Risk sharing versus risk transfer in Islamic finance: revised

Zubair Hasan

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Financial crisis; Risk-Sharing; Risk-Transfer; Islamic Banking; KL Declaration (search for similar items in EconPapers)
JEL-codes: B0 G2 G21 G3 (search for similar items in EconPapers)
Date: 2014-09, Revised 2015-03
New Economics Papers: this item is included in nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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