Risk Sharing in Finance: The Islamic Finance Alternative with its alternative perspective on a financial system design to mitigate future financial crises could not have been better timed. We are still suffering from the perplexing 2008–2009 financial crisis of banking and credit risk, which has had a devastating impact on the United States, United Kingdom and Europe. In contrast to many proposed solutions, which have never been tested, this one draws on the considerable experience from the Islamic financial risk–sharing system. Whether prime researcher, experienced public policy maker or seasoned private–sector practitioner, the reader will find this a thought–provoking approach to address fundamental financial reform.
Robert C. Merton
Nobel Laureate in Economics, 1997
The School of Management Distinguished Professor of Finance at the MIT Sloan School of Management and University Professor Emeritus at Harvard University
Risk Sharing in Finance: The Islamic Finance Alternative portrays how finance should ideally be done in the Islamic world. An array of different forms of equity contract substitutes for debt. The authors give a new perspective on fundamental reform of our financial system, as they also give us a vision of a future, in which financial crises are very much muted, or, like smallpox, have become a scourge of the past.
Nobel Laureate in Economics, 2001
Koshland Professor of Economics, University of California at Berkeley
The recent financial crisis has highlighted the risks of excessive debt and leverage. Could a fully equity–based financial system offer a superior alternative? This thoughtful and provocative book argues that it would. Essential reading for those who want to understand how a completely Islamized financial system might work in practice.
Sir Andrew Crockett
Vice Chairman of JPMorgan Chase International; Member, The Group of Thirty; and Former Head of the Bank for International Settlement (BIS)
This is a beautifully written, crystal clear, and tremendously insightful book about what ails our financial system and how key features of Islamic finance could help. Every student of finance can and should learn from this financial gem.
Laurence J. Kotlikoff
Author, Jimmy Stewart Is Dead
William Warren Fairfield Professor of Economics, Boston University
PART ONE THE HISTORY AND CAUSES OF FINANCIAL CRISES
CHAPTER 1 A Brief History of Financial Crises and Proposed Reforms 3
CHAPTER 2 Financialization and the Decoupling–Recoupling Hypotheses 31
PART TWO RISK SHARING AND THE ISLAMIC PARADIGM
CHAPTER 3 A Brief History of Risk–Sharing Finance 49
CHAPTER 4 Risk Sharing and the Islamic Finance Paradigm 69
CHAPTER 5 Risk Sharing in the Islamic Financial System: The Building Blocks 95
CHAPTER 6 Risk Sharing and Vibrant Capital Markets in Islamic Finance 115
CHAPTER 7 Portfolio Theory and Asset Pricing 133
CHAPTER 8 Complementary Role of Intermediaries and Markets in Promoting Risk Sharing 159
PART THREE MOVING FORWARD
CHAPTER 9 Enhanced Access to Finance, Social Welfare, and Economic Development under a Risk–Sharing System 181
CHAPTER 10 The Role of Institutions and Governance in Risk Sharing 201
CHAPTER 11 Gaps between the Theory and Practice of Islamic Finance 225
CHAPTER 12 Concluding Remarks 247