Shariah Risk: Its Origin, Definition, and Application in Islamic Finance

Abstract

“Risk” is widely used to explain an event pertaining to the probability of an outcome to occur. This paper provides the review of risk from its origin, where the concept of risk has been a concern for humanity since days of old, without the usage of its proper terminology. The study relies solely on related literature and highlights the application of risk in Islamic finance. Reviews of previous studies normally have its own terminology in research methodology. This section covers the issues of how risk is defined by researchers in various disciplines and therefore, how it is specifically related to Islamic finance through a generic and unique name, that is, Shariah risk. The major issue highlighted is where the sources are, which led to a deviation from the path that creates harmful effects. There are other sources for the risk that still need to be clarified further, but this study revealed the sources that lead to the changes of circumstances which result in having risks, based on the Quranic evidences in Islamic perspective. Hence, this paper aims to fill the gap of the current literature by showing the need to conduct further research on the derivation of Shariah risk and its potential in determining capital requirements in Islamic financial institutions.

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