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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. Middle East and Central Asia Dept.
This paper presents country experiences with reforms to strengthen regulatory oversight of the Islamic banking sector. Based on the selected country experiences, a number of important lessons and policy options can be drawn that have implications for the stable and sound development of Islamic banking. An enabling regulatory and institutional framework and a level playing field for conventional and Islamic banks is critical for the sound and stable growth of the Islamic banking industry. The country experiences also underscore the importance of providing an enabling framework while letting market forces determine the size of the industry.
International Monetary Fund. Middle East and Central Asia Dept.

better take into account the differential characteristics of IB products while ensuring a level playing field for Islamic and conventional banks. Centralized Shari’ah boards that help standardize industry practices and improve consumer perceptions have been established in only a limited number of countries. Further strengthening Shari’ah governance frameworks towards centralized Shari’ah boards could help ensure consistency in Shari’ah rulings within jurisdictions. There is also a need for better integration of the Shari’ah audit function in the enforcement

International Monetary Fund

IRR acts as countercyclical buffer, albeit funded by IAH instead of shareholders. 16. The rise of hybrid financial products, where aspects of conventional finance are melded with those of IB, is transforming the risk profile of IB, with potentially significant financial stability implications . Opportunities for profit in an environment where the enabling infrastructure for traditional IB is not yet fully developed, have, at times, spurred IB products that replicate aspects of conventional banking products, creating in the process new risks. For example, some new