RISK SHARING: OPTIMISING TRUE POTENTIAL OF ISLAMIC FINANCE

Small and medium-sized enterprises (SMEs) play an essential role for job creation, employment, investment, innovation and economic growth. Despite its huge potential to support economic growth, SME lending continued to face constraints especially post the 2007 crisis. The present debt-based financial system hinders SMEs from fairer access due to the perceived high risk of the SMEs. Risk-sharing finance on the other hand promotes pro-active risk management through the sharing of risks in the economy according to the risk-bearing ability of the participants. In many ways, risk sharing finance is naturally aligned with Islamic finance. The risk-sharing model operates on an asset-driven balance sheet management thereby ensuring that the financial sector grows in tandem with economic growth. It eliminates financial oppression/repression and predatory lending as compensations to investors are determined by the actual performance of the real economic activities. This ensures prosperity is shared equitably amongst those who share the risks of any economic venture. The rise of fintech has opened a new door of opportunity for the financial industry to push the present limits of debt-based finance. For Islamic financial institutions, the benefits of fintech go beyond as it could spur more risk-sharing financial activities that uphold the risk-reward principle. With creative rethinking, technology innovations can be the game-changer needed to propel the growth trajectory of Islamic finance to the next stage of development. The paper recommends for the introduction of retail low-denominated risk-sharing securities as a new investment instrument that are issued by SMEs and tradable via fintech-enabled platforms. Internet- and mobile-based platforms would reduce the cost for financing for SMEs and increase investment opportunity to the members of public. Use of blockchain or distributed ledger technology (DLT) and smart contracts could improve the appeals of risk-sharing contracts presently hindered by the lack of trust. DLT also could simplify and modernize outdated processes dictated by archaic business models

کلیدواژه ها:

Risk sharing ، Islamic finance ، fintech ، distributed ledger technology