Risk sharing and shared prosperity in Islamic finance

Abstract EN

This paper argues that risk sharing is an effective method of expanding participation of agents in economic growth and development and more effective sharing of fruits of prosperity than risk transfer that currently dominates financial systems.

Kuala Lumpur Declaration of 2012, by a group of leading Sharī‘ah scholars and Muslim economists, considers risk sharing as the essence of Islamic finance, a litmus test of which is its ability to promote financial inclusion and asset-building capacity of the poor and thus better sharing of prosperity.

The mobilisation of financial resources toward productive activities through risk sharing enables the Islamic financial system to actualize economic justice and social participation in an efficient manner.

The asset-backed equity-financing nature of Islamic finance is conducive to financial system stability because returns, which can only be known ex post, and thus shared on the same basis, are not divorced from risk.