The Regulation of Systemic Risk in Conventional and Islamic Finance

The thesis's main contribution is in the comparative analysis drawn between conventional and Islamic finance, which comprises the examination of different post-crisis regulations and policies that have been established to address four possible sources of systemic risk: bank runs, real estate bubbles, Systemically Important Financial Institutions (SIFIs) and shadow banking. The central objectives of this research are to identify the gaps in current Islamic regulatory approaches to address the possible systemic risk sources and, accordingly, to suggest improvements to Islamic regulations and policymaking in relation to how best to address these sources.

The research findings show that the Islamic financial system, similar to the situation in conventional finance, is prone to systemic risk insofar as they are both susceptible to three of the four proposed possible sources of systemic risk. This raises questions in regard to whether conventional approaches would be of any benefit to addressing this susceptibility in the Islamic system. Nonetheless, the Islamic system faces a further challenge that needs attention. The issue of Shari'ah non-compliance risk is an exclusive issue that could cause disruptions to the system if not addressed effectively. Hence, when addressing bank runs, real estate bubbles and SIFIs, Islamic regulators should ensure that their proposed regulations and policies are Shari'ah-compliant in the first place. If the regulatory responses to the possible sources of systemic risk are not Shari'ah-compliant, as some of the conventional post-crisis approaches have already proved to be, the Islamic system would remain exposed to systemic risk. Accordingly, this thesis intends to produce a list of recommendations for Islamic regulators to best attend to those possible sources of systemic risk, without violating Shari'ah law.