Publication:
An economic theory of Islamic finance regulation
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Date
2016
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Abstract
We argue that regulation can improve the performance of conventional banks up to a limit, but cannot eliminate the inefficiencies resulting from the use of the conventional loan contract. Islamic finance requires complicated and costly procedures compared to conventional finance. Yet, it has significant macroeconomic benefits, which cannot be internalized by individual banks. Therefore, Islamic bankers tend to mimic conventional finance in order to cut costs and maximize short-term profits. Regulation can modify bankers' incentives in order to capture the benefits of Islamic finance.
Keywords
Banking regulation , Financial intermediaries , Islamic banking , Monetary economics
Citation
Mahmoud Al-Jarhi, Mabid Ali Mohamed. (2016). An economic theory of Islamic finance regulation. Islamic Economic Studies, 24 (2), pp. 1-44.
Publisher
Islamic Research and Training Institute (IRTI)