The GCC has a mixed conventional and Islamic financial system in which overall development prospects and potential cross-country integration can be affected by intrinsic differences in the structure and operations of conventional versus Islamic finance. This paper explores characteristics of Islamic finance that might tend to partially isolate it from the general financial system with consequences for overall financial integration prospects and financial stability, potentially resulting in partial bifurcation of the financial system. The differences can be seen to impair overall financial development prospects, complicate monetary policy options, and possibly hinder cross-country economic integration if the GCC monetary union project reactivates. The paper enumerates several areas where special actions might be needed to more effectively integrate Islamic finance into national and regional financial systems. It is recommended that separate “Working Group on Islamic Finance” with a macroeconomic and policy orientation be set up covering treatment of Islamic finance within the GCC regional setting and to strengthen Islamic finance growth, soundness, and public benefit.
B590, E02, E42, F02, F36, G29, G21, G29, O11, O53, P400
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