An Economic Theory of Islamic Finance Regulation

Mabid Al-Jarhi

Islamic Economic Studies, 2016, vol. 24-2, 1-44

Abstract: We argue that regulation can improve the performance of conventional banks up to a limit, but cannot eliminate the inefficiencies resulting from the use of the conventional loan contract. Islamic finance requires complicated and costly procedures compared to conventional finance. Yet, it has significant macroeconomic benefits, which cannot be internalized by individual banks. Therefore, Islamic bankers tend to mimic conventional finance in order to cut costs and maximize short-term profits. Regulation can modify bankers’ incentives in order to capture the benefits of Islamic finance.

Keywords: banking regulation; financial intermediaries; Islamic banking; monetary economics (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (3)

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Working Paper: An Economic Theory of Islamic Finance Regulation (2016)
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