An Economic Theory of Islamic Finance Regulation

Mabid Al-Jarhi

MPRA Paper from University Library of Munich, Germany

Abstract: We argue that regulation can improve the performance of conventional banks up to a limit, but cannot eliminate the deficiencies 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. Based on Al-Jarhi’s macroeconomic model (1983), we construct an economic theory of Islamic banking regulation. Results point out to the potential of designing regulations that discourage mimicking conventional finance in order to benefit from the Islamic finance advantages.

Keywords: Al-Jarhi’s model; Islamic banking; Islamic finance; monetary economics; financial economics; banking; banking regulation; banking regulation; banking supervision; Islamic economics; financial economics; finance; financial intermediaries. (search for similar items in EconPapers)
JEL-codes: E4 E42 E43 E50 E52 E58 E6 (search for similar items in EconPapers)
Date: 2015-11-01, Revised 2016-03-01
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: An Economic Theory of Islamic Finance Regulation (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:72689

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