Antifragility of Islamic Finance: The Risk-Sharing Alternative (Finance, FinTech, and Crowdfunding in Islam)

__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. Cover 1 Table of Contents 11 List of Abbreviations 15 Glossary 19 Foreword 21 Prologue 25 Chapter 1. Introduction 27 Accessibility to Finance 31 Alternative Financial Systems 32 Fragility of Debt 36 Religion and Economics 39 Chapter 2. The Inconsistencies of Financial Modeling 43 Fragility of Statistics 48 Mandelbrot’s Fat Tails 50 Thinking Fast (and Slow) With Kahneman 53 Taleb’s Black Swan 55 Risk-Sharing 56 Chapter 3. Introduction to Antifragility 61 The Antifragility Triad 63 The (Ab)Normal Gaussian 66 A New(er) Toolkit 70 The Disorder Family 71 Black and Grey Swans 72 From Mediocristan to Extremistan 74 Triad—Deep Dive 75 Antifragilty and Redundancy 80 Antifragility and Convexity Bias 82 Antifragility and Time Series Forecasting 83 Antifragility and Risk Management 89 Antifragilty and Prospect Theory 90 Antifragility and Dragon Kings 92 Tail Wagging the Kangaroo 94 Chapter 4. Debt and Destruction 97 Introduction to Debt 99 History of Debt 104 Debt and Religion 107 Post-Great Recession Debate on Debt and Inequality 108 Subtleties of Debt 109 Chapter 5. Risk and Reward 113 Managing Risks via (Mis)Calculations 115 Risk-Sharing, Risk Transfer, and Risk Shifting 118 The Risk Transfer and Risk Shifting Workflow 120 The Risk-Sharing Workflow 122 Chapter 6. A Tale of Two Bubbles 125 Main Street, Wall Street, and Sand Hill Road 133 Mansions in the Seas 135 Debt, Equity, and Systemic Risk 136 Musharaka Mutanaqisah 139 Chapter 7. Epistemological Foundation of RSIF 141 Epistemology of Finance 142 Arrow-Debreu Economy 144 The Mysterious Rate of Interest 146 The Risk-Sharing Puzzle 148 Al-ghunm-bi-al-ghurm ≈ Skin-in-the-Game 150 Chapter 8. Risk-Sharing Islamic Bank Structure 157 Asset and Liability Contracts 158 Elimination of FRS and the Chicago Plan 162 RSIF and the Chicago Plan 163 Possible Structures for an Islamic Bank 164 Chapter 9. Risk Management for Risk-Sharing 167 Credit Risk 170 Liquidity Risk 170 Market Risk 171 Operational Risk 172 Systemic Risk 172 Chapter 10. The Islamic Finance Antifragility Framework 175 Skin-in-the-Game 175 Complex Systems 176 Naïve Interventionism 178 The Agency Problem 180 Fundamental Asymmetry 182 Nonpredictive Approach 184 Conflation of Event and Exposure 186 Ludic Fallacy 187 Rational Optionality 188 Non-linearities 189 Creative Destruction 190 Heuristics 191 Options 192 Via Negativa and Riba 194 Riba as a Precautionary Principle 195 Chapter 11. Regulating (for) the Black Swan 197 Social Sciences or Social Studies 198 L2 Norm and P-values 200 Starting From Regulatory Standards 204 Captains of the Ship(s) 205 Antifragility—the Regulatory Solution 210 The Risk-Sharing Regulatory Approach 215 Chapter 12. Of Ptolemy and Alchemy 219 The Great (Debt) Humiliation 224 Our Debt to Society 227 Acknowledgements 231 Bibliography 233 Index 237