No. 73 - Islamic finance and conventional financial systems.Market trends, supervisory perspectives and implications for central banking activity

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by Giorgio Gomel, Angelo Cicogna, Domenico De Falco, Marco Valerio Della Penna, Lorenzo Di Bona De Sarzana, Angela Di Maria, Patrizia Di Natale, Alessandra Freni, Sergio Masciantonio, Giacomo Oddo and Emilio VadalàOctober 2010

The paper analyses Islamic finance from the central bank and supervisory authority's perspective, focusing on the European and Italian context. It depicts a rapidly expanding sector, with recent annual growth rates of between 10 and 15 percent and a geographical presence that now reaches several Western countries.

Future prospects, however, could be hampered by problems concerning the standardization of products, governance structure, supervisory regulation, monetary policy instruments, and liquidity management. Islamic intermediaries are not necessarily riskier than traditional counterparts but their operational structure tends to be more complex.

Key issues in supervision include the treatment of investment accounts and transparency. It has been seen that there are limits to the efficiency of the monetary policy instruments developed so far to remedy the prohibition of interest; moreover, the growth of interbank and money markets is hindered by a shortage of "Shari'ah-compliant" products. Problems arising from the participation of Islamic banks in payment systems are also discussed.

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