Risk sharing and risk shifting: An historical perspective

Abstract

Islam prohibits risk shifting and encourages risk sharing. Consequently, Muslims have developed over the centuries a highly sophisticated know-how of risk sharing partnerships which was the envy of the world. When Europe borrowed this know-how from the 10th century onwards, it entered into the era of “commercial revolution”. 13th century Venice, 19th century Germany and the 20th century United States are the three western cases presented in this article, which demonstrate the dramatic achievements of risk sharing in the West. Thus, the wisdom of the Islamic prohibition is confirmed by these Western examples. The paper then examines how Muslims can re-introduce risk sharing techniques into the modern Islamic finance.