Mr. Frank E. Vogel (Director, Islamic Legal Studies Program, Harvard Law School and Chairman, Harvard Islamic Finance Forum), Mr. John B. Taylor(Undersecretary for International Affairs, United Sates Departmemt of Treasury).
Excellencies,
Ladies and Gentlemen:

I would like to start by expressing thanks, on behalf of IsDB and on my own behalf, to the Harvard University for inviting me to speak to such a distinguished group of scholars at this most prestigious seat of learning. The Harvard University has the distinction of being in the forefront among the premier centers of learning of the world in making historical contributions to the understanding of faiths, cultures and civilizations including Islam. The University has rendered an invaluable service by organizing the Islamic Finance Forums, the Fifth I had the honor to attend.
Mr. Chairman

The Islamic financial industry has completed the third decade of its existence. Its present systemic significance is easy to visualize from the fact that it now covers all segments of the financial services industry. Islamic commercial and investment banking as well as different forms of non-banking financial services are being offered in many parts of the world. During the last three years, the industry witnessed a number of important new developments including the establishment of International Islamic Rating Agency (IIRA), the setting up of Islamic Financial Services Board (IFSB), the creation of International Islamic Financial Market (IIFM) organization and the establishment of the Liquidity Management Centre (LMC). The industry has embarked upon integration with the global financial market through the issuance of sovereign and corporate Sukuks (trust certificates) under three broad structures that are either asset-specific, or project-specific, or balance sheet-specific. The debut issue of the IsDB-Sukuk was a major step forward. The IsDB-Sukuk has been rated AAA by S&P and distributed widely among major institutional investors including the leading central banks of the IsDB member countries. Over one-fifth of the IsDB-Sukuk was subscribed by European and Far Eastern investors excluding the central banks. The Sukuk is listed on the Luxembourg Stock Exchange. More recently, according to an announcement made through Reuter and Bloomberg wire-services by Karl-Heinz Paque, the regional Finance Minister of one of the eastern state of Germany, Saxony-Anhalt, the state parliament has approved plans to issue around EURO 100 million Sukuk adapted to meet Islamic laws as an alternative mode of resource mobilization. Several top ranking traditional international banks in USA, UK and France are taking the lead in providing Islamic financial services.

Being on the threshold of internationalization, it is recognized that the Islamic financial system should work hand-in-hand with the global financial system to ensure financial stability. IsDB alongwith the major central banks of its member countries have consciously decided that the Islamic financial system should work in close coordination with the international supervisory and regulatory agencies to achieve the common goal of ensuring financial stability. A crucial role is being played by the IsDB together with the concerned central bansk of its member countries to establish infrastructure institutions for the Islamic financial services industry with a view to setting out prudential standards for capital adequacy, risk management, corporate governance and transparency and disclosure in the field of Islamic banking and laying down guidelines for product innovation and development to strengthen the discipline in the Islamic financial market. Banking Laws in the member countries having Islamic banks subjected all Islamic banks and financial institutions to the same supervisory standards as those applied to conventional banks.

Both through IsDB, the Central Banks and the Ministries of Finance of our member countries, the Islamic financial industry also maintains close coordination with international bodies such as the United Nations Counter Terrorism Committee (UNCTC), the Financial Action Task Force (FATF), the BIS, the IMF and other international regulatory bodies to streamline the Best Business Practices for the industry.

The IsDB participates in the meetings and deliberations of Special Meetings of the UNCTC along with other international, and regional institutions and multilateral development banks (MDBs). These meetings are aimed at coordinating the efforts of participating institution to strengthen capacity building programs in UN member countries in order to help them comply with the UN Security Council Resolution Number 1373. The subject of building regulatory and supervisory capacities to effectively combat financing terrorism is at the center of these meetings and deliberations.

Mr. Chairman:
Most Islamic financial institutions operating in the member countries of the IsDB are required to implement the standards issued by the Basel Committee, such as Core Principles of Effective Banking Supervision, Customer Due Diligence for Banks, minimum regulatory capital requirements and guidelines concerning transparency and disclosures.
The IsDB member countries are working together with the international community to revise and upgrade their respective regulatory frameworks to ensure that the channels of financial institutions and markets are not abused. On combating money laundering and terrorist financing, the initial Forty Recommendations and the Eight Special Recommendations issued by the Financial Actions Task Force (FATF) are being implemented. Except for Indonesia, all IsDB member countries are listed by the FATF as compliant countries. In 2001 the FATF identified Indonesia as a non-compliant country due to flaws in its financial system followed by the financial crisis. Since then Indonesia has strived its best to strengthen its financial system and regulatory framework, and in February 2004 has reported to the FATF for reassessing its status as a fully compliant country. The assessment of the FATF is awaited and Indonesia will do whatever is needed to fully comply with international standards.
Various initiatives are also underway in the IsDB member countries to effectively implement the UN Security Council Resolution No. 1373 concerning combating the financing of terrorism . The implementation of the Security Council Resolution is being enforced by the regulatory authorities through the full cooperation of Islamic and traditional banks with UNCTC and FATF in the financial sector of the member countries.
The Islamic financial institutions are, in addition, pursuing rigorous self-regulation through their Shari’ah Supervisory Boards. It may be noted that under Islamic financing, the financial institutions are obliged to know their clients thoroughly in the process of financing assets and projects. Moreover, in such a system, cash disbursement directly to customers has a very limited scope as Islamic banks finance assets by making direct payments to the suppliers. The use of funds is thus known and transparent.
Ladies and Gentlemen:
Transparency and disclosures help in building an environment of trust and the media plays a vital role. However, rumors and bad publicity erodes the confidence of the public and damages the credibility of the industry. In responding to the tragic events of 9/11 some segments of the media have been unfair in trying to link terrorist financing with Islamic finance. There is no link whatsoever. The Islamic financial industry on the contrary, organizes financial services in accordance with the Islamic Law in the same way as the traditional financial industry is organized in accordance with the Civil Law or Common Law under close supervision of the regulatory authorities, all of them observing the highest international standards.
Mr. Chairman
Research centers, universities, financial institutions and regulators in the west can give a helping hand in building the Islamic financial industry in an organized and systematic manner. This is needed, not only to allow the traditional industry to interact with the Islamic financial industry, but also to enable the Islamic financial industry combat more effectively against the misuse of funds with the help of more sophisticated tools and to enhance transparency of their operations. Strengthening the global financial industry by making it possible for conventional and Islamic finance to interface, will help a very large part of world population to bring their financial and monetary transactions within the ambit of the formal financial markets. Hence, a sustainable solution to the problem of money laundering and financing terrorism rests on building sound formal markets and strengthening the capacities of regulators and supervisors and empowering them to undertake more effective supervision.
Ladies and Gentlemen:
The IsDB assigns a very high priority to strengthening the regulatory and supervisory architecture of the Islamic financial industry. The risk characteristics of the assets and liabilities of this industry are different as compared to the traditional industry. This raises the issue of applicability of the existing standards in supervising the Islamic financial institutions. It is to fulfill this objective that the Islamic Financial Services Board (IFSB) has been established as a regulatory and supervisory standard-setting organization for the industry. In a short period of its establishment, the total number of IFSB members has risen to 52, comprising 15 regulatory bodies as full members, 5 international inter-governmental organizations and 29 financial institutions and other organizations. The IFSB has already decided to prepare the best practice standards for the industry in four areas, namely, risk management, capital adequacy, corporate governance, and disclosures and transparency. Work on the preparation of standards for capital adequacy and risk management is in an advanced stage.

Ladies and Gentlemen:

The other infrastructure organizations, besides those mentioned earlier, which the IsDB and other industry stakeholders have established include: the Accounting and Auditing Organization for the Islamic Financial Institutions (AAOIFI), the General Council for Islamic Banks and Financial Institutions (GCIBFI), and the most recent body, the Arbitration and Reconciliation Center for Islamic Financial Industry (ARCIFI), being established jointly by IsDB and GCIBFI and hosted by UAE.

Mr. Chairman:
One of the requirements of setting credible standards for the industry is to bring some measure of harmony in the rulings given by the various Shari'ah Boards. This matter was considered in a recent meeting of the IFSB held in Bali, Indonesia last month and the need for evolving comprehensive uniform guidelines for Shari’ah supervision was emphasized. One of the Council Members proposed that credible guidelines can be prepared on the same lines as is done at present by the Basel Committee of Banking Supervision in the case of traditional banking.
There are important themes for dialogue between the Islamic law, civil law and common law systems. The transfer of the Islamic Finance Forums to the Harvard Law School and the deliberations of the present Forum are expected to initiate such a discussion process. The Islamic Research and Training Institute (IRTI), a member of the IsDB Group, and the institutions which I mentioned before could take part in such a dialogue.
Ladies and Gentlemen:
Due to time factor I would like to close my talk here. I am certain that other scholarly presentations in the Forum and its deliberations will cover the various aspects of this important theme in a more comprehensive manner. I wish the Forum a great success and I thank you all.