Risk-sharing: the sole basis of Islamic finance? It is time for a serious rethink

Hasan, Zubair (2015): Risk-sharing: the sole basis of Islamic finance? It is time for a serious rethink.

Abstract

There has been a disquieting revival of an old precept in Islamic finance - ‘no risk, no gain’- in the wake of the global financial crisis that started with the 2007 sub-prime debacle in the US. The recent proponents of the precept argue that the basic reason for the recurrence of such crises is the interest based conventional system of financing because it subsists solely on transference of risks to counter parties. In contrast, Islam shuns interest and promotes, they say, only the sharing of risks, not their transfer. The distinction is used to make a case for replacing the conventional system with the Islamic; for that alone is thought as the way to ensuring the establishment of a just and stable crisis free economic system. Empirics showing that Islamic banks have faced the current crisis better than the conventional are cited as the supporting evidence. The present paper refutes this line of argumentation and questions its basis and contentions.

• Item Type: MPRA Paper
• Language: English
• Keywords: Key words: Financial crisis; Risk-sharing; Risk-transfer; Islamic banks; ‘No risk, no gain’ precept.
• Subjects: G - Financial Economics > G1 - General Financial Markets; G - Financial Economics > G2 - Financial Institutions and Services; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

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