CREDIT RISK IN ISLAMIC BANKING AND FINANCE

Mohamed Ali Elgari
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Mohamed Ali Elgari: King Abdulaziz University, Postal: Jeddah, Saudi Arabia

Islamic Economic Studies, 2003, vol. 10-2, 2-25

Abstract: The concept of risk was well known in ancient societies. Even in financial decisions, people knew very well that lending to someone who is bankrupt has a high probability of losing the money as compared to a debtor with good standing. Nevertheless, risk became an important tool of decision-making when it became possible to measure it and to assign values to different situations. This paper argues that the concept of risk mentioned by jurists in their studies on the theory of contract has nothing to do with the concept of risk as known in modern financial studies. Such a distinction is important because when jurists refer to certain "risky" contracts and render them unacceptable from the Shari[ah point of view, some practitioners of Islamic finance take it as referring to risk in the jargon of finance. That is not correct. We should benefit from the great advances in studying risk and risk management techniques in finance. However, we have to develop our own theory that deals with the unique concept of risk from an Islamic perspective. This paper is an attempt in that direction.

Date: 2003
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