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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

addressed by a combination of BCBS and IFSB liquidity rules. That said, as is the case in many emerging and developing economies, implementation of key elements of the newly internationally agreed liquidity framework (i.e., the liquidity coverage ratio (LCR), and the net stable funding ratio (NSFR) is likely to pose significant challenges to jurisdictions with strong IB presence. This is particularly the case regarding the treatment of investment accounts, the determination of run-off rates on deposits in the absence of Islamic deposit insurance schemes in many countries

Mr. Alfred Kammer, Mr. Mohamed Norat, Mr. Marco A. Piñón-Farah, Mr. Ananthakrishnan Prasad, Mr. Christopher M Towe, and Mr. Zeine Zeidane

significantly. All members of the IMF with a significant IB presence were canvassed, and 39 countries responded. Ten of these countries excluded themselves as not recognizing IB. The main results of the survey are as follows: IB practices are relatively widespread and given explicit recognition in regulation . In particular: (i) 72 percent of the respondents indicated that the legal and regulatory framework explicitly recognizes IB practices, products or institutions; (ii) 76 percent of the respondents noted that IB was being conducted by a stand-alone Islamic bank; and

International Monetary Fund
This paper discusses the need for ensuring financial stability in countries with Islamic Banking (IB). IB continues to grow rapidly, in size and complexity, posing a challenge to supervisory authorities and central banks. The legal environment within which IBs operate can be complex and challenging and may have implications for financial stability. IBs operate in diverse legal environments, some of which are more evolved than others in providing strong legal underpinnings for IB. International governance standards apply to IB but need to be customized to consider IBs’ distinct governance features. Significant progress has been achieved in developing prudential standards for IB, although broader implementation and more consistent application are needed. Progress has been slow in developing IB’s liquidity management and money markets. In recent years, hybrid financial products in IB have emerged that replicate aspects of conventional finance in an IB context, raising financial stability concerns. The IMF has played an important role in promoting financial stability in IB jurisdictions, working closely with IB standard setters, and international organization to shape IB standards and promote best practices.
International Monetary Fund

traditionally faced a number of obstacles, but some progress has been achieved in recent years . Obstacles have included: a chronic sector-wide excess liquidity in some jurisdictions, the very slow pace of issuance of sovereign Sukuk in most jurisdictions, and lack of alternatives to repo-like transactions, which are viewed as replicating an interest-bearing loan. Some progress has been achieved in developing instruments and markets ( Box 12 ), mostly in countries with a substantial IB presence or with more developed money and sovereign Sukuk markets (e.g., Bahrain

Mr. Alfred Kammer, Mr. Mohamed Norat, Mr. Marco A. Piñón-Farah, Mr. Ananthakrishnan Prasad, Mr. Christopher M Towe, and Mr. Zeine Zeidane
The SDN discusses the main policy issues and challenges in building an inclusive and safe Islamic finance industry, with emphasis on Islamic banking and Sukuk markets. To this end, it discuses why Islamic finance matters, taking into account its recent and prospective growth; and, its potential contributions in terms of financial inclusion, support for small- and medium-sized enterprises and investment in public infrastructure and, in principle, reduced systemic risk. It then covers a range of regulatory and other challenges, and offers policy advice, to address factors that hamper the development of the industry and, more generally, the delivery of its potential benefits. The paper covers regulatory and supervisory issues, safety nets and resolution frameworks, access to finance, Sukuk markets, and macroeconomic policies.