Towards an Economic Theory of Islamic Finance Regulation

Islamic finance has several comparative advantages over conventional finance. Since they are related to efficiency, stability and other macroeconomic benefits, they cannot be easily internalized by Islamic bankers. Islamic bankers have no incentive to stick to the Islamic finance paradigm and instead tend to mimic conventional finance. Regulation is therefore required to modify their behavior in order to allow the Islamic finance industry to enjoy its advantages. This paper attempts to modify the economic theory of bank regulations towards that aim