Epistemological Foundation of Finance: Islamic and Conventional

Mirakhor, Abbas; Smolo, Edib

doi:10.32350/ibfr.2014.01.01

Cited by 11 publications

(17 citation statements)

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“…Yet the remedy that Islamic finance offered in response to seemingly recurrent crises was not only framed in moral and theological terms. Islamic finance experts asserted a technical justification for Islamic finance that emphasized the superiority of economic arrangements premised on partnership and investment, rather than interest‐based lending (Mirakhor and Bao 2013). What became known as the 2008 financial crisis was largely interpreted in Malaysia and in the United States as the outcome of a surfeit of debt (Mian and Sufi 2014).…”

Section: Crisis Twomentioning

confidence: 99%

Crisis Effects

Rudnyckyj¹

2018

Cult. Anthropol.

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Section: Crisis Twomentioning

confidence: 99%

Crisis Effects

Rudnyckyj¹

2018

Cult. Anthropol.

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“…Also, sukuk operates in a way that shares the risk and the rewards; no one has the opportunity to take advantage of another when sharing is imposed. Along with this requirement for sukuk to offer a fair investment process, this feature strikes a bargain as well for better sustainability in the global economy (Mirakhor, 2011), in contrast to the global financial crisis in 2008, when debt through bonds encouraged wealth to be stolen, risk to be shifted, one to take advantage of another, a feeding frenzy of greedy and irresponsible behaviour that ultimately caused a massive economic collapse, as explained later in this paper. Although sukuk may be considered a safe instrument to better promote sustainability, this Islamic-guided instrument also faces a few issues such as that of imitative sukuk, which has convergence value with bonds (Kamil et al, 2010;Mirakhor, 1987).…”

Section: Introductionmentioning

confidence: 97%

“…The years leading up to the financial crisis of 2008 saw a time when major risk was shifted from equity holders to debtholders with an eye to expanding the formers' wealth at debtholders' expense (Brunnermeier and Oehmke, 2012). During that time, risk shifting was prominently featured in the subprime mortgage crisis, when risk was shifted from homeowners to small lenders, investment banks and investorsand ultimately, taxpayers (Mirakhor, 2011). Recurring financial crises have fostered efforts among regulators to overhaul financial systems to reduce their fragility.…”

Section: Introductionmentioning

confidence: 99%

Risk shifting elimination and risk sharing exposure in equity-based financing – a theoretical exposition

Hamzah

Ishak

Rasedee

2018

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Purpose The purpose of this paper is to examine incentives for risk shifting in debt- and equity-based contracts based on the critiques of the similarities between sukuk and bonds. Design/methodology/approach This paper uses a theoretical and mathematical model to investigate whether incentives for risk taking exist in: debt contracts; and equity contracts. Findings Based on this theoretical model, it argues that risk shifting behaviour exists in debt contracts only because debt naturally gives rise to risk shifting behaviour when the transaction takes place. In contrast, equity contracts, by their very nature, involve sharing transactional risk and returns and are thus thought to make risk shifting behaviour undesirable. Nonetheless, previous researchers have found that equity-based financing also might carry risk shifting incentives. Even so, this paper argues that the amount of capital provided and the underlying assets must be considered, especially in the event of default. Through mathematical modelling, this element of equity financing can make risk shifting unattractive, thus making equity financing more distinct than debt financing. Research limitations/implications Global awareness of the dangers of debt should be increased as a means of reducing the amount of debt outstanding globally. Although some regulators suggest that sukuk replaces debt, they must also be aware that imitative sukuk poses the same threat to efforts to avoid debt. In short, efforts to ensure future financial stability cannot address only debts or bonds but must also address those types of sukuk that mirrors bonds in their operation. In the wake of the global financial crisis, amid the frantic search for ways of protecting against future financial shocks, this analysis aims to help create future stability by encouraging market players to avoid debt-based activities and promoting equity-based instruments. Practical implications This paper’s findings are relevant for countries that feature more than one type of financial market (e.g. Islamic and conventional) because risk shifting behaviour can degrade economic and financial stability. Originality/value This paper differs from the previous literature in two important ways, viewing risk shifting behaviour not only in relation to debt or bonds but also when set against debt-based sukuk, which has been subjected to similar criticism. Indeed, to the extent that debts and bonds encourage risk shifting behaviour and threaten the entire financial system, so, too, can imitation sukuk or debt-based sukuk. Second, this paper is unique in exploring the ability of equity features to curb equityholders’ incentive to engage in risk shifting behaviour. Such an examination is necessary for the wake of the global financial crisis, for researchers and economists now agree that risk shifting must be controlled.

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“…In an environment where the whole economic system is based on interest, it is very difficult and challenging task. However, risk sharing which is the base of Islamic financial system has appeared as a substitute to conventional financial system of risk transfer in the era of black swans, difficulties and complications, for a multipolar world (El Tiby, 2011;Mirakhor & Smolo, 2014;Shaukat & Mirakhor, 2017).…”

Section: Introductionmentioning

confidence: 99%

“…Islam is a rules-based system in which a setup of recommended procedures, regulations and principles directs the social, economic, political and legal structure of the society. Compliance with these principles and regulations renders the society a combination of collective support by demanding individuals to share the risks in life (Mirakhor & Smolo, 2014). The main objective of Islamic finance is to form a stable financial system which fulfils the requirements of the consumers, institutions and the state; assists the real economy; and leads to equitable dissemination of wealth in the economy by evading prohibited (h .…”

Section: Introductionmentioning

confidence: 99%