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Introducing Islamic Banks into Conventional Banking Systems

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The paper focuses on the process by which Islamic retail banking is implanted in traditional financial systems. Drawing from the experience of several countries which have introduced Islamic banking over a period of time, the paper delineates the main phases of the process, with the intention of underscoring the main challenges faced by supervisors and practitioners at each stage. It also discusses some of the main elements required to build a supporting financial infrastructure that conforms to Islamic principles.

The sequence of steps to introduce Islamic banks that is discussed below should not be seen as a rigid template from which countries may not deviate. Such a rigid scheme would hardly be realistic, as countries’ specific circumstances will vary substantially in practice. Instead, the goal is simply to discuss a series of stepping stones in the road to introducing Islamic banks, while simultaneously flagging some of the main issues that, sooner or later, are likely to arise as this industry develops. In this sense, the stages below should not be viewed as strictly sequential, but rather as overlapping layers of the same process.

The paper is structured as follows: Section II discusses some preliminaries with which the authorities should be familiar before introducing Islamic banks; Section III explains the different phases in the development of Islamic banking; Section IV discusses the role that the supervisory authority should play in this process; Section V explains the different elements that are needed to build a supporting Islamic financial infrastructure; finally, Section VI concludes.

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