Fiqh Maxim of ‘al-Ghurm bi al-Ghunm’: A Critique on the Interpretation of the Maxim relating to Risk-Return Concept in Islamic Banking and Finance

Purpose – This paper aims to critically review the interpretation of fiqh maxim ‘al-ghurm bi al-ghunm’ which is widely adapted in the Islamic banking and finance while being associated with the risk-return concept. Tracing back the doctrinal sources of Shariah law, the review intends to examine the appropriate meaning of the Shariah texts based on their contexts and occurrences. Design/methodology/approach – This paper inclines to the doctrinal methodology specified to Shariah law whereby the observations, documents and records will be comparatively reviewed for establishing a critical evaluation. A number of doctrinal sources have been gathered to analyse the essence of the subject matter, in which the two types of materials referred to are mainly classical Arabic dictionaries and the books of Hadith. Findings – The review demonstrates a discrepancy on the adaptation of the maxim into Islamic banking and finance in relation to the risk-return concept. Though both principles have similarities in risk return precepts, nevertheless, they also possess differences in terms of interpretation and applications. The context of the Hadiths, which is the Shariah basis of the maxim or from where it is derived, describes specific scenario in relation to asset-based transaction, whereas the risk-return concept is quite generic for risk measurement system that is commonly used in financial management and investment. Research limitations/implications – Even though the general belief says Islamic alternatives to interest bearing financial services are risk-sharing based mode such as musharakah and mudarabah, the argument is hardly supported by and found in present-day academia Though the observations may limit the searching result, they however do not hamper the findings. Originality/value – The paper identifies the apparent gap of the current theories to assist researchers ascertaining the research area. Paper type Conceptual Paper