Modern Islamic finance came into existence shortly before a sweeping movement of deregulation transformed the landscape of global finance. In the early years of modern Islamic banking ambitious regulatory schemes were devised. There was talk of an Islamic Central Bank, of a global zakat fund, and of other ambitious collaborative schemes. Scholars worked on an Islamic approach to bank regulation. Most of these ideas were never put into practice, as they were simply overtaken by events. In the era of deregulation, national regulators gradually lost the margin of maneuver they once enjoyed. Most of the norms and practices of financial regulation were established internationally, with little input from regulators outside the industrial world.

Although Islamic banks have thrived in the global economy, their compliance with many of the new norms has sometimes been problematic. Increasingly, however, in recent years and in particular since the creation in 2002 of the IFSB, Islamic regulators have been coordinating their policies with other international financial regulators. Although the global financial collapse of 2008 set in motion attempts to re-regulate global finance, the outlines of such global re-regulation are not, as this book goes to press, yet clear.

Financial Regulation

Financial regulators must perform a number of tasks: ensuring that the financial sector is safe and sound; mobilizing savings by channeling them toward the most productive uses; and devising an efficient conduit for payments around the economy. Before the disruptions of the 1970s, regulators performed a mostly technical task outside the political limelight. In recent years, however, virtually every country, including those with well-established regulatory authorities and traditions has been rocked by banking crises. The near-collapse of the global financial system in 2008 is likely to cost, according to the projections of the IMF, $4.1 trillion.