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Risk-sharing: the sole basis of Islamic finance? It is time for a serious rethink

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  • Hasan, Zubair

Abstract

There has been a disquieting revival of an old precept in Islamic finance - ‘no risk, no gain’- in the wake of the global financial crisis that started with the 2007 sub-prime debacle in the US. The recent proponents of the precept argue that the basic reason for the recurrence of such crises is the interest based conventional system of financing because it subsists solely on transference of risks to counter parties. In contrast, Islam shuns interest and promotes, they say, only the 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 economic system. Empirics showing that Islamic banks have faced the current crisis better than the conventional are cited as the supporting evidence. The present paper refutes this line of argumentation and questions its basis and contentions.

Suggested Citation

  • Hasan, Zubair, 2015. "Risk-sharing: the sole basis of Islamic finance? It is time for a serious rethink," MPRA Paper 66895, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:66895
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    References listed on IDEAS

    as
    1. Zubair Hasan, 1983. "Theory of Profit: The Islamic Viewpoint نظرية الربح: وجهة النظر الإسلامية," Journal of Research in Islamic Economics, King Abdulaziz University, Islamic Economics Institute., vol. 1(1), pages 3-14, January.
    2. Jared Rubin, 2011. "Institutions, the Rise of Commerce and the Persistence of Laws: Interest Restrictions in Islam and Christianity," Economic Journal, Royal Economic Society, vol. 121(557), pages 1310-1339, December.
    3. Hasan, Zubair, 2005. "Islamic banking at the crossroads: theory versus practice," MPRA Paper 2821, University Library of Munich, Germany.
    4. Nabi, Mahmoud Sami, 1437. "Access to Finance and Investment: Does Profit Sharing Dominate Debt?," Working Papers 0000-0, The Islamic Research and Teaching Institute (IRTI).
    5. Wagner, Alfred, 1891. "Marshall's Principles of Economics," History of Economic Thought Articles, McMaster University Archive for the History of Economic Thought, vol. 5, pages 319-338.
    6. Hossein Askari & Abbas Mirakhor, 2014. "Risk sharing, public policy and the contribution of Islamic finance," PSL Quarterly Review, Economia civile, vol. 67(271), pages 345-379.
    7. Hasan, Zubair, 1983. "Profit Theory: the Islamic viewpoint," MPRA Paper 3012, University Library of Munich, Germany.
    8. Muhammad Umer Chapra, 2014. "Morality and Justice in Islamic Economics and Finance," Books, Edward Elgar Publishing, number 15817.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Key words: Financial crisis; Risk-sharing; Risk-transfer; Islamic banks; ‘No risk; no gain’ precept.;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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