RISK SHARING: AN ALTERNATIVE TO INTEREST-BASED DEBT FINANCING

Risk sharing―the essence of Islamic finance―appears to have all the desirable characteristics that would make it the basis of an ‘antifragile’ and resilient economic order. Its epistemological roots are discernible from Verse 275 of Chapter 2 of the Qur’an. The verse, in part, allows exchange (al-bayʿ) and prohibits interest (al-ribā). Exchange requires risk sharing because it entails exchange of property rights’ titles between contracting parties. Financing based on interestrate debt does not allow the exchange of the creditor’s property rights to the debtor with respect to the amount loaned; the creditor retains the property rights on the money. Taken together, allowing exchange and prohibiting interest constitute the organizing principle of Islamic finance.