University of Colorado at Boulder

This thesis aims to reconcile the contradictions that exist between financial intermediary practices and customers' needs in Saudi Arabia. Due to these contradictions, resources cannot be allocated properly and the role of the central bank is lessened. Through examination of these financial systems, a monetary model is developed that incorporates interest-free financial institutions and increases the role of the central bank in managing liquidity. The study also proposes policy reforms, then evaluates through a simulated analysis their effectiveness within the current economic system.

The work discusses the important role of depository institutions in Islamic banking. The author first points to debt contracts as a most useful tool of these institutions but affirms that such instruments are risky and contribute to economic instability, especially when a composite of the debt of the country, institutions, and individuals is considered. The writer suggest a fundamental reform in the depository institutions' daily practices but notes that limiting such reform to supervisory and regulatory measures, albeit necessary, is not enough and may be precarious.