The industry has now not only achieved a market share beyond the target of 20 percent by the year 2010 as was envisioned in the Financial Sector Masterplan, but it has also met the increasing and differentiated demands of the economy through the range of financial product offerings in Islamic banking, takaful and Islamic capital market segments. The initiatives taken to develop the Islamic financial system has aimed to build a comprehensive financial sector that operates at the highest efficiency and with an outreach that would extend beyond domestic and regional markets and thus facilitate greater cross border economic linkages. In advancing to the next level of growth and development, the Islamic Financial Services Act 2013 (IFSA) now provides the industry with the foundation to transition into its next stage of development. The Act takes into account the specificities of Islamic finance while ensuring a robust governance of an end-to-end Shariah compliant regulatory framework. It also provides an enabling environment for Islamic banks to diversify their business through the offering of investment accounts as an alternative means of raising funds from the public. With this, Islamic banks are allowed to pursue their role as investment intermediaries in which the alternative modes of risk-sharing contracts can be applied for the investment account. This new categorisation of deposits under the new Act has now been fully observed since mid2015 with the effective reclassification of deposits to either being Islamic deposits or investment accounts.
For a short presentation this could be too ambitious, so I will have to leave out some parts of the story. I will concentrate in some issues that I believe are essential for understanding the present state of affairs: global imbalances, the financial crisis, emerging economies’ growth and globalization, with its inflationary effects and “decoupling” phenomenon. I will continue with some policy lessons and implications on the Chilean economy. But first allow me to make some reflections on economic policy. Entrepreneurial success and failure are inherent to market economies. This is also true in financial entities. We know that in the corporate world rotation is high, with firms coming in and going out, and jobs being created and destroyed. This is at the cornerstone of Schumpeter’s destructive creation, and explains a substantial part of progress and productivity growth. However, there are negative externalities. Miscoordination and contagion problems, especially in the financial system, have the potential to amplify the cycles and transform destructive creation into destructive destruction. A financial institution in distress does not make the headlines, but when complications become systemic, the consequences can be very disturbing. It is thus crucial to prevent problems in one specific sector from spreading across the whole economy, with costly consequences. Hence the importance of safeguarding the economy’s financial stability. Until a while ago, when I was asked to speak about financial stability I normally discussed evidence from developing economies. We have learned than exchange-rate crises are costly per se, but if accompanied by a financial breakdown the cost duplicates.