Theoretical Framework and Essence of Effective Regulation of Islamic Banking System
Banks in distress present a threat to orderliness and stability in financial markets due to the risk of “contagion” whereby if one financial institution fails; the sustainability of others is also threatened. In order to reduce bank failure to minimum bearable level the attention of the regulatory authority to effective regulation and supervision is being called for. Therefore, this paper tries to examine the theoretical framework and the essence of proper and effective regulation and supervision of Islamic financial system. The paper is both descriptive and explorative in nature employs qualitative research methodology. The study will have policy implication to Central Banks around the world in formulating and implementing effective legal, regulation and supervision for Islamic financial system. This will not only help in preventing distress or failure in banking industry but also serve as a developmental vehicle to push Islamic financial system to a higher level. It will also serve as a source of reference for the academicians, students and practitioners.
Keywords: Theoretical framework, Regulation and supervision, Islamic banking and financial system, Distress/failure.
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