Last week was an extremely busy one at INCEIF. Major engagements at the WIEF, the launch of the new INCEIF Endowment Fund, multiple visitors to the campus from all over the world. A closed door roundtable session on the future of Islamic Finance with 8 luminaries from the Industry and final preparation for a busy week ahead in the UK.
Some would say that was a normal week, as indeed I would, if it were not for the new insights gained on important issues such as Impact Investing, the specificities of the demonstration effect in Islamic Finance and our entire approach to Risk Sharing.
I have entitled this BLOG “SHOOT.” Here is why.
While listening to one of our recent PhD graduates explain his paper of Antifragility in Islamic Finance, I was very taken by a footballing analogy that he used to compare Basel 3 and its Risk Sharing/Risk Shifting approach with the Risk Sharing approach of Islamic Finance.
Basel 3 is very focused on predictive models, particularly VAR (Value at Risk), where billions of dollars of risky transactions are pushed into a long tail of risk and a mathematical model is created to predict the probability of that risk happening. The number in dollar value is huge and the number in terms of probability of the risk actually happening is also 1 in several million or even higher. Just look at what happened in the GFC which no one predicted, not even the Basel Committee. In footballing terms he likened this to trying to predict mathematically where Christiano Ronaldo was going to kick the ball in order to score a goal and the further probability that he would execute the kick perfectly. All the focus of Basel 3 is on the kicker of the ball and where he is going to shoot.
In Islamic Finance, which uses Risk Sharing, the footballing focus is on the Goalkeeper. Making sure that he is fit and agile, familiar with the forward he is facing and is prepared in every way possible to save the shot. Risk sharing is about having the goalkeeper prepared fully rather than trying to predict where the forward is trying to shoot.
We may need to change the playing field?
There is much to do and not a moment to lose!
By Daud Vicary Abdullah