Islamic ﬁnance is based on ethical principles in line with Islamic religious law. Despite its low
share of the global ﬁnancial market, Islamic ﬁnance has been one of this sector’s fastest growing components over the last decades and has gained further momentum in the wake of the ﬁnancial crisis.
The paper examines the development of and possible prospects for Islamic ﬁnance, with a special focus on Europe. It compares Islamic and conventional ﬁnance, particularly as concerns risks associated with the operations of respective institutions, as well as corporate governance. The paper also analyses empirical evidence comparing Islamic and conventional ﬁnancial institutions with regard to their: (i) efﬁciency and proﬁtability; and (ii) stability and resilience. Finally, the paper considers the conduct of monetary policy in an Islamic banking context. This is not uncomplicated given the fact that interest rates – normally a cornerstone of monetary policy – are prohibited under Islamic ﬁnance. Liquidity management issues are thus discussed here, with particular reference to the euro area.
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