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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

transaction costs and facilitate diversification for small savers and investors. As financial intermediaries, these institutions provide services such as: asset transformation, a payment system, custodial services, and risk management ( Van Greuning and Iqbal, 2008 ). In theory, however, Islamic and conventional banking differ in important ways. 3 While conventional banks’ (CBs) intermediation is largely debt-based and allows for risk transfer, IBs intermediation is asset-based and centers on risk sharing ( Table 1 ). This largely reflects that IB is based on