Page 14 - Valentino Cattelan - In the name of God: managing risk in Islamic finance

VALENTINO CATTELAN

transactions (as in the case of financial derivatives), therefore, become unlawful
in the light of Islamic risk management.
Last, as seen, this asset-backed financial model, fostered by the need of
exchange equilibrium, upholds human agency and participation in the
‘real’/‘right’ (haqq) through criteria of profit-loss sharing implemented by Islamic
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financial institutions in their business activity.
Considering all this, some conclusions can be advanced on the
conceptualization of risk (as rizq ﻕﺯﺭ and, then, daman ﻦمﺿ) in Islamic finance.
A fundamental principle has been preliminarily mentioned in our investigation:
al- kharaj bi-l-daman, ‘profit follows responsibility’, ubi emolumentum ibi onus. The
principle is incorporated in a famous hadith, according to which the risk for loss of
an asset falls upon the person who is receiving benefit from the asset itself. As
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seen, in Islamic finance any advantage or disadvantage cannot be separated from a
contextual ownership or possession (gain accompanies liability for loss).
Thus, in case of commercial activities, where participants provide capital
and/or labour, the contracting parties necessarily share the risk of the undertaking,
and, consequently, its profits (mudaraba and musharaka). In asset-based
transactions, risk follows the ownership or possession of the res, and a fixed return
(e.g., the mark-up of murabaha) becomes admissible, not in terms of the illicit riba,
but as related to the risk that has been borne by the vendor (again, al-kharaj bi-l-
daman). In other terms, here, the risk is not a commercial ‘entity’ per se, but «is
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generally a function of either legal ownership or possession of the res».
The proposed interpretation of al-kharaj bi-l-daman as the principle governing
the legitimacy of profit in Islamic risk management finds confirmation in the
centrality of the object in the theory of contracts in Islamic law (where «it is the
thing… that takes primacy. […] the thing must have a material, concrete
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existence. It does not exist trace of what has been called: res incorporales»). This
principle provides hermeneutical help in the understanding of the fatawa issued

49 Although much is still to be done in the direction of equity-products, such as mudaraba and
musharaka, as major share of their portfolio. Accordingly, Islamic scholarship has always called for
an increase of equity-based products in the balance sheets of Islamic financial institutions. See, for
instance, the resolution by the AAOIFI Shari‘ah Board (13- 14 Feb 2008, Bahrain): «the Shari’ah
Board advises Islamic Financial Institutions to decrease their involvement in debt- related
operations and to increase true partnership based on profit and loss sharing in order to achieve the
objectives of the Shari‘ah».
50 Abu Dawud, Tirmidhi, Nisa’I, ibn Maja, Ahmad ibn Hanbal. The principle was also incorporated
in Art. 85 of the Majalla (see also Art. 87, al-ghurm bil-ghunum, which has the same meaning).
51 FADEL, The regulation of risk in Islamic law, the common law, and federal regulatory law, in
Proceedings of the Fourth Harvard University Forum on Islamic Finance, Harvard University, Cambridge,
Massachusetts, 2002, 83.
52 CHEHATA, Études de droit musulman. 2 / La notion de responsabilité contractuelle. Le concept de
propriété, Paris, 1973, 122. See also VOGEL, Contract law of Islam and the Arab Middle East, in
International Encyclopedia of Comparative Law, Vol. VII, Contracts in general, Chapter 7, Tübingen,
Dordrecht, Boston, Lancaster, 2006, 1-77.

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