RISK SHARING IN ISLAMIC FINANCE@Unikl

8/12/2019 RISK SHARING IN ISLAMIC FINANCE@Unikl

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I) Al-Quran :

And he said, "O my sons, do not enter from one gate but enter fromdifferent gates; and I cannot avail you against [the decree of] Allah aThe decision is only for Allah; upon Him I have relied, and upon Him lthose who would rely [indeed] rely."

(Surah Yusuf: Ve

2) Sunnah

(Hadith from Prophet Muhammad S.A.W)

Prophet (peace be upon him) once asked a Bedouin who left his camuntied, Why do you not tie your camel? The Bedouin answered, I ptrust in God. The Prophet PBUH then said, tie up your camel first theyour trust in God.


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According to Ibn Taymiyyahrisk is divided into two types

Commercial risk :

Risk which is normally faced by a traderwho buys goods from producer or supplier

and sells them to the customer.

The goods cannot be sold solely.

Associated with the wealth creationactivities.

Gambling risk:

No additional wealth created

Zero sum games (Maysir)


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Inevitable Risk

Deeds areaccompanied byrisks or risk that

cannot beavoided.

Insignificant

Focuses on thedegree of riskinvolve while

doing good deeds

Unintentiona

Which is focusiof normal

activities onvalue creatio

and not the risrequired.


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All activities andproducts are inconformity withShariah principles.

Recognized as atype of risk whichcan contribute tosignificant losses.


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Risk faced byIslamic

Financial

Institution

EQUITY

INVESTMENT

SHARIAH

NON

COMPLIANCE

PRICE RISK

REAL ESTATE

RATE OF

RETURN

DISPLACED

COMMERCIAL

CREDIT RISK

OPERATIONAL


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Rate ofreturn risk

Equityinvestment

risk

Displacedcommercial

risk and

Reputationrisk (for non-compliancewith Shariahprinciple).


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For example, an Islamic bank may expecto earn 5 percent on its assets, which ipassed on to the investors-depositors.

Islamic banks to offer a higher rates ttheir investors


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Entering into apartnership for the

purpose of undertaking orparticipating in a

particular financing orgeneral business activity

as described in thecontract.

The provider of financeshares in the business

risk.

Considering thatconventional commerc

banks do not invest iequity based assets


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Profit equalization reverses (PER) and Investment risk reserve (IRR).

To manage displaced commercial riskthe Islamic banks create reserves suchas:


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Avoid interest, Gambling, and speculation; steer clear of investing in prohibited indust

Complying withminimum

requirements:

Any product sent to regulators for considera

is, without a doubt, shariah-compliant.

Developing

compliant products

Conducting regular shariah audits to look fopossible noncompliance that may underminfirms reputation

Keeping transactionsand operations in

compliance


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financial instrumentthat derives

its value from thevalue of someunderlying assets

and the product offinancialengineering andinnovation

In hedging purpose :

to mitigate riskssuch as fluctuatin interest rates

movement in shprices, adverseforeign exchangrate changes

and variability icommodity price


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They ask you about wine and gambling. Say, "In them isgreat sin and [yet, some] benefit for people. But their siis greater than their benefit." And they ask you what theshould spend. Say, "The excess [beyond needs]." Thus

Allah makes clear to you the verses [of revelation] thatyou might give thought.

(Surah Al-Baqarah: Verse 21


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Derivatives are usedto separate risksfrom traditionalinstruments and

transfer these risksto parties willing to

bear these risks.The fundamentalrisk involved in

derivative businessincludes:

Credit Risk

This is the risk offailure ofcounterparty toperform itsobligation as perthe contract. Alsoknown as defaultor counterpartyrisk.

Market Risk

Market risk is a riskof financial loss asa result of adversemovements ofprices of theunderlying asset/instrument.

Liquidity

-The inafirm to atransactprevailin

prices li -Relatedof separ

-Relatedfunding of the fiderivativ


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Income must be derived

as profits from sharedbusiness risk rather than

guaranteed return.

Islamic finance canproduce close

equivalents to equity,mortgages, and

derivatives known inconventional finance.

Relies on structuralarrangements of asset

transfer between borrowersand lenders to emulate

traditional interest-bearingfinancial contracts.


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A number of instruments/contracts exist Islamic finance that could be considered a bafor forward/futures contracts within an Islamframework.

Each of these contracts concern deferr

transactions, and would be applicable fdifferent situations. The first and probably tmost relevant of these to modern dforward/futures contracts would be the SalaContract.


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When viewed solely as a promise to buy or sell an asset a

predetermined price within a stipulated period, sharscholars find nothing objectionable with options.

It is in the trading of these promises and the charging premiums that objections are raised.

Options have generally been examined under the fidoctrine of al-khiyarat (contractual stipulations) or undthe bai-al-urbun concept. Urbun being a transaction which a buyer places an initial good faith deposit.


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Barings Singaporereported SIMEX tradelosses of GBP 850

million

In July 1992, Leeson

was instructed to openaccounts for BFSerror.Leeson used the

account for hisunauthorized trading.

End of Septem

1992, on accounof loss of S $million Leeson b

deal in Japangovernment bo

Despite losaccumulated i

account 88888 ,continued to bethe Nikkei indexhope that it w

fall below 19

points in Januar

On February 23, 1995,a senior clerk

placement of theheadquarters of Baringsnoticed discrepanciesin Leeson's account.

Leeson was foundguilty for his action offraud and forgery,he

has been imprisoned bySingapore authoritiesfor six and half year.

Documents

RISK SHARING IN ISLAMIC FINANCE@Unikl