Foundations of Islamic Finance series
Edited by Mervyn K. Lewis, Mohamed Ariff and Shamsher Mohamad
Chapter 6: Foundations of risk-sharing finance: an Islamic view
Before the inception of the Islamic Finance Industry (IFI), there was what could be called a ‘market failure’ in the conventional system: significant unmet demand for Shari’ah-compliant financial products. IFI grew out of conventional finance to meet this demand. Muslim scholars writing since the 1970s emphasized that Islamic finance was about risk-sharing (or profit/loss-sharing) contracts (see Siddiqi, 1985). Practitioners grounded in conventional finance, however, were interested in developing ways and means of finance that, while Shari’ah-compliant, were familiar to and accepted by market players in conventional finance. Scholars emphasized risk-sharing while practitioners focused on traditional methods of conventional finance based on risk transfer and risk shifting. In doing so, financial instruments of conventional finance were replicated, reverse engineered or retrofitted for Shari’ah compatibility, a somewhat regrettable process.
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