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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

. International corporate and bank governance principles generally apply to IB . 15 Variations in governance arrangements between jurisdictions generally relate to the approach of the underlying legal framework (e.g., Anglo-American vs. French-German approaches), and local circumstances. Furthermore, the on-going debate on how to address the weakness in traditional bank governance structures that were exposed by the GFC (e.g., roles and duties of bank boards, etc.) are equally relevant for IBs. Corporate Structure 23. IB services are normally provided separately from

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

which is to be managed by the customer/investor. Profits generated by that enterprise or activity are shared in accordance with the terms of the Mudharabah agreement, while losses are to be borne solely by the IB unless they are due to the customer/investor’s misconduct, negligence, or breach of the contract terms. Annex 3. Islamic Window vs. Fully-fledged Islamic Bank 1 According to supervisory authorities who allow windows consider that this structure has the following advantages: IB services/products benefit from the experience of conventional banks

International Monetary Fund. Middle East and Central Asia Dept.

powers to rule on the compliance of products and contracts with Shari’ah and are by law required to evaluate and determine the Shari’ah compliance of the IBs. Shari’ah Scholars are full-time employees of banks offering IB services. There is no governing body that oversees Shari’ah Scholars discharge of their professional obligations. There are no provisions specific to IBs relating to audit requirements. 70. The consumer protection framework is yet to be adapted to cater to consumers of IB products . There is currently no difference between IBs and

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.
Mr. In W Song and Carel Oosthuizen

demand for Islamic banking services (countries with a small Muslim population), the IB window could be the only feasible way of providing IB services, thus enhancing financial inclusion. Supervisory authorities who do not allow windows, noted the following risks for such structure: The commingling of Islamic windows’ assets and liabilities with conventional assets and liabilities could have significant reputational risk, as depositors in windows might suddenly withdraw their money if rumors regarding commingling arise. It also raises issues related to consumer

Mr. In W Song and Carel Oosthuizen
The growing presence of Islamic banking needs to be accompanied by the development of effective regulation and supervision. This paper examines the results of the survey conducted by the International Monetary Fund to document international experiences and country practices related to legal and prudential frameworks governing Islamic banking activities. Although a number of countries have made considerable progress in creating legal, regulatory, and supervisory frameworks that accommodate Islamic banking, there are substantial differences. This paper also identifies a number of challenges faced by regulatory and supervisory agencies regarding Islamic banking.