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Sacralizing Finance: Risk-Sharing Islamic Finance

In: Ethical Dimensions of Islamic Finance

Author

Listed:
  • Zamir Iqbal

    (Islamic Development Bank)

  • Abbas Mirakhor

    (INCEIF)

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.

Suggested Citation

  • Zamir Iqbal & Abbas Mirakhor, 2017. "Sacralizing Finance: Risk-Sharing Islamic Finance," Palgrave Studies in Islamic Banking, Finance and Economics, in: Ethical Dimensions of Islamic Finance, chapter 0, pages 135-162, Palgrave Macmillan.
    • Handle: RePEc:pal:psibcp:978-3-319-66390-6_6
    DOI: 10.1007/978-3-319-66390-6_6
    as

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