Antifragility of Islamic Finance: The Risk-Sharing Alternative PDF
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1 FINANCE, FINTECH, AND CROWDFUNDING IN ISLAM Antifragility of Islamic Finance: The Risk-Sharing Alternative explains M how risk-sharing, as defined under Islamic finance, makes financial I systems antifragile. It highlights the benefits of 100% equity-based RR finance over debt-based finance. AA The recent financial crisis has given rise to discussions on a new KF approach to risk management called antifragility. This concept spec- HI & O ifies conditions under which systems become resilient to shocks R caused by Black Swans—highly unpredictable outlier events that have a major negative (or positive) consequence when they occur, with their occurrence only explained retrospectively. Per this concept, the long-term survivability of any system centers exclusively on its anti- A fragile nature, that is, its ability to absorb and even benefit from Black Antifragility Swan–type shocks. This book aims to investigate risk-sharing Islamic n finance as an antifragile system. t As a by-product of the Great Recession, the problems of debt- i based financial systems are starting to be highlighted by industry f r and by academia. The antifragile solution for avoiding future financial a crises is primarily centered on moving the existing financial system towards more equity and less debt, thereby introducing skin-in-the- g game into financial transactions. This book introduces a model of a i of Islamic 100% equity-based financial system, centered on risk sharing, as a l i possible alternative to the contemporary debt-based, conventional t financial system, which is based on risk transfer and on risk shifting. In y essence, this book attempts to provide a practical model for an anti- fragile financial system by evaluating the characteristics of Islamic o finance under the criteria of antifragility. f I Finance Umar Rafi specializes in the field of information technology in the s financial services domain. He is currently working as a computer sci- l a entist in Silicon Valley. He has a BS in mathematics from the United States Air Force Academy, an MS in computer science from Wichita m State University, and a PhD in Islamic finance from the International Centre for Education in Islamic Finance (INCEIF). i c Abbas Mirakhor joined INCEIF in 2010 as Distinguished Scholar and F the first holder of INCEIF’s chair in Islamic finance. His research inter- ests include conventional and Islamic economics and finance. Prior i n to joining INCEIF, he spent 24 years with the International Monetary Fund, serving as executive director and dean of the executive board. a He is a graduate of Kansas State University, where he received his n Bachelor, Master, and PhD degrees in Economics. The Risk-Sharing Alternative c e www.peterlang.com P E T E R L A N G FINANCE, FINTECH, AND UMAR RAFI ABBAS MIRAKHOR CROWDFUNDING and IN ISLAM 1 FINANCE, FINTECH, AND CROWDFUNDING IN ISLAM Antifragility of Islamic Finance: The Risk-Sharing Alternative explains M how risk-sharing, as defined under Islamic finance, makes financial I systems antifragile. It highlights the benefits of 100% equity-based RR finance over debt-based finance. AA The recent financial crisis has given rise to discussions on a new KF approach to risk management called antifragility. This concept spec- HI & O ifies conditions under which systems become resilient to shocks R caused by Black Swans—highly unpredictable outlier events that have a major negative (or positive) consequence when they occur, with their occurrence only explained retrospectively. Per this concept, the long-term survivability of any system centers exclusively on its anti- A fragile nature, that is, its ability to absorb and even benefit from Black Antifragility Swan–type shocks. This book aims to investigate risk-sharing Islamic n finance as an antifragile system. t As a by-product of the Great Recession, the problems of debt- i based financial systems are starting to be highlighted by industry f r and by academia. The antifragile solution for avoiding future financial a crises is primarily centered on moving the existing financial system towards more equity and less debt, thereby introducing skin-in-the- g game into financial transactions. This book introduces a model of a i of Islamic 100% equity-based financial system, centered on risk sharing, as a l i possible alternative to the contemporary debt-based, conventional t financial system, which is based on risk transfer and on risk shifting. In y essence, this book attempts to provide a practical model for an anti- fragile financial system by evaluating the characteristics of Islamic o finance under the criteria of antifragility. f I Finance Umar Rafi specializes in the field of information technology in the s financial services domain. He is currently working as a computer sci- l a entist in Silicon Valley. He has a BS in mathematics from the United States Air Force Academy, an MS in computer science from Wichita m State University, and a PhD in Islamic finance from the International Centre for Education in Islamic Finance (INCEIF). i c Abbas Mirakhor joined INCEIF in 2010 as Distinguished Scholar and F the first holder of INCEIF’s chair in Islamic finance. His research inter- ests include conventional and Islamic economics and finance. Prior i n to joining INCEIF, he spent 24 years with the International Monetary Fund, serving as executive director and dean of the executive board. a He is a graduate of Kansas State University, where he received his n Bachelor, Master, and PhD degrees in Economics. The Risk-Sharing Alternative c e www.peterlang.com P E T E R L A N G FINANCE, FINTECH, AND UMAR RAFI ABBAS MIRAKHOR CROWDFUNDING and IN ISLAM ADVANCE PRAISE FOR Antifragility of Islamic Finance “Ten years after the 2007 global financial crisis and 20 years after the Asian financial crisis, you would have thought that mainstream economics would have been discredited for its failure to predict and offer credible solutions for radical uncertainty and fragile financial systems. Umar Rafi and Abbas Mirakhor’s book Antifragility of Islamic Finance: The Risk-Sharing Alternative offers a rare and revolutionary position that the equity and risk-sharing nature of Islamic finance is more robust, resilient, and antifragile than conventional debt finance, which has become concentrated, fragile, and unmanageable. The authors succinctly map the original work of Mandelbrot, Nassim Taleb, and Kahneman into the basic philosophy of Islamic finance. I commend this book as a fundamental building block for the foundations of Islamic finance as mainstream finance.” —Tan Sri Andrew Sheng, distinguished fellow at the Asia Global Institute, University of Hong Kong, and chief advisor to the China Banking Regulatory Commission. “This is a must-read book for practitioners and policy makers contemplating a truly sound business model for Islamic finance. The book articulates well the superiority of risk-sharing based finance in comparison to debt-based finance by cleverly drawing the parallels of risk- sharing and antifragility (a new concept introduced by Nassim Nicholas Taleb). Its arrival is indeed timely to alleviate any remaining scepticism on the viability of risk-sharing finance as the model for the next generation of Islamic finance. Readers will appreciate the insightful analysis on the gaps of presently used statistical modelling, which if treated as a ‘black box’ could adversely influence financial and policy decision-making.” —Siti Muawanah Lajis, Islamic Banking and Takaful Department, Bank Negara Malaysia “The recent Great Recession has revealed a dramatic lack of resiliency of the current economic and financial system. Umar Rafi and Abbas Mirakhor have carried out an excellent in-depth analysis of the quantitative and qualitative underlying factors leading to the Great Recession, concluding with a deep insight on why and how to prevent and/or prepare for another one. They offer a unique transformational solution based on the disruptive concept of antifragility, which is gaining wide attention in the economic and financial community. This is a must-read book for anyone interested in evaluating and constructing an alternate financial and economic system, based on 100% equity that will offer more resiliency, to the current debt-based financial system that is extremely fragile.” —Ken Tachibana, managing principal, Intelligence Capital Antifragility of Islamic Finance FINANCE, FINTECH, AND CROWDFUNDING IN ISLAM Hossein Askari and Dariush Zahedi Series Editors Vol. 1 The Finance, FinTech, and Crowdfunding in Islam series is part of the Peter Lang Politics and Economics list. Every volume is peer reviewed and meets the highest quality standards for content and production. PETER LANG New York Bern Frankfurt Berlin Brussels Vienna Oxford Warsaw Umar Rafi and Abbas Mirakhor Antifragility of Islamic Finance The Risk-Sharing Alternative PETER LANG New York Bern Frankfurt Berlin Brussels Vienna Oxford Warsaw Library of Congress Cataloging-in-Publication Data Names: Rafi, Umar, author. | Mirakhor, Abbas, author. Title: Antifragility of Islamic finance: the risk-sharing alternative / Umar Rafi and Abbas Mirakhor. Description: New York: Peter Lang, 2018. Series: Finance, fintech and crowdfunding in Islam; vol. 1 ISSN 2572-7435 (print) | ISSN 2572-7443 (online) Includes bibliographical references and index. Identifiers: LCCN 2017023482 | ISBN 978-1-4331-4350-2 (hardcover: alk. paper) ISBN 978-1-4331-4347-2 (ebook pdf) | ISBN 978-1-4331-4348-9 (epub) ISBN 978-1-4331-4349-6 (mobi) Subjects: LCSH: Finance—Islamic countries. | Finance—Religious aspects—Islam. Finance (Islamic law) | Risk management. Classification: LCC HG187.4 .R34 2018 | DDC 332.0917/67—dc23 LC record available at https://lccn.loc.gov/2017023482 DOI 10.3726/b11155 Bibliographic information published by Die Deutsche Nationalbibliothek. Die Deutsche Nationalbibliothek lists this publication in the “Deutsche Nationalbibliografie”; detailed bibliographic data are available on the Internet at http://dnb.d-nb.de/. © 2018 Peter Lang Publishing, Inc., New York 29 Broadway, 18th floor, New York, NY 10006 www.peterlang.com All rights reserved. Reprint or reproduction, even partially, in all forms such as microfilm, xerography, microfiche, microcard, and offset strictly prohibited. To Muhammad Iqbal (Lahori)
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