This includes reviewing the responsibility and accountability of the Board and Management as well as requiring for the setting up of various Board committees. In the case of Malaysia, the High Court of Malaysia has dedicated high court judges to preside on litigated cases over matters relating to Islamic banking and finance. To undertake a holistic legal review, the Central Bank of Malaysia has set up a Law Review Committee to review the common law-based domestic legislations to assimilate the Shariah principles with the aim of removing any impediments to ensure the unhindered and efficient functioning of the Islamic banking and financial system. The Central Bank Act has also been amended to provide for the establishment of a Shariah Advisory Council at the Central Bank as the sole authority and reference on all Shariah matters pertaining to Islamic banking and finance. The successful integration of these core components to become a comprehensive Islamic financial system has contributed towards a more active domestic Islamic financial intermediation process. To-date, Islamic banking has mobilised assets amounting to RM76 billion or 10 percent of the market size, of which approximately 70 percent of the Islamic banking assets were generated by the conventional banks with Islamic windows. In the takaful sector, the four takaful operators registered a total of RM4 billion in terms of assets.
Islamic banking operations therefore need to be governed by its own standards and best practices in parallel with the international best practice. The establishment of the Islamic Financial Services Board (IFSB) in 2002 as an international prudential standard-setting body to promulgate the international regulatory and supervisory standards for Islamic financial institutions is aimed towards achieving this objective. In this regard, the IFSB has already made progress in developing the prudential standards on the capital adequacy and risk management framework. These standards are expected to be completed in 2005. In addition, the IFSB will commence work on developing standards on corporate governance. At present, some countries have adopted the Basle Accord standards in their regulatory and supervisory framework for their Islamic banking industry. However, these standards do not adequately  2  BIS Review 3/2004  address the requirements of Islamic banking operations and transactions, resulting in gaps in the standards. Therefore, these gaps will be taken into account with respect to the capital treatment and risk associated for the different types of Islamic financial contracts to truly reflect their features and characteristics. While certain products in Islamic finance by their nature may not attract capital, the Islamic financial institutions need to have a more rigorous risk management systems in managing the funds placed under this arrangement. In this regard, the risk management standard needs to specifically address this concern. The Islamic financial institutions can expect to be better regulated and supervised following the adoption of the standards to be issued by the IFSB.