Risk sharing versus risk transfer in islamic finance

Hasan, Zubair (2015): Risk sharing versus risk transfer in islamic finance.

Abstract

Some writers on Islamic finance have recently resuscitated the old ‘no risk, no gain’ precept from the earlier literature in the wake of 2007-2008 financial crisis. They argue that the basic reason for the recurrence of such crises is the conventional interest-based financial system that subsists purely on transferring of risks. In contrast, Islam shuns interest and promotes 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 financial system. Islamic banks have faced the current crisis better than the conventional is cited as evidence. The present paper is a critique of this line of thought. It argues that risk-sharing is not basic to Islam. It encourages profit sharing of which sharing of risk is a consequence not the cause. The paper concludes that the case is for reform, not for replacement, of the current debt dominated system marked with duality.

• Item Type: MPRA Paper
• Language: English
• Keywords: Financial crisis; Risk-Sharing; Risk-Transfer; Islamic Banking; KL Declaration
• Subjects: N - Economic History > N0 - General; N - Economic History > N2 - Financial Markets and Institutions > N20 - General, International, or Comparative

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