Islamic Banks and Financial Stability: A Theoretical Perspective on the Risk-Sharing Model

This study examines the potential role of Islamic banks in promoting financial stability through the principles of risk sharing, asset-backed financing, and the prohibition of interest and excessive uncertainty. Unlike conventional banking, which is largely based on interest-bearing debt and risk transfer, Islamic banking theoretically emphasizes the distribution of risks and returns among the parties involved in financial transactions. The study discusses how profit-and-loss-sharing instruments, particularly mudarabah and musharakah, can strengthen the relationship between financial activities and the real economy while reducing excessive leverage and speculative behaviour. It also considers the role of asset-based instruments, such as murabahah, ijarah, and sukuk, in supporting productive economic activities. From a theoretical perspective, these characteristics may enhance the resilience of Islamic banks during periods of financial instability. However, the widespread reliance on debt-like instruments, liquidity-management constraints, regulatory differences, and limited use of genuine risk-sharing contracts may reduce these expected advantages. The study concludes that Islamic banks can contribute to financial stability when their operations reflect the substantive principles of Islamic finance rather than merely reproducing conventional financial products in Sharia-compliant forms.