Najib Razak, whose government oversees one of the world's largest and most comprehensive Islamic financial sectors, said it was "imperative for the industry to draw upon the lessons learnt to ensure that we avoid any such financial instability in the future".
Mr Najib said the Islamic financial system was attracting growing global attention as conventional financial institutions continued to reel from huge losses.
However, it would remain resilient only with strong governance and risk management systems that could keep pace with sophisticated innovation.
"Although Islamic finance has largely escaped the ravages caused by overzealous financial innovation and imprudent lending practices, which were at the heart of the global crisis, we cannot afford to be complacent," he said at a conference in Kuala Lumpur.
The Islamic financial sector has emerged as a key element of the Malaysian economy following the establishment of a single national sharia advisory council within Bank Negara Malaysia, the central bank, which also oversees the country's parallel conventional financial system.
Malaysian Islamic banking assets account for about $65bn with takaful [Islamic insurance] assets of about $2.6bn and Islamic capital market stocks with a market value of about $235bn.
The country is also a centre for sukuk [Islamic bonds] and is developing an Islamic commodities market.
According to Bank Negara, Islamic assets under management globally amount to about $750bn and are growing at between 15 and 20 per cent a year.
The bank said there was about 680 sharia-compliant funds globally and about $107bn of outstanding sukuk.
Malaysia has signed agreements with a number of countries, including Bahrain, Dubai and Qatar, to collaborate on developing Islamic finance, including mutual recognition of common standards.
However, some muslim academics have said the Islamic sector needs a uniform system of international regulation, including a single sharia authority, to remove the threat of potential instability as innovative products come on to the market.
Dr Abbas Mirakhor, a former executive director of the International Monetary Fund, called recently for a transnational regulatory authority to replace the many sharia councils and individual muslim scholars whose approval is sufficient to allow the launch of a new Islamic product.
"It is possible to standardise and harmonise across borders a system of sharia rulings that would obviate the need for every bank and every instrument to have its own sharia boards," Dr Abbas told the Financial Times.
By Kevin Brown in Singapore
© Financial Times 2009
Link: http://www.zawya.com/Story.cfm/sidZAWYA20091104050616/Malaysian%20PM%20warns%20Islamic%20financial%20sector
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