Islamic financial institutions generally operate within the conventional regulatory environment, in some cases with additional regulation that caters to the specifics of the Islamic financial industry. Although different regulatory and advisory bodies govern the workings of Islamic financial institutions, this does not mean that their regulations are mandatory in every jurisdiction. This chapter reviews how Islamic financial institutions are regulated, additional regulatory bodies and some of the lesser known types of institutions in the Islamic financial market place. Finally, the case is made for the suitability of LIBOR as a benchmark when determining the profit margin on an Islamic financial transaction.
13.1 Regulatory Institutions
Besides financial regulators, there are four main institutions directly associated with Islamic finance, each of which is explored in more detail.
Islamic financial institutions are generally regulated in a similar way to other financial institutions, although the application varies from country to country. Three different models for financial regulation can generally be observed in the market:
- Fully Islamic. In this model, all financial institutions operating in a country are fully Islamic, and no conventional financial institutions are authorised to operate. A fully Islamic financial system is, for instance, operational in Iran.
- Dual regulation. In this case, both conventional ...