Malaysia has developed the comparative advantage in the area of Islamic finance. The comprehensiveness of the Islamic financial system in Malaysia has been mutually reinforcing with the key components of the financial system comprising the Islamic banking, takaful, Islamic money and capital markets now being at an advanced stage of development. In addition, the established legal, regulatory and Shariah frameworks in the Islamic financial infrastructure is also a key competitive advantage for Malaysia , placing it ahead of other financial centres offering Islamic financial services. In terms of Shariah governance, it has enabled the development of Islamic finance to be orderly and compliant with the Islamic injunctions, thereby ensuring that customer confidence be maintained. The conducive Shariah environment has also ensured that Malaysia is sustained as a centre of product innovation, producing cutting-edge products for the increasingly sophisticated customers. In respect of Shariah interpretation and practices, the MIFC will adopt a stance of mutual recognition and accommodate the various juristic reasoning that has been approved by recognised Shariah advisers . Next week, Bank Negara Malaysia will again host the 2nd International Shariah Scholars Dialogue, gathering the Shariah scholars from different regions in our endeavour to continuously bridge and  BIS Review 104/2006  1  foster greater interaction and promote understanding on the issues and challenges faced by the Islamic community on the aspect of Shariah. Malaysia also has a strong and advanced regulatory regime and legal structure in the Islamic financial system.
6  For a more detailed analysis of forward rates and surveys as measures of monetary policy expectations see Alsterlind, J. and Dillen, H, “Monetary policy expectations and forward premia”, Sveriges Riksbank Economic Review 2005:2. 4  BIS central bankers’ speeches  Figure 2 SEK/EUR exchange rate and 5-year interest rate differential in relation to Germany Per cent  Source: Reuters EcoWin. So, what form does the link between the krona exchange rate and the interest rate differential take in the data? Figure 2 shows the value of the krona relative to the euro and the difference between Swedish and German five-year government bond rates since 1995. If we only look at the past few years, the theory seems to apply rather well as the krona has strengthened against the krona at the same time as the difference between Swedish and German long-term rates has grown. On the other hand, the figure shows that there have been several episodes with both increasing and decreasing interest rate differentials in which the krona has not at all reacted in accordance with this simple view. If we now concentrate solely on the most recent period, one may wonder why interest rate differentials appear to capture shifts in relative market expectations, while during the same period of time it was difficult, as previously pointed out, to directly interpret interest rate fluctuations in terms of market expectations?