Tools for Risk Management in Islamic Finance

A Case Study of the “Harm and Retaliation by Harm is not Allowed” Sharī‘ah Maxim

Abstract

Tracing through the pages of history, it becomes apparent that ‘risk’ in the field of finance was always there, and the measures to control it or to minimize it and/or to get rid-off from it were also taken. Thus, it is not an alien concept today. Speaking from the Islamic point of view, the Islamic primary sources holy Quran and Prophetic Traditionsprovide guidelines on the risk management. This paper, in this direction, is a humble attempt to throw light on the management of risk in Islamic finance in the light of Sharī‘ah Maxim the “redress of harm”. Harm has not been given any space in Islam either as initiative or in response. The measures taken in this direction and the rules deduced from this maxim to cover the risk has been highlighted. While risk is an important tool which is being focused before going to any financial transaction, this paper highlights how this maxim provides relief to minimize risk in Islamic financial sector, and gives the satisfaction to Islamic financial sector, application of the maxim in Islamic financial sector. Rules for redress of harm laid down by jurists have been also discussed.