Risk Sharing as an Alternative to Debt 103
commits to deliver a product in the future against payments today. There are a
number of risks involved. There is a price risk for both sides of the exchange;
the price may be higher or lower in the future. In that case the two sides have
a shared risk once they enter into the contract agreement. If the price in the
future is higher, the buyer will be better off and the price risk has been shed
to the seller. The converse is true if the price is lower. There are other risks
for the buyer, including the risks of non - delivery and quality. The seller also
faces additional risks, including the risk that the price of raw materials may
be higher in the future, as may transportation and delivery costs. This risk
may also be lower. Again, these risks have been shared through the contract.
The same argument applies to deferred payment contracts.
It may appear that spot exchanges or cash sales involve no risk. But price
changes after the completion of a spot exchange are not entirely unknown.
The two sides of a spot exchange share this risk. Moreover, from the time
of the classical economists it has been known that specialization through
comparative advantage provides the basis for gains from trade. But in spe-
cializing, a producer takes a risk of becoming dependent on other producers
who specialize in producing what he needs. Again, through exchange, the
two sides to a transaction share the risk of specialization. Additionally, there
are pre - exchange risks of production and transportation that are shared
through the exchange. It is clear that the contracts at the other end of the
spectrum — mudarabah and musharakah — are risk - sharing transactions.
Therefore, it can be inferred that by mandating al - bai’, Allah (swt) ordained
risk sharing in all exchange activities.
A further observation that can be made is that it appears that the rea-
son for the prohibition of riba is the fact that opportunities for risk sharing
do not exist in such contracts. It may be argued that the creditor does take
risk — the risk of default. But it is not risk taking per se that makes a trans-
action permissible. A gambler takes risk as well, but gambling is forbidden
(haram.) Instead what seems to matter is opportunity for risk sharing. Riba
is a contract of risk transfer. As Keynes emphasized in his writing, if interest
rates did not exist, the fi nancier would have to share in all the risks that the
entrepreneur faces in producing, marketing and selling a product. But by
decoupling his future gains, by loaning money today for more money in the
future, from all activities of the entrepreneur, the fi nancier transfers all risks
to the entrepreneur.
It is clear that the intent behind prohibiting riba is to shift the focus
to risk - sharing contracts of exchange. Ismail (1989), however, suggests
that, based on the three interpretations considered, trade (al - bay’) and
exchange (al - tirajah) are the same. These terms appear in a number of verses
of the Qur’an, and in at least one verse (24:37) they appear together. Given the
acknowledged beauty and eloquence of its rhetoric in conveying complex
ideas, many scholars argue that it is unlikely that it would use two words
in the same verse to refer to the same transaction contract. Indeed, major
lexicons of the Arabic language reveal that the two phrases are not the
same. These sources suggest, based on the Qur’an itself (2:16; 2:254; 9:111;