Tuesday, June 28, 2022

Risk and Return: Islamic Eco. Vs. Conventional Eco. #capitalism #islamiceconomics

Today i am going to discuss the topic what is the position of capital in both islamic as well as conventional economic system because this topic is very important before going to discuss about the risk management and islamic financial system as we know that the capitalism for the complete finance.

Revolves around the capital so first of all it is mandatory and necessary that first we have determined what is the position of capital how islamic economic system deals capital and how conventional economic system deals capital because the dealing of these two systems will determine the sources of risk and.

The methods of management to to manage the or mitigate the risk so that is why first of all i am going to start that what is the position of capital in both system before going to deeply analyze about the position of capital first we have to initiate we.

Start let's talk that what is the risk and how islamic economic system deals with by the conventional economic system deal with the risk the risk basically the risk has two types one is that risk beyond human control the second one is risk in human control what is risk beyond human control.

The risk beyond human control mean that it is not possible for humankind to control that risk when it will happen then it will happen and the person will be forced to bear that loss so it is known as also risk of loss it is known as risk in human.

Control and the second one is risk in control and that is known that the type of is the risk that can be mitigate that can be controlled by mankind by person through different technique let's say through the pledge through charging.

Guarantee so when the there has a guarantee then there is no risk upon the principal amount if someone is lending so these are the basically two types of risk risk beyond control and risk and control okay let's see that when.

Someone will become eligible to earn a profit there is a principle in islamic economic system and that principle is known as profit devolves with liability of loss in simple words it's mean that.

If you want to make profit you must be a risk of loss let's explain this principle in conventional way that let's say there is a y-axis risk is on y-axis and the reward is on x-axis we see in the conventional economic as the conventional finance says.

That as your risk increase your reward increase let's see if your risk is r rs1 there is a risk one then your reward will be r1 if your risk increase to the rs2 then your reward also increase if your risk increase r3 then your reward also.

Increased so these three points it means that there is a positive relationship between risk and reward so these two risk and reward have positive relationship that is positively related risk and reward so this theory says that when someone is on origin on origin mean.

There is a risk is zero reward is zero no risk no reward risk is zero reward return is also zero so in conventional economic paradigm if we as we saw that no risk no profit because there is a positive relationship between risk and reward and al-hiraj.

The prince islamic principle also advocate and approve this positive relationship between these two uh concepts okay so other here with the month principle as we know that there are two types of risk risk beyond control and risk in human.

Control if you want to make profit you must be at risk of loss so what is the risk of loss that is risk beyond human control is a risk of loss if someone is bearing this type of risk then according to islamic economic system.

That person is allowed to earn profit for example second one the risk in control alfred principle is not applied upon it because there is no risk here risk of loss is not here let's say a person says that if i landed 10 000 rupee to someone and i.

Also fear that that person can default and that person will not pay back to me my principal among 10 000 rupees so this is my risk of loss because when he will not pay back then i will be at risk so this is my risk of loss no as per islamic principle i should be considered eligible to earn.

Profit upon my that lended amount because i am bearing risk of loss so it is the argument of the lender in conventional economic paradigm who says that your sharia principle says that if you want to earn a profit you must be a risk of loss so i am bearing the risk of loss upon my.

Debt i landed capital so please allow me that i should earn 1 000 rupee on my 10 000 rupee as a profit but we islamic economic says no you're this additional 1 000 rupee over the 10 000 principal loan is known as interest rate this is not profit why because.

The principle says that there should be risk of loss and here you're talking about upon your landed amount this is not risk of loss rather it is a risk of default but you are calling it naming it again and again that this is my risk of law this is my risk of loss dear this is not your risk.

Of loss this is risk of default because you are saying that it is possible that you will not pay back so what is it in conventional economic and system and conventional financial system it is known as that that guy may be defaulted guy the borrower may be defaulted so it means.

That you are bearing risk of default risk of default is different from risk of loss because risk of default is a risk that can be mitigated that can be controlled through charging pledge you can ask for pledge you can ask for more gauge you can ask for personal.

Surety you can ask for a second personal loan then your risk of default has become zero even your risk of loss is zero because now your principal has become secured if someone will not pay you've got your his asset you will sell his.

Asset and you will recover your money principal amount the remaining will be paid back to the owner of that like asset so it means that risk in control is not related to al-firaj with demand in conventional economic or the conventional banking sector there is no concept of risk of loss.

No conventional or interest bank is bearing risk of loss all of their risks are related to the risk in control that can be mitigated that can be controlled and which are known as risk of default so this is the case the disbelievers when the islam allowed sale then the disbeliever said that there is no difference between sale and.

Loan because they were looking that if someone guy who have who got 10 000 rupee 2 guys mr let assume that mr a he got 10 000. and mr b he got 10 000 both guy they have a thousand rupee and.

This guy did that he bought asset from this 10 000 rupee and he sold it for 12 000 and this guy gave landed 10 000 rupee he landed a thousand rupee and got 20 000 rupee.

Now he earned additional 2000 on his 10 and he got also 2 000 rupee profit upon his 10 000 the disbelievers were looking at this thing and they said that end result is same so they said that sale is similar to river there is no difference between these two.

Things but allah said that no ah on the basis of procedure and what is the procedure because here there is a risk of default.

Here but here there is a risk of loss so what is the risk of loss when mr a purchased the asset for 10 000 rupee with the intention that he will sell it in the market for 12 000 rupee that guy was not sure that whether he will sell it for on profit because if the market environment will.

Be friendly then it will be possible that he may sell it on profit if environment is market environment is not friendly then it is possible that he may sell it for nine thousand rupee and he will be a loss of one thousand rupee so this is the big difference between these two contracts so that is why allah allowed.

And the conclusion of all this debate says that sale is different from riba there is no similarity between sale and rival on the basis of this debate we say that let's talk about the position of capital so capital there are two types of capital one is risking capital the second one is secured capital so risky.

Capital is a capital where there is a risk of losses involved where the risk of loss is involved risk beyond control is involved that is known as risky capital like invested capital investment in sales investment in partnership two or three friends uh run a business and they jointly own business and they have.

Shares so if there will be loss they will participate if they'll be profit they will participate so this is investment capital risky capital islam says that here profit making is allowed upon risky capital the second one is secured capital what is secured capital where there is no risk of loss there is.

A risk in this secure capital but that is not risk of loss what is the risk here there here is a risk of default which can be controlled through again we discussed planned mortgage personal security that this recipient is reduced.

So what is the secured capital example is borrowed capital lended capital loans risk of loss zero then the return will be zero no risk no return and here here there is a risk.

Risk is greater than 0 so that is why reward is greater than 0 so this is the difference between islamic and the conventional economic system regarding the risk and capital

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