Re-visiting Current Debate on Shariah Position of Derivatives

Zaheer Anwer, Farrukh Habib
Published Online: June 2019
Abstract

The current practices in Money, Capital, Foreign Exchange and Securities markets, based on interest and short selling, stress upon using hedging instruments for risk management. Nevertheless, there is disagreement among scholars and researchers regarding permissibility status of these instruments. Although majority of Islamic economists and scholars have expressed serious concern on the use of financial engineering products, a number of scholars insist on their use by the Islamic financial institutions. The present study aims to evaluate the permissibility status of derivatives in the light of the main features of Islamic law of contract. It is found that, while the hedging instruments may carry various advantages for individual institutions, their usage leads to fragility in the global financial system and markets owing to involvement of gharar, short selling and interest. In order to circumvent the Shariah prohibitions their structures are extremely complicated that lead to deviance from real economic activity. Although some Muslim jurisdictions have allowed derivatives, their usage is not appropriate in the light of set principles for a valid contract, as envisaged by Shariah. Muslim countries and scholars need to develop distinguished instruments for hedging risk in a Shariah compliant manner. This study thus provides with an extensive overview of scholarly views and contemporary practices and offers objective evaluation of derivative contracts.


Keywords

Islamic finance; Risk management; Hedging; Derivatives, Structured products. .