Second Strategic Shariah Roundtable Launch KL Declaration on Risk Sharing in Islamic Finance (By MIFC)

See: http://mifc.com/index.php?ch=menu_know_lib&pg=menu_know_lib_arcs&ac=797

Last Updated : 05 Oct 2012



International Shariah Research Academy for Islamic Finance (ISRA), in collaboration with the Islamic Research and Training Institute (IRTI) of the Islamic Development Bank (IDB) Group and Durham University, UK, launched The Kuala Lumpur Declaration as a result of the proceedings of their Second Strategic Roundtable Discussion, which was held during GIFF 2012.

The Roundtable, which was attended by prominent Shariah scholars, advisories, economists and market players, deliberated at length on the issue of risk-sharing and noted that the financial crisis that started in 2008 highlighted the fact that the most salient feature of the dominant conventional financial system is the transfer of risks away from financial institutions and onto customers, governments and the public at large.

Following introductory remarks by the three hosts - Assoc. Prof. Dr Mohamad Akram Laldin, the Executive Director of ISRA; Prof. Dr. Mohd Azmi Omar, Director General of IRTI; and Prof. Dr. Habib Ahmed of Durham University, the discussion centered primarily on a paper presented by renowned Islamic economist, Prof. Abbas Mirakhor, on “Risk Sharing: The Operational Essence of Islamic Finance”.

This was followed by contributions from three respondents to the paper - Sheikh Nizam Yaquby from Bahrain; Dr Khawla al-Nobani, Managing Partner of Dirayah Islamic Financial Advisory Services, Jordan; and Rafe Haneef, CEO of HSBC Amanah Malaysia.

At the end of the proceedings, the participants issued the Kuala Lumpur Declaration, whereby it was agreed that:

• The Shariah emphasises risk sharing as a salient characteristic of Islamic financial transactions. This is not only exemplified in equity-based contracts such as Musyarakah and Mudarabah, but even in exchange contracts such as sales and leasing, whereby risk is shared by virtue of possession.
• Risk transfer and risk shifting in exchange contracts violate the Shariah principle that liability is inseparable from the right to profit.
• Sales must be genuine transactions in open markets.
• Although the Shariah recognises the permissibility of debt, it is acknowledged that excessive debt has detrimental effects on society.

The Roundtable Discussion also issued several recommendations which included:

• Governments should endeavour to move away from interest-based systems towards enhancing risk-sharing systems towards enhancing risk-sharing systems by leveling the playing fields between equity and debt.
• Accordingly, governments should increase their use of fiscal and monetary policies based on risk sharing.
• Governments could issue macro-market instruments that would provide their Treasuries with a significant source of non-interest rate based financing while promoting risk sharing, provided that these securities met three conditions: i) they are of low denomination; ii) they are sold on the retail market; and iii) they come with strong governance oversight.
• There is a need to broaden the organisational structures beyond traditional banking models to formats such as venture capital and Waqfs to fulfill the social goals and risk-sharing features of Islamic finance.