For many banks, perhaps the ideal situation would be one in which they could adopt the same approach in every jurisdiction in which it operates. The widest possible adoption of Basel II would certainly have the benefit of reducing supervisory burden for banks, but it would have benefits for supervisors as well. Because Basel II fosters enhanced risk management, more effective supervision, greater transparency and financial stability, I believe that it is in many countries’ best interest to adopt the new Framework. Having said that, however, we also have to recognise that countries are in varying states of preparedness to adopt Basel II. When I talk with my fellow supervisors, I therefore emphasise the benefits of Basel II, but I also encourage them to get the basics right and not jump into Basel II implementation before they are ready. Even so, I believe that it can be extremely useful for countries to start implementing already some of the principles behind pillars 2 and 3 of the framework as preparation for the formal transition. This dialogue takes many forms. In addition to the informal discussions that I and my fellow Committee members have with our non-Committee member colleagues, we also have several formal mechanisms in place. For example, the Committee has a long-standing working group that includes representatives from sixteen non-member countries, and we have increased our interaction with this working group.
In addition, as the returns in Islamic banking are uncertain and can only be ascertained on an ex-post basis, well-developed IT systems would be necessary to enable Islamic banking institutions to make projections on future returns so as to reduce the degree of uncertainty in the returns to be paid to the depositors. This would also strengthen the potential competitiveness of the Islamic financial services industry. Another facet to risk management is the need for the Islamic banking industry to develop a derivatives market. In the current increasingly uncertain global financial environment, investors need to be in a position to mitigate and manage these emerging new risks. Islamic banking institutions, in particular, have to a large extent long-term assets which include long-term Islamic housing mortgages and Islamic financial instruments, that are funded by short-term deposits, thus giving rise to a maturity mismatch between the assets and liabilities. There is therefore a need for the development of a broader range of Islamic financial market instruments to provide the industry with effective risk mitigating instruments. In addition to the derivatives market, the Islamic financial system also needs deeper and more efficient money and capital markets to facilitate sound asset and liability, and liquidity management by Islamic financial institutions. In this regard, Bank Negara Malaysia will issue Sukuk al-Ijarah, to meet the requirements of participants in the Islamic money market.