Regulating Islamic financial institutions: the nature of the regulated

Also referred to as World Bank Policy Research Working Paper 3227, March 2004. _x000D_ _x000D_ In addition to the risks attributed to Islamic finance due to a general lack of understanding of how the system operates, Islamic financial institutions face a number of other risks. The nature and practices associated with transactional and intermediation contracts are discussed, as well as conceptual frameworks such as two tier mudaraba and two windows mudaraba . The theoretical principles of Islamic finance do not entirely correspond with current practices, particularly with respect to: the structuring of assets, the manner in which accounting policies are applied to different types of account holders, and operations that do not always conform to profit and loss sharing principles. Any advantages engendered to Islamic banks (and their perceived stability) due to the nature of risk-sharing principles are neutralized through the payment of competitive market returns to equity holders. Risk topics covere