Value Preservation Through Risk Management. A Shariah Compliant Proposal For Equity Risk Management

This paper makes a case for the preservation of Muslim Wealth through risk management. It provides an exposition of risk management techniques used in conventional finance and outlines the limitations faced by Muslim fund managers and businesses. This limitation arises from the proscription of key risk-management tools, in particular financial derivatives. Though the reasons for the prohibition are diverse, the overriding concern appears to be that they encourage speculative behaviour. As such the emphasis of Islamic risk management has been on, On Balance Sheet methods. The problem with On Balance Sheet methods is that they require the restructuring of business transactions which can render businesses less competitive and subject to residual risk. The paper proposes a portfolio insurance scheme that uses the logic and mechanics of conventional Index Put Options but in a Shariah compliant manner. The proposal is intended to strike a balance between the need to avoid speculation and the genuine need for hedging equity risks.