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

Listed author(s):
  • Bacha, Obiyathulla I.

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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 12632.

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Date of creation: 2004
Date of revision: Apr 2003
Publication status: Published in The European Journal Of Management And Public Policy 1.3(2004): pp. 65-83
Handle: RePEc:pra:mprapa:12632
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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 02/192, International Monetary Fund.
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