Islamic finance has distinctive characteristics built upon the Shari'ah principles that govern and regulate contractual relationships in financial transactions. Islamic finance is distinguished, not only by its strong connection to Islamic law, but also by Islamic ethics that provide the spirit and orientation for financial transactions. Islamic financial products and services are to be structured in a way that ensures justice, fairness and transparency so that mutual consent among the parties involved in the contract can be achieved. This signifies that both parties to a contract are willing to bear the financial consequences of that contract.
The linkage between liability for risk and legitimacy of reward is a governing principle that must be fully observed in financial transactions. It is the cornerstone of any Islamic business or financial deal. Taking risk in Islamic financial transactions entails that each of the contracting parties agrees to bear their portion of the fundamental financial risks and liabilities connected to real economic activities, which are indispensable to entitlement to benefit from them. The absence of this principle may give rise to numerous prohibited elements such as ribā, gharar and gambling that violate the objectives of financial transactions. However, the distinctive features of risk from the fiqhi perspective and the domains from which it emanates have not been clearly spelled out by the scholars. In addition, the concept of risk taking in relation to contemporary risks associated with financial contracts, such as credit risk, liquidity risk, reputational risk and market risk, needs further scrutiny.
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