Displaced commercial risk and the sharing principle in Islamic banks: A critical analysis

Abstract

The purpose of this article is to critically examine the adoption of displaced commercial risk as a risk specific to Islamic banking (DCR), since Islamic finance is based on the principle of sharing losses and profits, however, under competitive pressure, Islamic banks voluntarily sacrifice a portion of their profits to guarantee depositors the same returns as conventional banks in order to satisfy them. The methodology adopted is based on a critical review and conceptual analysis of existing literature and Sharia principles. The results highlight that the transfer of risk to the bank calls into question the authenticity of the Islamic banking intermediation model because, by moving away from the partnership approach, the bank implicitly guarantees returns, which compromises its ethical identity.

Our analysis also highlights that DCR management, while allowing banks to remain competitive, discourages customers from accepting losses. Our article proposes that the return on investment accounts should reflect the actual performance of investment projects, because when the bank offers an artificial fixed rate of return, the customer no longer distinguishes between a risky investment and a guaranteed deposit. Financial education for depositors will be necessary, and the true application of PPP is recommended in our article. Through critical analysis, our article attempts to show the extent to which DCR management distorts the logic of sharing, as well as to propose solutions for maintaining the spirit of partnership despite any form of constraint. The scope of this work is primarily conceptual, and its limitations lie in the absence of empirical validation, thus paving the way for future research.

Classification JEL: G21, G23

Paper type: Theoretical Research