Risk-sharing transactions and undertakings under the participatory finance models in Islamic finance also enhances prospects for increasing financial inclusion and in bringing the financially unserved into the economic mainstream. In many IDB member countries, studies have shown that economic development is constrained by the lack of access to finance, given that only about 30 percent of the adult population use formal financial intermediaries. Greater outreach to small and medium enterprises (SMEs) and microenterprises can be achieved through the wider application of equity-based structures in financing for SMEs and Islamic microfinance given their strong emphasis on promoting entrepreneurship and valuecreating activities. This contributes towards the overall objective of generating inclusive growth that enhances the prospects for job creation. Integration with other financial products such as microtakaful and social welfare arrangements such as endowment (waqf) can also provide a total financial solution for the lower income groups and small businesses. Risk-sharing in Islamic finance also extends to the creation of a more equitable and just distribution of wealth. Redistributive instruments such as obligatory alms giving (zakat), endowment (waqf) and charity (sadaqah) complement risk-sharing financing tools to form part of a comprehensive approach to address poverty and promote social justice within the community, aspects that are important in increasing the potential for a more balanced economic growth.

The explicit risk-sharing element between the financier and customer instils greater discipline and responsibility, given the obligation and economic incentives created for participants to the contract to evaluate the risk profile of the product or investment proposition, the underlying trends in earnings and cash flows, and its income-producing potential. Such a process strengthens safeguards against the widespread mispricing of risks. The strong incentives for financial institutions to understand the nature and level of risk and leverage that is embedded in the Islamic financial instruments would in turn lead to more responsible innovation. This ensures that the products offered are aligned in delivering real benefits for the investors. Reinforced by a combination of stronger governance, enhanced transparency and more robust risk management, the trust-based relationship that underpins Islamic finance is therefore strengthened, thereby promoting overall confidence in the intermediation process. More recently, in this decade, the greater use of equity-based models has been most evident in the sukuk market, with Shariah structures evolving from predominantly lease-based (Ijarah) and mark-up sale (Murabahah) structures to profit and loss sharing partnerships (Musharakah), as well as convertible and exchangeable trusts. The evolution of assetbacked and asset-based sukuk provides further options for investors to diversify their portfolio. Asset-backed sukuk, has profit and loss sharing elements that thus offers investment sustainability. The possibility of a default is minimised, as investors of assetbacked sukuk are not guaranteed to receive income or capital gains, and profits are paid by the issuers only when the underlying assets earn profits.