A Simple Fiqh-and-Economics Rationale for Mutualization in Islamic Financial Intermediation

Islamic finance is a prohibition-driven industry, aiming to avoid the prohibitions of riba and gharar. It is well accepted in Islamic jurisprudence that riba and gharar do not affect the legal validity of non-commutative financial contracts (e.g. gifts). Jurists have long viewed this as a potential solution to the problem of gharar in commercial insurance, proposing mutual insurance as a non-commutative alternative. Likewise, AlQarafi had shown that loans are exempted from the rules of riba and gharar because of their non-commutative (in this case charitable) nature. It is thus argued that a substantial portion of Islamic financial intermediation can and should be conducted through mutual financial institutions.