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Islam proposes the replacement of an interest-based financial system with one which operates on the basis of risk and profit sharing. Using a general equilibrium model, this paper investigates some open-economy implications of the adoption of Islamic banking for growth and stabilization of the economy. It analyzes the long-run effects of Islamic banking on international capital flows and on the economy’s capacity to adjust to disturbances. It concludes that monetary policy can be used effectively for stabilization purposes and that disturbances to asset positions are absorbed efficiently in an Islamic financial system.

Balance of payments --- Banking --- Banks and Banking --- Banks and banking --- Banks --- Commercial banks --- Current Account Adjustment --- Current account deficits --- Depository Institutions --- Exports and Imports --- Financial Economics --- Financial Instruments --- Institutional Investors --- International economics --- Investment & securities --- Investments: Stocks --- Islamic Banking and Finance --- Islamic banking --- Islamic countries --- Micro Finance Institutions --- Mortgages --- Non-bank Financial Institutions --- Other Economic Systems: Public Economics --- Pension Funds --- Short-term Capital Movements --- Stocks