Antifragility of Islamic Finance

The Risk-Sharing Alternative

by Umar Rafi (Author) Abbas Mirakhor (Author)
©2018 Monographs XXIV, 220 Pages


Antifragility of Islamic Finance: The Risk-Sharing Alternative explains how risk-sharing, as defined under Islamic finance, makes financial systems antifragile. It highlights the benefits of 100% equity-based finance over debt-based finance.
The recent financial crisis has given rise to discussions on a new approach to risk management called antifragility. This concept specifies conditions under which systems become resilient to shocks caused by Black Swans—highly unpredictable outlier events that have a major negative (or positive) consequence when they occur, with their occurrence only explained retrospectively. Per this concept, the long-term survivability of any system centers exclusively on its antifragile nature, that is, its ability to absorb and even benefit from Black Swan–type shocks. This book aims to investigate risk-sharing Islamic finance as an antifragile system.
As a by-product of the Great Recession, the problems of debt-based financial systems are starting to be highlighted by industry and by academia. The antifragile solution for avoiding future financial crises is primarily centered on moving the existing financial system towards more equity and less debt, thereby introducing skin-in-the-game into financial transactions. This book introduces a model of a 100% equity-based financial system, centered on risk sharing, as a possible alternative to the contemporary debt-based, conventional financial system, which is based on risk transfer and on risk shifting. In essence, this book attempts to provide a practical model for an antifragile financial system by evaluating the characteristics of Islamic finance under the criteria of antifragility.

Table Of Contents

  • Cover
  • Title
  • Copyright
  • About the author
  • About the book
  • Advance Praise for Antifragility of Islamic Finance
  • This eBook can be cited
  • Table of Contents
  • List of Abbreviations
  • Glossary
  • Foreword
  • Prologue
  • Chapter 1. Introduction
  • Accessibility to Finance
  • Alternative Financial Systems
  • Fragility of Debt
  • Religion and Economics
  • Chapter 2. The Inconsistencies of Financial Modeling
  • Fragility of Statistics
  • Mandelbrot’s Fat Tails
  • Thinking Fast (and Slow) With Kahneman
  • Taleb’s Black Swan
  • Risk-Sharing
  • Chapter 3. Introduction to Antifragility
  • The Antifragility Triad
  • The (Ab)Normal Gaussian
  • A New(er) Toolkit
  • The Disorder Family
  • Black and Grey Swans
  • From Mediocristan to Extremistan
  • Triad—Deep Dive
  • Antifragilty and Redundancy
  • Antifragility and Convexity Bias
  • Antifragility and Time Series Forecasting
  • Antifragility and Risk Management
  • Antifragilty and Prospect Theory
  • Antifragility and Dragon Kings
  • Tail Wagging the Kangaroo
  • Chapter 4. Debt and Destruction
  • Introduction to Debt
  • History of Debt
  • Debt and Religion
  • Post-Great Recession Debate on Debt and Inequality
  • Subtleties of Debt
  • Chapter 5. Risk and Reward
  • Managing Risks via (Mis)Calculations
  • Risk-Sharing, Risk Transfer, and Risk Shifting
  • The Risk Transfer and Risk Shifting Workflow
  • The Risk-Sharing Workflow
  • Chapter 6. A Tale of Two Bubbles
  • Main Street, Wall Street, and Sand Hill Road
  • Mansions in the Seas
  • Debt, Equity, and Systemic Risk
  • Musharaka Mutanaqisah
  • Chapter 7. Epistemological Foundation of RSIF
  • Epistemology of Finance
  • Arrow-Debreu Economy
  • The Mysterious Rate of Interest
  • The Risk-Sharing Puzzle
  • Al-ghunm-bi-al-ghurm ≈ Skin-in-the-Game
  • Chapter 8. Risk-Sharing Islamic Bank Structure
  • Asset and Liability Contracts
  • Elimination of FRS and the Chicago Plan
  • RSIF and the Chicago Plan
  • Possible Structures for an Islamic Bank
  • Chapter 9. Risk Management for Risk-Sharing
  • Credit Risk
  • Liquidity Risk
  • Market Risk
  • Operational Risk
  • Systemic Risk
  • Chapter 10. The Islamic Finance Antifragility Framework
  • Skin-in-the-Game
  • Complex Systems
  • Naïve Interventionism
  • The Agency Problem
  • Fundamental Asymmetry
  • Nonpredictive Approach
  • Conflation of Event and Exposure
  • Ludic Fallacy
  • Rational Optionality
  • Non-linearities
  • Creative Destruction
  • Heuristics
  • Options
  • Via Negativa and Riba
  • Riba as a Precautionary Principle
  • Chapter 11. Regulating (for) the Black Swan
  • Social Sciences or Social Studies
  • L2 Norm and P-values
  • Starting From Regulatory Standards
  • Captains of the Ship(s)
  • Antifragility—the Regulatory Solution
  • The Risk-Sharing Regulatory Approach
  • Chapter 12. Of Ptolemy and Alchemy
  • The Great (Debt) Humiliation
  • Our Debt to Society
  • Acknowledgements
  • Bibliography
  • Index
  • Series index

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Antifragility of Islamic Finance: The Risk-Sharing Alternative

Whenever I see the name Abbas Mirakhor and Islamic finance (or risk-sharing finance) together, I get excited because I know that I am in for a treat. Professor Mirakhor has made the most significant contributions to this field over the last 25 years and has always something new and illuminating to say. So, this time it was a double delight, first to see his name along with that of Umar Rafi on a new book on risk-sharing finance, and second to be asked to write a brief foreword—for me an honor. True to form, this book does not disappoint and will be a reference volume for anyone interested in Islamic, or risk-sharing, finance and antifragile financial systems, and how best to eliminate recurring financial crises.

Rafi and Mirakhor begin by explaining why and how conventional risk management techniques fail in the real world of Black Swans or fat tailed distributions. Namely, under these conditions, the conventional financial model(s) we use to predict the future—something that is necessary for risk management—is inconsistent and fails because it is based on Gaussian probability distributions. As a result, the failure to predict highly unusual states of nature leads to financial crises, such as the one we experienced most recently in 2007–2008 with fallouts that continue to plague the world today. This is where antifragility comes into play. Whereas the conventional financial ← xvii | xviii → system relies on predictability, antifragility relies on readiness to deal with highly unusual states of nature. Given the experience with recurring financial crises, Mirakhor and Rafi see an antifragile financial system as a clear alternative to the conventional system, a system that deserves serious consideration.


XXIV, 220
ISBN (Hardcover)
Publication date
2018 (January)
New York, Bern, Berlin, Bruxelles, Frankfurt am Main, Oxford, Wien, 2018. XXIV, 220 pp., 12 b/w ill., 4 tables

Biographical notes

Umar Rafi (Author) Abbas Mirakhor (Author)

Umar Rafi specializes in the field of information technology in the financial services domain. He is currently working as a computer scientist in Silicon Valley. He has a BS in mathematics from the United States Air Force Academy, an MS in computer science from Wichita State University, and a PhD in Islamic finance from the International Centre for Education in Islamic Finance (INCEIF). Abbas Mirakhor joined INCEIF in 2010 as Distinguished Scholar and the first holder of INCEIF’s chair in Islamic finance. His research interests include conventional and Islamic economics and finance. Prior to joining INCEIF, he spent 24 years with the International Monetary Fund, serving as executive director and dean of the executive board. He is a graduate of Kansas State University, where he received his Bachelor, Master and PhD degrees in Economics.


Title: Antifragility of Islamic Finance
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246 pages