The Global Financial Crisis, Risk Management and Social Justice in Islamic Finance

Abstract

The most salient values of the Islamic financial system are fairness and socio-economic justice. The exuberance of Islam’s uncompromising commitment to the well-being of humankind goes beyond its caring for existing generations to ensuring a sustainable future for generations to come. This is evident by giving utmost priority to the environment and preserving earth’s valuable–yet limited–endowments and resources, and by limiting public borrowings to available resources hence freeing future generations from the burden of debt. The Islamic system of production and finance based on profit-and-loss sharing (PLS) is more efficient and equitable in distribution of wealth and income. Allocation of funds under risk sharing will be based on the viability and expected profitability of the proposed entrepreneurial undertakings rather than on the creditworthiness of competing entrepreneurs. Furthermore, risk sharing offers both entrepreneurs and investors incentives to be truly engaged in productive economic activities, wherein entrepreneurs will be encouraged by the prospect of seeing their ideas transformed into business entities, and financers will be obliged to assess the risk involved more cautiously, and effectively monitor the use of funds by the entrepreneurs. The appropriate implementation of such partnership contracts increases the likelihood of business success, injects more discipline into the financial market by reducing excessive lending, and ultimately will have positive implications for the socio-economic well-being of society at large.