Abstract
The use of financial derivatives is controversial in Islamic Finance.The commonly held opinion is that derivatives are not Sharīʿah compliant, so should not be used in Islamic Finance. The use of Islamic derivatives in some jurisdictions and not in others on the one hand and the lesser clarity regarding their Sharīʿah compliance on the other hand have created uncertainty and thus hindrance for the Islamic Financial Institutions (IFIs) in properly managing the associated risks. This study is an effort to address the said issue.It aims to analyze the forward, futures, options and swap contracts from a Sharīʿah perspective and intends to look for their Sharīʿah compliant alternatives to fill this viable gap,so that the IFIs may not find themselves in an unfavorable position. The current study adopted the qualitative research method to clarify and understand the relevant issues. The analysis showed that, in principle, the current application of derivative instruments is not Sharīʿah compliant due to a number of forbidden elements. Islamic contracts used as the bases or building blocks for developing derivatives conforming to the Sharīʿah principles include BaiʿSalam, Murābahah, Wakalah and Wa’ad based arrangements.Based on these Sharīʿah concepts, alternatives to Short Selling, FX Forward contract, Profit Rate Swap and Cross-Currency Swap were examined which presumably minimize the gap and help the IFIs in the development and careful implementation of these structured products as per the fundamentals of Islamic Finance.
Muhammad Daraz Khan. (2020) Sharīʿah Evaluation of Financial Derivatives and Developing Sharīʿah Compliant Hedging Instruments, Islamic Banking and Finance Review, Volume-07, Issue-1.
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