 In this module, we shall explain pricing of risk in Islam. What is the Islamic stance on pricing of risk? And this would be quite a bit in detail. Can the risk be sold for a price? This is a question which we have asked even in the previous module. To answer this question, it is important to take into account certain points about risk. Number one, for example, risk is not recognized as a tradable item in Islam. So this is the starting point. Risk is not a tradable item in Islam. Hence, risk cannot be bought and sold on its own. However, on its own this is very important. However, risk can be bought and sold when it is part of another activity. An extreme example of trading in risk is gambling. And let me explain. What do we mean by that one? If I ask you to give me 1000 rupees and I would create a situation, what is that situation? I would throw a dice on the floor or on the table or wherever. If 6 comes up, I will keep this 1000. If anything else comes up, I will actually pay you 10 times of this 1000. So I have created this situation which is risky for me. I am charging you 1000 rupees to sell you this risky situation. That risky situation may generate an outcome of 10,000 rupees or nothing. So that is what we mean by an extreme example of trading in risk is gambling. Another example could be conventional insurance. And this is something we would be focusing on in our segment on Takaful which is an Islamic version of insurance. In Islam, risk cannot be priced and sold. However, risk management through risk sharing is incorrect. This is why we have Islamic modes of financing like Mudarbha and Musharka. They are actually risk sharing instruments. Why is risk not tradable? In Islam, anything with a sharia recognized value can be bought and sold, rented or gifted i.e. exceed. This sharia recognized value, this is a very important requirement. Islam does not recognize any value in alcohol for example, any intoxicating substance. Because of that, it is not permissible for Muslims to buy or sell or gift alcohol to someone for consumption. So it is not only that drinking of alcohol is prohibited rather buying, selling, leasing or even gifting. This is not permissible as well in Islam. Just to exemplify, just to explain, if someone sends you a bottle of wine and you say that this is something I cannot drink, you cannot gift it to someone else, a non-Muslim, who actually can consume it. So it cannot be gifted either. Risk is not a valuable thing as I said earlier. It is not a valuable asset, it is not even a valuable right. Rather it is something, it is a happening or the possibility of happening something, a process, a consequence that people would like to avoid. This is something bad. Hence, risk is not a valuable asset and it cannot be traded for a price. So this is the answer to this question, why risk is not tradable? Let us see credit risk. What is credit risk? Credit risk is the possibility of a loss resulting from a borrower's failure to repay a loan or meet contractual obligation. That is what we call credit risk. Credit risk cannot be priced and hence cannot be bought and sold in an Islamic frame. In conventional framework of course credit risk is recognized and it is priced as well. But how about credit risk in credit sale? Islam does allow credit risk and its pricing in credit sales but from a different perspective. Many scholars would say that this is not actually the case of pricing credit risk. Credit sales, they allow an increase in price because the item is being sold on a credit basis on the deferment of the price basis. However, the price, this increase in price may not necessarily be because of the credit risk. On the contrary, this could be reflected by the opportunity cost of the trade and not the credit risk per se. What does this mean? I used a difficult language, let me explain it in a simple kind of example. So there is a party A seller, there is a party B. This party A is the shopkeeper, party B is the owner. Now if party A sells this item to party B on credit. Of course this seller has bought this commodity from the wholesale market by paying this price, wholesale price and of course this party is going to pay this PM1 to party A after a certain time period. After a month. Now in this one month, the shopkeeper does not have that money. And the shopkeeper cannot do business with that money in this one month. That is what we call opportunity cost. Now if there was money, he would have sold the party B to the spot. He would have bought that item from the wholesale market. He sold it to someone else, he sold it to party C, he sold it to party D. He sold many transactions with that money. Of course by charging PM0 here, PM0 again, another price. And of course during this process, the shopkeeper is paying this wholesale price to the person or the shop or the wholesaler. He is buying the commodity from. The total profit of the party A in this context would be PM0 minus PW. If there are three transactions during this time period, multiplied with pre. Now this profit, the first case, the credit sale case, can be more than that. It can be equal to that and it could actually be less than that one. These possibilities, three possibilities justify pricing of risk in a credit sale and not the credit risk per se. I hope that you have understood this delicate difference.