While world trade has, on average, expanded by 16% over the period 2004–2008, Asia’s trade with the Middle East and Latin America has increased on average by about 30%. Asia’s trade with other emerging economies now stands at 13% of Asia’s total exports. A further recent development is the increasing international dimension of Islamic finance which is also influencing the global patterns of financial and trade flows. Islamic finance today has contributed to increasing the financial and economic ties between Asia and the Middle East. The emergence of new financial centres in Asia and the Middle East has seen stronger investment and financial flows between the two regions. With the greater internationalisation of this form of financial intermediation, it has also opened up the prospects for the developed economies to forge stronger financial linkages with these dynamic growth regions of Asia and the Middle East. The inherent features of Islamic finance require that financial transactions are supported by an underlying economic activity, thus ensuring that there is a close link between financial and productive flows. Islamic finance is also based on the principle of profit-sharing and therefore risk sharing. Islamic financial transactions clearly define the arrangements at the outset, and  BIS Review 94/2010  3  provides the incentive for the appropriate due diligence to be undertaken by the Islamic financial institutions to ensure that the profits are commensurate with the risks being assumed. Aspects of governance and risk management are therefore strongly emphasised in the arrangements.
The Government has also reduced its stake in the commercial banks over the most recent years and intends to have them largely or fully privatised by the end of the current electoral term next year. The privatisation process creates opportunities for continued rationalisation in the financial system creating ample opportunities in the period ahead, including closer ties with foreign financial institutions. It is tempting to put recent economic developments in Iceland into the context of developments in some of the other Nordic Countries about a decade ago. Liberalisation of the Icelandic financial markets was more or less completed in the mid 1990´s when the last restrictions on the movement of capital between Iceland and other countries were removed. Our liberalisation came a few years later than in the other Nordic Countries. You will recall that in some of the other Nordic Countries, liberalisation was followed by a boom period in the economy, partly or largely fuelled by a rapid growth of credit and in some cases large fiscal deficits. At the same time, these countries were pursuing a fixed exchange rate policy vis-a-vis the ECU. Developments in the domestic economies were such that the fixed exchange rate policy was gradually undermined, the rapid credit growth of banks resulted in weakening loan portfolios when asset prices fell, the exchange rate fixety gave way to floating, the currencies depreciated and inflation rose. The current account of the balance of payments also deteriorated.