Risk Sharing In Finance The Islamic Finance Alternative

The financial crisis of 2008 has motivated a number of academics, practitioners and policymakers to question the fundamental stability of the conventional financial system, a system predominantly based on debt financing and leveraging; with the embedded risk that the temptation of leveraging could become excessive, and this combined with the inherent asset-liability mismatch threatens the solvency of financial institutions and overall financial stability. An alternative to the conventional financial system is a system with no debt financing, only equity or direct asset financing; where there would be no "risk shifting" as happens with debt, only "risk sharing" as happens with equity or asset-financing. Financial institutions would be serving their traditional role as intermediaries between savers and investors but with no debt on their balance sheets, no opportunity to engage in leveraging and no predetermined interest rate payments as liabilities. Such a system has been suggested by a number of noted conventional economists over the last hundred years and it is the system whose basic principles have been advocated by Islam and to some extent by other Abrahamic religions. While a n