ISLAMIC BANKING HAS THUS FAR MIMICKED CONVENTIONAL BANKING WITH THE RESULT THAT THE SAME PROBLEMS AND OUTCOMES HAVE SURFACED, EVEN THOUGH IT IS OPERATING WITHIN AN INTEREST FREE FRAMEWORK. THIS APPARENT “CONVERGENCE” HAS LED TO DISAFFECTION BOTH AMONG CONSUMERS OF ISLAMIC BANKING SERVICES AND POLICY MAKERS. THIS PAPER PROPOSES A risk sharing MODEL FOR ISLAMIC BANKS THAT CAN POTENTIALLY PULL ISLAMIC BANKING AWAY FROM THIS PATH DEPENDENCY. UNDER THE PROPOSAL AN ISLAMIC BANK’S ASSETS WOULD BE SECURITIZED BY THE ISSUANCE OF SUKUK TYPE INSTRUMENTS THAT HAVE THE SAME UNDERLYING CONTRACT AND AVERAGE “DURATION” AS CUSTOMER FINANCING. SMALL ASSETS MAY HAVE TO BE POOLED INTO TRANCHES OF SIMILAR MATURITY BEFORE BEING SECURITIZED. MEDIUM AND LARGER ASSETS WOULD HAVE PAPERS ISSUED DIRECTLY AGAINST THEM. THUS, INSTEAD OF DEPOSITORS, AN ISLAMIC BANK WOULD HAVE THOUSANDS OF SUKUK HOLDERS, ALL OF WHOM SHARE THE PROFITS AND LOSSES ARISING FROM THEIR RESPECTIVE TAGGED ASSET. OTHER THAN WADIAH BASED SAFE CUSTODY ACCOUNTS AND CURRENT ACCOUNTS AGAINST WHICH THE BANK HOLDS CASH, ALL OTHER DEPOSITORS WOULD BE “SOLD” SUKUK FOR THE AMOUNT, DURATION AND risk LEVEL THAT THEY PREFER. THE MODEL HAS SEVERAL ADVANTAGES SUCH AS, MINIMIZING SYSTEMIC risk THROUGH risk DISSIPATION AND REDUCING THE LIQUIDITY MISMATCH INHERENT TO BANKING. THE SECURITIZED PAPERS PROVIDE NEW LIQUIDITY INSTRUMENTS AND CAN ENHANCE LIQUIDITY WITHIN THE ISLAMIC FINANCE SECTOR. WHERE THE MACRO ECONOMY IS CONCERNED, THE PROPOSAL ENHANCES SYSTEM STABILITY BY REDUCING risk CONCENTRATION WITHIN THE BANKING SYSTEM, SUBSTANTIALLY WIDEMING FINANCIAL INCLUSION BY WAY OF SMALL DENOMINATION SUKUK AND MINIMIZES THE CONTINGENT LIABILITIES OF GOVERNMENTS BY AVOIDING THE USE OF DEPOSIT INSURANCE.

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 PROACTIVE risk MANAGEMENT THROUGH THE sharing OF riskS IN THE ECONOMY ACCORDING TO THE riskBEARING 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.

FROM NEW YORK AND SAN FRANCISCO TO LONDON, DUBAI, SINGAPORE AND BEYOND, THE EMERGENCE OF FINANCIAL TECHNOLOGY (FINTECH) START-UPS PROMISES A CHANGE IN THE FACE OF FINANCE AS WE KNOW IT. THE PURPOSE OF THIS PAPER IS TO PROVIDE A VIEW ON HOW FINTECH CAN ACCELERATE THE ADOPTION OF risk sharing ISLAMIC FINANCE. IT DOES SO BY FIRST EXPLAINING TODAY’S BUSINESS BUZZWORD. THE PAPER THEN CONSIDERS THE ISLAMIC VIEW OF FINANCE AS SUPPORT FOR REAL SECTOR TRANSACTIONS THROUGH risk sharing AND SUGGESTS A WAY FORWARD TO MODELLING A MORE GLOBALLY AND INTRINSICALLY VIABLE ISLAMIC FINANCIAL SYSTEM.

EVIDENCE HAS BEEN MOUNTING THAT THE INTEREST-BASED DEBT FINANCING REGIME IS UNDER INCREASING DISTRESS. EVIDENCE ALSO SUGGESTS THAT THE FINANCIAL CRISES, WHATEVER TITLE THEY CARRIED - EXCHANGE RATE CRISIS OR BANKING CRISIS– HAVE BEEN DEBT RELATED CRISES IN ESSENCE. AT PRESENT, DATA SUGGEST THAT THE DEBT-TO-GDP RATIO OF THE RICHEST MEMBERS OF THE G-20 IS EXPECTED TO REACH 120% MARK BY 2014. THERE IS ALSO EVIDENCE THAT OUT OF SECURITIES WORTH US$ 200 TRILLION IN THE GLOBAL ECONOMY, NO LESS THAN THREE-FOURTH REPRESENT INTEREST-BASED DEBT. IT IS DIFFICULT TO SEE HOW THIS MASSIVE DEBT VOLUME CAN BE VALIDATED BY THE UNDERLYING PRODUCTIVE CAPACITY OF THE GLOBAL ECONOMY. THIS PICTURE BECOMES MORE ALARMING CONSIDERING THE ANEMIC STATE OF GLOBAL ECONOMIC GROWTH. THERE IS GREAT UNCERTAINTY WITH REGARD TO INTEREST RATES.ALTHOUGH POLICY-DRIVEN INTEREST RATES ARE NEAR-ZERO LEVEL, THERE IS NO ASSURANCE THAT THEY WILL NOT RISE AS THE risk AND INFLATION PREMIA BECOME SIGNIFICANT. HENCE, A MORE SERIOUS FINANCIAL CRISIS MAY BE IN THE OFFING AND A GENERAL COLLAPSE OF ASSET PRICES MAY OCCUR. THIS PAPER ARGUES THAT THE SURVIVAL OF THE INTEREST-BASED DEBT REGIME IS BECOMING LESS TENABLE, AS IS THE PROCESS OF FINANCIALIZATION THAT HAS ACCOMPANIED THE GROWTH OF GLOBAL FINANCE OVER THE LAST FOUR DECADES. THE ABOVE HAS RESULTED IN AN UNPRECEDENTED INCREASE IN ECONOMIC riskS; GENERATING (ADVERSE) NON-LINEARITIES IN SYSTEM‘S BEHAVIOR. SUCH A BEHAVIOR IS NOTHING BUT A DEMONSTRATION OF THE VERSE, “ALLAH OBLITERATES RIBA … “ OF THE QURAN. AS A RESULT, THE SEARCH IS ON FOR A PARADIGM SHIFT TOWARDS A LESS VOLATILE AND MORE RESILIENT FINANCING REGIME. THE PAPER PROPOSES risk sharing BASED ISLAMIC FINANCING AS SUITABLE ALTERNATIVE AND ALSO DEMONSTRATES EMPIRICALLY ITS BETTER GROWTH AND STABILITY CHARACTERISTICS BY USING ADVANCED DYNAMIC HETEROGENEOUS PANEL TECHNIQUES.