Conceptual Approach to Identification of Fault lines in Conventional Financial System’s Risk TransferMechanism: A Case for Risk Sharing in Islamic Finance

By Mustapha Abubakar PhD & Kabiru Jinjiri Ringim

Abstract

The concepts, theory and practice of risk sharing as enshrined in Islamic finance remain a real mechanism for widening the space for participation in economic activities for growth and development. The perceived propensity for greater risk sharing derivable benefits, which mutual efforts enjoyed in Islamic finance, is a process of risk transfer in a conventional financial system. Indeed, risk sharing takes center stage in Islamic finance as a catalyst for business inclusion, thus accommodating the poor more in economic activities. Many fault lines have been identified in existing practices in conventional systems, through risk transfer, which voids the essence of its institution as a nebulous structure to fund economic activities. The dysfunctional outing of conventional finance risk transfer mechanism is rarely documented. Hence, the efficacy of Islamic finance risk sharing mechanism that ought to be harnessed has not been adequately brought to the limelight. Consequently, the primary objective of this paper is to present a conceptual discussion on risk, arguments about Islamic risk sharing practice, and fault lines that inherently characterize conventional risk transfer mechanism. The paper argues for a reintroduction and strengthening of other crucial players’relevant activities for such to be harmonized in the interest of the overall financial system stability.