Islamic Finance and Economic Development: Risk, Regulation, and Corporate Governance

CHAPTER 5

The Dilemma of Tailor-Made versus Mainstream Regulation

Islamic finance offers opportunities for expanding investments, raising growth performance, and reducing poverty. It does so by offering new financial services, an everyday event in the realm of finance in which their fate is ultimately decided by market developments. In this permanent evolution, market participants, regulators, and the broader institutional environment face continuous challenges. Market participants' challenges lie in their ability to identify opportunities for profit and the ability to pursue them while complying with Shari'a and managing risks. The regulators' challenge resides is their ability to provide a systemic governance framework that promotes financial stability while not stifling market vibrancy. Finally, at the broader institutional level, the institutional infrastructure needs to enable the expansion of investments by incorporating features that mitigate investors' risks.

For the opportunities it offers to materialize, Islamic finance needs to address the aforementioned challenges squarely without compromising the tenets on which it is founded. A requirement for that purpose is the availability of adequate information and analysis that provide market participants and policy makers with sound foundations for their decisions. Information and knowledge are at the core of progress. Islamic financial services providers, consumers, and the financial authorities that govern them all need ...