Applying Risk-Taking in Islamic Banking and Finance from the Perspective of Islamic Jurisprudence

Abstract

Islamic financial Institutions are expected to take considerable business risks when earning from their financial dealings. The objective of this study is to clarify the concept of risk in Islamic commercial financial transactions from the fiqhi (or Islamic Jurisprudence) perspective and analytically evaluate the selected three issues having place in the practice of Islamic finance based on the concept of risk taking maintained by Islamic fiqh. This is desk-based research where data has been collected from various sources such as classical fiqh books, regulators’ policy documents and guidelines, and journal articles. This study employed mixed methods of literature review and qualitative content analysis to analyze the data critically in search of assertive findings. The study revealed the issues relating to risk-taking behaviour of Islamic financial institutions (IFIs) as, amongst others, charging the cost of the fund on defaulting customers, holding the lessee liable for the total loss of leased assets under Ijārah Thumma al-Bay’(AITAB) and capital guarantee under Mushārakah based instruments. This study suggests that Institutions facilitating Islamic financial instruments shall have to evaluate the business risk based on their subjects namely (i) property (māl) and (ii) work (ʿamal) in ensuring the fulfilment of Shariah principles and expected risk-taking concept embedded in contracts or instruments without diverting them. Analysis of the selected cases in this research identified that when risk-taking principle is breached, the prohibited elements, such as Ribā, Gharar and Maysir, do arise and that they impede the realization of the Maqāṣid al-Shariah intended for Islamic financial contracts. This research would allow the Shariah scholars and legal authorities in the Islamic financial industry to extend their knowledge on issues in the practice of Islamic finance pertaining to risk-taking behaviours that are expected by the IFIs.