Risk Sharing in Corporate and Public Finance: The Contribution of Islamic Finance


  • Obiyathulla Ismath Bacha
  • Abbas Mirakhor
  • Hossein Askari




Islamic finance, risk sharing, risk shifting, financial inclusion, equity, debt, leverage


Financial crises have become a recurring problem for modern economies with increasingly detrimental fallouts. Risk-sharing finance (RSF) contracts may be the best instrument for addressing the problem and its fallout, and in particular the risk-sharing principles of Islamic finance offer a potential alternative. This paper offers some preliminary thoughts on the design and implementation of RSF for both private and public sector funding, for revenue and non-revenue generating projects.  It is argued that such form of financing avoids the leverage of conventional debt, minimizes the costs of dilution, reduces macroeconomic vulnerability, and enhances financial inclusion. It also has the potential to be a less risky alternative for developing countries to finance public spending and economic growth.


JEL Classifications: G32, P43, O16


ALLEN J.B. (2012), “Seeking True Financial Reform: Ending the Debt-Equity Distinction”, William & Mary Business Law Review, vol. 3 n. 1, pp. 243-272.

ASKARI H. (2015), “Severe Financial Crises and Fundamental Reforms: The Benefits of Risk Sharing”, Journal of King Abdulaziz University: Islamic Economics, vol. 28 n. 1, pp. 101-138.

ASKARI H., IQBAL Z., KRICHENE N. and MIRAKHOR A. (2011), Risk Sharing in Finance: The Islamic Finance Alternative, Singapore: John Wiley and Sons.

BAUM A., CHECHERITA-WESTPHAL C. and ROTHER P. (2013), “Debt and Growth: New Evidence for the Euro Area”, Journal of International Money and Finance, vol. 32, pp. 809-821.

BROUWER M. (2005), “Managing Uncertainty through Profit Sharing Contracts from Medieval Italy to Silicon Valley”, Journal of Management and Governance, vol. 9 nn. 3-4, pp. 237-255.

CANER M., GRENNES T. and KOEHLER-GEIB F. (2012), “Finding the Tipping Point: When Sovereign Debt Turns Bad”, Policy Research Working Paper, n. 5391, The World Bank, Washington (DC).

CECCHETTI S.G., MOHANTY M.S. and ZAMPOLLI F. (2011), “The Real Effects of Debt”, BIS Working Papers, n. 352, Bank for International Settlements, Basel.

CHECHERITA-WESTPHAL C. and ROTHER P. (2012), “The Impact of High Government Debt on Economic Growth and its Channels: An Empirical Investigation for the Euro Area”, European Economic Review, vol. 56 n. 7, pp. 1392-1405.

DAFERMOS Y. (2015), “The ‘Other Half’ of the Public Debt-Economic Growth Relationship: A Note on Reinhart and Rogoff”, European Journal of Economics and Economic Policies: Intervention, vol. 12 n. 1, pp. 20-28.

DUBE A. (2013), “A Note on Debt, Growth and Causality”, mimeo, available at https://dl.dropboxusercontent.com/u/15038936/RR%20Timepath/Dube_Growth_Debt_Causation.pdf.

FERREIRA C. (2014), “Debt and Economic Growth in the European Union: What Causes What?”, Working Papers, n. 08/2014, Department of Economics, Lisboa School of Economics and Management, Lisbon.

HERNDON T., ASH M. and POLLIN R. (2014), “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff”, Cambridge Journal of Economics, vol. 38 n. 2, pp. 257-279.

JENSEN M.C. and MECKLING W.H. (1976), “Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure”, Journal of Financial Economics, vol. 3 n. 4, pp. 305-360.

KOURTELLOS A., STENGOS T. and TAN C.M. (2013), “The Effect of Public Debt on Growth in Multiple Regimes”, Journal of Macroeconomics, vol. 38, pp. 35-43.

KUMAR M.S. and WOO J. (2010), “Public Debt and Growth”, IMF Working Paper, n. 10/174, International Monetary Fund, Washington (DC).

LOF M. and MALINEN T. (2013), “Does Sovereign Debt Weaken Economic Growth? A Panel VAR Analysis”, MPRA Paper, n. 52039, Munich University Library.

MIAN A. and SUFI A. (2014), House of Debt, Chicago (IL): The University of Chicago Press.

MINEA A. and PARENT A. (2012), “Is High Public Debt Always Harmful To Economic Growth? Reinhart and Rogoff and Some Complex Nonlinearities”, Etudes et Documents, n. 2012.18, CERDI, University of Auvergne, Clermont-Ferrand.

MIRAKHOR A. (2003), “Muslim Contribution to Economics”, in Al-Hassani B. and Mirakhor A. (eds.), Essays on Iqtisad: The Islamic Approach to Economic Problems, New York: Global Scholarly Publications.

––––– (2011a), “Risk Sharing and Public Policy”, 5th International Islamic Capital Market Forum, Securities Commission of Malaysia, 10 November 2011, Kuala Lumpur.

––––– (2011b), “Epistemological Foundation of Finance: Islamic and Conventional”, 3rd Foundation of Islamic Finance Conference, 8-10 March 2011, Kuala Lumpur.

––––– (2015), “Issues in Islamic Finance: Financial Crises Caused by a Lack of Risk Sharing”, video available at https://www.youtube.com/watch?t=1&v=pjS7rjuGa9A.

MIRAKHOR A. and IQBAL Z. (1988), “Stabilization and Growth in an Open Islamic Economy”, IMF Working Paper, n. 88/22, International Monetary Fund, Washington (DC).

––––– (2007), “Profit-and-Loss Sharing Contracts in Islamic Finance”, in Hassan M.K. and Lewis M.K. (eds.), Handbook of Islamic Banking, Cheltenham: Edward Elgar, pp. 49-63.

MODIGLIANI F. and MILLER H.M. (1958), “The Cost of Capital, Corporation Finance and the Theory of Investment”, The American Economic Review, vol. 48 n. 3, pp. 261-297.

OBIYATHULLA I.B. (1997), “Adapting Mudarabah Financing to Contemporary Realities: A Proposed Financing Structure”, The Journal of Accounting, Commerce & Finance, vol. 1 n. 1, pp. 26-54.

PANIZZA U. and PRESBITERO A.F. (2012), “Public Debt and Economic Growth: Is There a Causal Effect?”, MoFiR Working Paper, n. 65, Money and Finance Research Group, Marche Polytechnic University, Ancona.

––––– (2013), “Public Debt and Economic Growth in Advanced Economies: A Survey”, MoFiR Working Paper, n. 78, Money and Finance Research Group, Marche Polytechnic University, Ancona.

PESCATORI A., SANDRI D. and SIMON J. (2014), “Debt and Growth: Is There a Magic Threshold?”, IMF Working Paper, n. WP/14/34, International Monetary Fund, Washington (DC).

REINHART C. and ROGOFF K. (2009), This Time Is Different: Eight Centuries of Financial Folly, Princeton (NJ): Princeton University Press.

––––– (2010), “Growth in a Time of Debt”, NBER Working Paper, n. 15639, The National Bureau of Economic Research, Cambridge (MA).

REINHART C., REINHART V.R. and ROGOFF K. (2012), “Public Debt Overhangs: Advanced-Economy Episodes Since 1800”, Journal of Economic Perspectives, vol. 26 n. 3, pp. 69-86.

ROGOFF K. (2011), “Global Imbalances Without Tears”, Project Syndicate, available at http://www.project-syndicate.org/commentary/global-imbalances-without-tears.

SHILLER R. (1993), “Aggregate Income Risks and Hedging Mechanisms”, Cowles Foundation Discussion Paper, n. 1048, Cowles Foundation for Research in Economics, Yale University, New Haven (CT).

UDOVITCH A.L. (1967), “Credit as a Means of Investment in Medieval Islamic Trade”, Journal of the American Oriental Society, vol. 87 n. 3, pp. 260-264.

––––– (1970a), “Commercial Techniques in Early Medieval Islamic Trade”, in Richards D.S. (ed.), Islam and the Trade of Asia, Philadelphia (PA): University of Pennsylvania Press, pp. 37-62.

––––– (1970b), Partnership and Profit in Medieval Islam, Princeton (NJ): Princeton University Press.




How to Cite

Bacha, O. I., Mirakhor, A., & Askari, H. (2015). Risk Sharing in Corporate and Public Finance: The Contribution of Islamic Finance. PSL Quarterly Review, 68(274). https://doi.org/10.13133/2037-3643/13168