I recently co-authored a paper that was published in the Journal of Derivatives in the USA. One of the questions asked by the editor, Professor Stephen Figlewski of NYU, was “what is the risk free rate in Islamic finance?” This turned out to be a tough question to answer, with some in the literature considering that there is no such concept in Islamic finance, since every transaction has to involve some risk-taking. After surveying a few well-known researchers in the field, some of the answers we received argued that the closest thing to a conventional risk-free transaction is qard al-hasan, i.e. the benevolent loan; others argued that sadaqa (donation to the poor) would be considered a risk-free investment since its returns are guaranteed by Allah’s blessings.


This just highlights the fact that the field of Islamic finance is still lacking in the area of theory development at least as far as having a vocabulary that corresponds with conventional finance terminology. It is possible that teaching and learning Islamic finance might be facilitated by considering the most important models and theories in conventional finance, such as CAPM, and explaining Shari’a views on the topic or developing their Islamic finance equivalent.
(502)

Print Friendly