This volume comprises a selection of papers prepared in connection with a high-level seminar on Law and Financial Stability held at the IMF in 2016. It examines, from a legal perspective, the progress made in implementing the financial regulatory reforms adopted since the global financial crisis and highlights the role of the IMF in advancing these reforms and charting the course for a future reform agenda, including the development of a coherent international policy framework for resolution and resolution planning. The book’s unique perspective on the role of the law in promoting financial stability comes from the contribution of selected experts and representatives from our membership who share their views on this subject.
What attracts conventional investors to Islamic financial instruments? We answer this question by comparing Malaysian Islamic and conventional security prices and their response to macrofinancial factors. Our analysis suggests that Islamic and conventional bond and equity prices are driven by common factors. Likewise, especially in recent years, Islamic banks have responded to economic and financial shocks in the same way as conventional banks, suggesting that the gap between Islamic and conventional financial practices is shrinking.
Derivatives are few and far between in countries where the compatibility of financial transactions with Islamic law requires the development of shari'ah-compliant structures. Islamic finance is governed by the shari'ah, which bans speculation and gambling, and stipulates that income must be derived as profits from the shared generation of goods and services between counterparties rather than interest or a guaranteed return. The paper explains the fundamental legal principles underpinning Islamic finance with a view towards developing a cohesive theory of derivatives subject to shari'ahprinciples. After critically reviewing accepted contracts and the scholastic debate surrounding existing financial innovation in this area, the paper offers an axiomatic perspective on a principle-based permissibility of derivatives under Islamic law.
International Monetary Fund. External Relations Dept.
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Islamic banks are prohibited from charging or paying interest, and thus can operate only on the basis of profit-sharing arrangements. This paper provides a brief survey of the theory and practice of Islamic banking. It covers developments in Islamic banking since the mid-1970s, how such banks operate, and the analytical underpinnings of a financial system based on Islamic principles. Finally, the future of Islamic banking is assessed.
Islam proposes the replacement of an interest-based financial system with one which operates on the basis of risk and profit sharing. Using a general equilibrium model, this paper investigates some open-economy implications of the adoption of Islamic banking for growth and stabilization of the economy. It analyzes the long-run effects of Islamic banking on international capital flows and on the economy’s capacity to adjust to disturbances. It concludes that monetary policy can be used effectively for stabilization purposes and that disturbances to asset positions are absorbed efficiently in an Islamic financial system.