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Value Preservation through Risk Management - A Shariah Compliant Proposal for Equity Risk Management

Author

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  • Bacha, Obiyathulla I.

Abstract

This paper makes a case for the preservation of Muslim Wealth through risk management. It provides an exposition of risk management techniques used in conventional finance and outlines the limitations faced by Muslim fund managers and businesses. This limitation arises from the proscription of key risk-management tools, in particular financial derivatives. Though the reasons for the prohibition are diverse, the overriding concern appears to be that they encourage speculative behaviour. As such the emphasis of Islamic risk management has been on, On Balance Sheet methods. The problem with On Balance Sheet methods is that they require the restructuring of business transactions which can render businesses less competitive and subject to residual risk. The paper proposes a portfolio insurance scheme that uses the logic and mechanics of conventional Index Put Options but in a Shariah compliant manner. The proposal is intended to strike a balance between the need to avoid speculation and the genuine need for hedging equity risks.

Suggested Citation

  • Bacha, Obiyathulla I., 2004. "Value Preservation through Risk Management - A Shariah Compliant Proposal for Equity Risk Management," MPRA Paper 12632, University Library of Munich, Germany, revised Apr 2003.
    • Handle: RePEc:pra:mprapa:12632
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    File URL: https://mpra.ub.uni-muenchen.de/12632/1/MPRA_paper_12632.pdf
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    References listed on IDEAS

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    1. International Monetary Fund, 2002. "Islamic Financial Institutions and Products in the Global Financial System: Key Issues in Risk Management and Challenges Ahead," IMF Working Papers 2002/192, International Monetary Fund.
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    Cited by:

    1. Bengana, Mohamed & Khouildi, Mohamed Yassine, 2018. "Options: From Conventional and Islamic perspectives Analyses on the Islamic solutions," MPRA Paper 84499, University Library of Munich, Germany.
    2. Mustapha, Ishaq Muhammad & Masih, Mansur, 2017. "Dynamics of islamic stock market returns and exchange rate movements in the ASEAN Countries in a regime-switching environment: Implications for the islamic investors and risk hedgers," MPRA Paper 82218, University Library of Munich, Germany.
    3. Syed Adeel Hussain, 2013. "Differentiation of Market Risk Characteristics among Sharia Compliant and Conventional Equities listed on the Pakistani Capital Market - KSE 100 Index over a selective time period," 2013 Papers phu395, Job Market Papers.

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    More about this item

    Keywords

    Shariah compliant; equity risk management;

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D69 - Microeconomics - - Welfare Economics - - - Other
    • A10 - General Economics and Teaching - - General Economics - - - General

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