A careful assessment needs to be made of the potential medium and longterm effects of the proposed reforms on market structures and behaviour. These considerations are equally relevant in the context of Islamic finance. The assessment on the aims and relevance of each of the proposed reform measures needs to take into account the two important considerations in Islamic finance; the need to support sustainable and responsible innovation, and secondly, to leverage on its inbuilt strengths that set Islamic finance apart in performing its role in supporting the efficient mobilisation and allocation of resources to generate real economic activities. Given the damaging effects of complexity and opacity associated with the recent unfettered innovative activities in the conventional financial markets, it has resulted in a reassessment of the role and benefits of financial innovation. In Islamic finance, innovation is key in pushing the frontier of market development to generate the range of products and services, processes and functions. The key lies in preserving the benefits of innovative initiatives and activities whilst ensuring that they do not result in negative externalities. In considering the relevance of the global regulatory reform to Islamic finance, there is therefore a need to consider the underlying elements that guide the process towards sustainable and more socially-responsible financial innovation. This comes in the forms of its strong paradigm in governance, disclosure and transparency, as well as its emphasis that innovations are anchored in the objectives of Shariah and thus are for the benefit of the people.
Today, it is precisely this element in Islamic finance amongst others, that are highly relevant to the discussions on the reform of the national and international financial system so that we have a system of financial intermediation that is stable, sustainable and contributes to global growth. In ten years now Islamic finance has experienced accelerated growth and the financial landscape has undergone a major transformation with great progress achieved on many fronts. The transformation is particularly evident in three dimensions, firstly, Islamic finance has evolved into a complete and competitive form of financial intermediation, effectively serving consumers and businesses, both Muslims and non-Muslims. Islamic finance has become a competitive form of intermediation with several established conventional players now entering the Islamic finance industry, resulting in more diverse Islamic financial institutions with wide spectrum of product range. Secondly, this recent decade has also seen significant milestones being achieved in the area of the international Islamic financial infrastructure of Islamic finance since the establishment of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) in 1990. In 2002, the Islamic Financial Services Board (IFSB) was established as an international prudential standard setting body for Islamic finance. The IFSB with a membership of now 50 regulatory authorities has since developed a number of standards ranging from capital adequacy requirements to standards for governance and risk management, taking into account the specificities of Islamic finance.