risk?Literally,risk is the exposure to unknown, unknowable or chance events, and theirdegrees. However risk necessarily implies a negative outcome – high risk meansdangerous; low risk means safer. In English, the word ‘risky’ implies danger.
Risk can be calculated using probability to arrive at figures showing thechances of something happening, which can be very low (for example, beingstruck by lightning) or very high (for example, the sun rising tomorrow). Thishighlights the negative implication of risk; whereas it would be said thatthere is a low risk of being struck by lightning (a bad thing), one would neversay that there is a high risk of the sun rising tomorrow (a good thing). Riskand probability are therefore not quite the same thing, as probability makes nojudgement on the goodness or badness of an outcome, whereas risk does. Risk isa very complicated concept mathematically and in everyday life, but in Islamic dealings it hasits own deeply studied subject, largely called gharar, which is a forbidden act inIslam. However, risk of some sort is unavoidable. Any transaction, no matterhow seemingly risk-free it is, can be prevented by a external force, such as aweather event, illness, war or a change in political leadership.
In Islamicfinance, the kind of risk that is forbidden has a distinct air or gambling, oftaking excessive risk, or of engaging in commercial activities where the riskitself is what gives it its profitability. The avoidance of risk manifestsitself in strict rules on derivativeinstruments and pure gambling. Gharar rules also forbid the selling of thingswhich are not present at the time of the sale, and of one party using theother’s ignorance of the real risks of a transaction to win a deal, which wouldbe considered underhand and unfair.risk of default?The risk toa lender of non-repayment of a loan (seedefault risk).risk premium?In any investmentthere is a a positive difference between the potential profits from a risky option and those of a less riskyoption.
For example, a safe investment option might be in a water company, anda riskierinvestment option might be in a new and untested electronic gadget. Thepotential returns from the gadget, if it proves to be successful, might behuge, but this potential has to be balanced against its not catching on andbecoming a failure. If the potential profits are large enough, the risk mightbe considered worth taking as opposed to the safer option of investing inwater, something that there will always be demand for but which might notattract high profits for investors. The risk premium is the minimum amount ofpotential profits that would persuade an investor to invest in a particular wayas opposed to a safer but less profitable way.riskier?More risky,more dangerous, than another option.
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