make stock markets function more efficient? BIS Review 50/2002  1  Nothing new about periods of undue optimism One important lesson is that in a deregulated world, waves of excessive due optimism can arise and result in pronounced financial cycles. In the 1990s there were several periods of financial turbulence. One was Sweden’s own bank and currency crisis about a decade ago. At the same time there were problems in other countries and turbulence in the European exchange rate mechanism (ERM). That was followed by the crises in Asia and Mexico, the problems with the major hedge fund Long Term Capital Management, Russia’s suspension of payments, the IT bubble and, most recently, the difficulties in Latin America. Further back, there have likewise been periods of excessive optimism and financial crises. Here, briefly, are the most spectacular items in Sweden’s economic history. •  The first real financial crisis in Sweden occurred back in 1857. It mainly involved the real estate market and obliged the government to support the banking system for the second time in our history. The first occasion had been in 1668, when the Palmstruch Bank was taken over by parliament and ultimately became what we now call the Riksbank.