Notwithstanding some recent signs of improvement in the economic outlook, it is premature to declare the financial crisis over. From today’s perspective, the need for enhanced credit support remains. Therefore, for the time being central bank liquidity is likely to remain abundant. This does not mean, however, that the broader concept of liquidity in terms of monetary aggregates grows strongly. And it is this broader concept, not central bank liquidity itself, which is related to inflationary pressures over the medium term. Of course, central bank credit and broader monetary aggregates are linked over time. In a modern banking system, and in normal circumstances, central bank credit is largely used by banks – in the form of required reserves – to create bank credit, and expand deposits and broad money aggregates. So, an increased provision of central bank credit can lead – more or less automatically – to an increase in broad money. In current conditions, that link has been weakened, however. Today, banks – in the aggregate – tend to hold part of the central bank credit that they obtain in our refinancing operations not as a reserve against an expansion of loans and deposits, but in the form of  8  BIS Review 103/2009  excess reserves deposited with the Eurosystem. This attenuates the automatic link between the provision of central bank liquidity and broad money. And, as a consequence, it attenuates the inflationary potential of the Eurosystem’s outstanding credit to banks.
The starting point in revising laws is therefore to ensure that the governing laws allow for the conduct of Islamic finance business. A closely related goal is to consider removing elements in existing laws, including the non-regulatory laws, which may render the conduct of Islamic finance business uncompetitive or inefficient. Initial considerations would involve changes to ensure that Islamic finance is placed on a level playing field with conventional finance. The purposes and objectives of the governing laws for Islamic finance are known to be largely similar to conventional finance from the financial regulation standpoint. Notwithstanding this, an ideal approach is devising a legal framework for Islamic finance that sanctions the statutory obligations for Shariah compliance in the governing law. This approach however, may not be feasible as preference for religions concerns can be seen to be contradictory to the principles of secularism and parity of beliefs rights in certain jurisdictions. We may need alternative approaches. I will revisit and elaborate on these points in greater detail at a later part of this speech. In Malaysia, the new Central Bank of Malaysia Act 2009 explicitly codifies the duality of the Malaysian financial system which shall consist of the conventional financial system and the Islamic financial system. In this regard, Malaysia has taken the approach to enact regulatory laws that are, at least for banking and takaful (Islamic insurance) industry, separate from conventional finance as the legal foundation for the conduct of Islamic finance business.