Islamic finance and the concept of profit and risk sharing

Abstract

This paper introduces Islamic partnership structures as an alternative to conventional debt contracts. It specifically addresses the situation of entrepreneurs seeking funding from banks. The Islamic principle of profit and risk sharing, emphasised in Islamic partnership structures, is discussed in detail as it replaces the phenomenon of risk transfer present in most conventional financial and banking products. This paper explores two of the commonly used Islamic partnership structures; the Mudarabah and Musharakah structures. The paper explains how these structures benefit the financiers as well as entrepreneurs as both parties share in the risks and profits of the enterprise and hence both their interests are aligned. In addition to the financial and economic impacts of the principle of profit and risk sharing, the paper explores its important role in achieving socio-economic justice