The aim of the plan is to provide clarity of the vision and objectives that are to be achieved in the context of a more challenging environment that is driven by rapid change in a world that is becoming increasingly more integrated and more technology and knowledge-based. In the development of our Islamic financial system, a comprehensive approach has been adopted. Malaysia has given emphasis to the development of a comprehensive financial infrastructure that includes the Islamic financial markets, Islamic financial instruments, contract law and law enforcement procedures, Shariah governance framework, Islamic accounting practices and valuation standards, appropriate disclosure requirements as well as an efficient and secure payment and settlement system. Attention has also been directed to develop the prudential regulatory and supervisory framework that underpins the stability of the Islamic financial industry. Today, my remarks will focus on three key areas in which greater attention is needed in order to secure a promising future for the Islamic financial services industry. These areas include accelerating the pace of financial innovation, strengthening risk management capabilities and leveraging on information technology. Accelerating the pace of financial innovation As we advance forward in the development of Islamic finance, innovation will be key in securing the competitive advantage. It will be vital to the future of Islamic finance.
Enhancing the IT infrastructure has therefore become indispensable in view of the need to capture and maintain sufficient financial data and information for risk analysis. In Islamic banking, IT applications in strengthening risk management capabilities are even more demanding in view of the risk intricacies in the different Islamic modes of finance. A financing facility for example that is extended to a client based on Murabahah, Ijarah, Istisna’ and Musyarakah will all have its own unique risk exposures. The risk exposure is not only different across the different modes of finance but also across clients. In addition, different maturities of the Islamic financial contracts will have different implications for risk across modes and across clients. Islamic financial institutions need to have a robust internal rating system that can map all assets in the balance sheet in accordance with the risk characteristics of each asset. Comprehensive IT systems will be needed to capture and store long-term historical data so that expected probability of the return can be estimated and a risk weight can be quantified and assigned. Indeed, the heterogeneous modes of Islamic finance require an even more rigorous system for expected return calculation as compared to interest-based credit transactions. The complex and volatile financial environment requires enhanced capacity of Islamic financial institutions in dealing with uncertainties and probabilities. This will enable Islamic financial institutions  BIS Review 20/2004  3  to strengthen tolerance levels to deal with financial vulnerabilities.