But the scale of maturity transformation undertaken today produces private benefits and social costs. We have seen from the experience of first Iceland, and now Ireland, the results that can follow from allowing a banking system to become too large relative to national output without having first solved the “too important to fail” problem. 4. Finding a solution  Many remedies for reducing the riskiness of our financial system have been proposed, ranging from higher capital requirements on banks to functional separation and other more radical ideas. The guiding principle of any change should be to ensure that the costs of maturity transformation – the costs of periodic financial crises – fall on those who enjoy the benefits of maturity transformation – the reduced cost of financial intermediation. All proposals should be evaluated by this simple criterion. The first, and most obvious, response to the divergence between private benefits and social costs is the imposition of a permanent tax on the activity of maturity transformation to “internalise the externalities”. Such a tax, or levy, has been discussed by the G7, and introduced in the UK. The principle that the “polluter pays” for the costs they impose on others is an old one, going back at least to Pigou in the 1920s. The main practical problem is to calibrate the costs to maturity transformation. The loss of world output from the financial crisis is enormous, even though such a crisis might be considered a once in a generation, or even once in a century, event.
These indications show that businesses are seeing the economic and business merit of Shariah-compliant products and services and that its appeal extend beyond the traditional captive market. However, growth of the magnitude that Islamic finance experienced over the last decade would increasingly become more difficult if the industry does not continue to be nimble and agile in its approach. Innovation is therefore a key priority for Islamic finance players to keep expanding and gain market share. As indicated by the results of the retail consumer banking and insurance survey in the country report, the demand for Islamic banking by survey respondents far exceeds that for its conventional counterpart. This should be an encouragement for Islamic banks to boost its innovativeness in meeting customers’ needs. The Islamic Financial Services Act 2013 is already paving the way for the development of Islamic banking solutions that are differentiated from conventional products by allowing funds to be mobilised either through deposits or investment accounts. This classification brings greater options for the  BIS central bankers’ speeches  1  public and reflects an enhanced risk-sharing approach to Islamic banking. It also gives the industry additional options to create creative solutions for its customers. Greater engagement and collaboration between industry and academia would also ensure mutually-reinforcing efforts in driving innovation through the development and implementation of new research findings and breakthroughs.