Sacralizing Finance: Risk-Sharing Islamic Finance

Zamir Iqbal and Abbas Mirakhor
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Zamir Iqbal: Islamic Development Bank
Abbas Mirakhor: INCEIF

Chapter Chapter 6 in Ethical Dimensions of Islamic Finance, 2017, pp 135-162 from Palgrave Macmillan

Abstract: Abstract This chapter argues that risk-sharing finance’s features of anti-fragility and a de-leveraged economy would lead to a stable financial system that would lead to just and equitable allocation and distribution of resources in an economy. Risk-sharing finance has the potential to enhance efficiency as each party to contracts has “skin-in-the-game,” thus eliminating or minimizing the principal–agent problem. In doing so, it can minimize monitoring, supervisory, and disciplinary costs, leading to efficiency gains. As a result, participants in a contract of an economic undertaking can choose higher risk–higher return projects and thus increase the efficiency and productivity of the system. Risk sharing can also create a reciprocal and trusting environment that strengthens social cohesion, promotes social mobility, and reduces income inequality without perverse incentive effects and resentments.

Keywords: Islamic Finance; Shared Risk; Property rightsProperty Rights; Financial institutionsFinancial Institutions; Financial sectorFinancial Sector (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:pal:psibcp:978-3-319-66390-6_6

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DOI: 10.1007/978-3-319-66390-6_6

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