Structure risk is the possibility of losing asset value due to differences between two apparently Shariah compliant views about the financial contract underlying the investment. The existence of structure risk in Islamic finance makes it vulnerable to systemic instability just like the conventional interest-based lending system.

2. The basis of a financial
contract
Ownership risk
the borrower
Credit risk of
of the asset
Team A: Independent Team B: Shariah Boards/Councils
Shariah Boards/Councils associated with financial institutions &
rating agencies
Structure Risk

3. Motives of teams
Team A Team B
Lending is a not-for- In a competitive market
profit social institution financial products must
and to justify profit carry minimum risks &
there is a need to replicate
from any transaction the dominant markets
the ownership risk of which are based on
the asset cannot be lending and therefore the
avoided and must be credit risk of the borrower
taken must be the benchmark

4. Structure risk in financial market
products

5. Structure risk in bank financing
Team A – Team B –
Murabahah Tawaruq a
financing a comprehensive
genuine asset financing
purchase mechanism

6. Pitfall of Tawaruq $100
$100 $100 Tawaruq
$100 Tawaruq Tawaruq
$100 Tawaruq
Tawaruq
Financing Scenario -3: But if we make non-genuine
Murabahah like Tawaruq as the core business, this
scenario prevails which is almost similar to Scenario -
1, where financing gets out of the real economy.
BANK Murabahah Financing Scenario-2: If we make genuine Murabahah
as the core business of banks, this scenario prevails,
for asset where financing cannot get out of the real economy.
In this scenario, we can benefit from the advantages
$100 of the fractional reserve banking system but at the
same time also avoiding the excessive and unhealthy
credit creation by banks.
5% interest
7% interest
10% interest
Financing Scenario-1: If we make lending as the core
commercial activity of banks, financing gets out of the real
15% interest
economy and this scenario is the real possibility as lending will 20% interest
be primarily based on ratings and credit risk.
$100 $100 $100 $100 $100

7. Structure risk & Shariah non compliance risk
Structure risk is the risk of
losing asset value because
of differences between two
apparently Shariah
compliant views regarding
a financial contract

8. Systemic stability
Structure risk adds an
additional factor of
vulnerability of the financial
system to instability/crisis
and therefore it must be
avoided