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Aledjandro Lopez Mejia, Suliman Aljabrin, Rachid Awad, Mr. Mohamed Norat, and Mr. In W Song
This paper aims at developing a better understanding of Islamic banking (IB) and providing policy recommendations to enhance the supervision of Islamic banks (IBs). It points out and discusses similarities and differences of IBs with conventional banks (CBs) and reviews whether the IBs are more stable than CBs. Given the risks faced by IBs, the paper concludes that they need a legal, corporate and regulatory framework as much as CB does. The paper also argues that it is important to ensure operational independence of the supervisory agency, which has to be supported by adequate resources, a sound legal framework, a well designed governance structure, and robust accountability practices.
Aledjandro Lopez Mejia, Suliman Aljabrin, Rachid Awad, Mr. Mohamed Norat, and Mr. In W Song

and loss sharing (PLS) activities and their asset portfolios become largely composed of short-term, low profit and trade related transactions ( El-Hawary, Grais and Iqbal, 2004 ). The nature of some risks faced by IBs and CBs is different. 7 Risks that are unique to IBs arise directly from the specific characteristics of Islamic contracts (including the nature of risk-sharing). Risks specific to IBs include: 8 Shariah compliance risk : Inadequate compliance with Shariah law could weaken consumer protection as a result of fraudulent activities and