Interest Risk Analysis in Comparison with a Profit and Loss Sharing Financial System

In addition to such variables as the level of income and its time- span, the revenue risk of financial institutions has an important role in their success and efficiency. The present paper, focusing on aforementioned element, investigates the distinction between interest-based financial institutions and participatory financial institutions in view of their revenue risk. The research hypothesis is that investor’s risk in interestloaning system is more than his/her risk in a profit and loss sharing system. To test this hypothesis, investors’ risk in participatory institutions and interest-based institutions has been analyzed, using simple variance method and Johnson’s inequation method and corollaries of Rothschild-Stieglitz model. The results show that investor’s risk in interest loaning system is more than his/her risk in a system based on participation in benefit and loss. More risk in interest loaning system means less stability, more distance form justice, less growth, and as a result, less efficiency and welfare.