Risk and Regulation of Islamic Banking

Risk and Regulation of Islamic Banking

Foundations of Islamic Finance series

Edited by Mervyn K. Lewis, Mohamed Ariff and Shamsher Mohamad

From a single product offering in 1963, the Islamic financial services industry has grown to an estimated $1.6 trillion in assets. Products must comply with profit and risk-sharing criteria and regulations preventing banks from venturing into activities with high risk and excessive uncertainty. This timely volume analyses these matters and considers the range of new products, discussing both conceptual and practical dimensions. It connects Islamic finance to the mainstream theoretical literature on financial intermediation while also exploring its differences. The expert contributors also examine why an ethical foundation is important and why the system requires well-thought-out regulations to ensure outcomes that protect the community’s well-being.

Chapter 17: Development needs of the Islamic banking industry

Mohamed Ariff, Mervyn K. Lewis and Shamsher Mohamad

Subjects: asian studies, asian economics, economics and finance, asian economics, financial economics and regulation, islamic economics and finance, money and banking


In this concluding chapter, we summarize some of the main themes and ideas in the preceding chapters before considering the challenges the Islamic financial services industry is facing in the second decade of the twenty-first century. The first contribution of this book is that we have sought to connect the Islamic banking theories to the rich conceptual framework already developed over some five decades that form the basis of research (and graduate courses) on conventional banking and financial intermediation, in particular, information asymmetries, adverse selection, moral hazard, agency theory, optimal contract design and incentive structures. A second contribution is an analysis of the risk-and-profit-sharing aspects of Islamic finance as well as the specific regulatory developments on the operational matters to manage Islamic banking. The latter discussion points to distinctive differences in the way Islamic banks price products without using interest rates, which form the core of conventional finance as the latter developed particularly over two-and-half centuries ago as a fractional banking system.

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