Beruflich Dokumente
Kultur Dokumente
Derivatives in
in Islamic
Islamic
Finance
Finance An
An Overview
Overview
Obiyathulla Ismath Bacha
Management Centre,
International Islamic University, Malaysia
As with any other financial product, derivatives were the result of financial
innovation. Innovation that responded to the existing need to help manage
risk in increasingly sophisticated business environments.
Options
Increased flexibility
Ability to take advantage of favourable price movts (unlike lock-in)
*managing contingent claims/liabilities.
An asset that does not come with guaranteed fixed returns has
some amount of uncertainty. Infact even a guaranteed instrument
has risks if the issuers credibility is questionable.
What makes risk management challenging is the fact that risks and
returns are generally positively correlated. Thus, the risk-return
tradeoff.
Requisites
Requisites for
for aa Shariah
Shariah Compliant
Compliant Derivative Instrument
Riba can be in different forms and is prohibited in all its forms. For
example, Riba can also occur when one gets a positive return without
taking any risk.
In
Bai Salam
i)
easily
iii)
iv)
The
The Salam
Salam Contract
Contract &
& Islamic
Islamic Financial
Financial
Institutions
Institutions
Since the Salam Contract involves transacting
in the underlying asset and financial institutions
may not want to be transacting in the
underlying asset, there are a number of
alternatives available. These are in the form of
parallel Salam Contracts.
(Jurists however are not all in agreement of the
permissibility).
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(I)
(I) Parallel
Parallel with
with Seller
Seller
Here, after entering into the original Salam Contract, the
bank can get into a parallel Salam sale to sell the
underlying commodity after a time lapse for the same
maturity date.
The resale price would be higher and considered justifiable
since there has been a time lapse. The difference between
the 2 prices would constitute the banks profit. The shorter
the time left to maturity, the higher would be the price.
Both transactions should be independent of each other.
The original transaction should not have been priced with
the intention to do a subsequent parallel Salam
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(II)
(II)
Offsetting
Offsetting Transaction
Transaction with
with Third
Third
Party
Party
Here, the bank which had gone into an original Salam Contract
enters into a contract promising to sell the commodity to a third
party on the delivery date.
Since this is not a Salam Contract the bank does not receive
advance payment.
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18
The
The Baibil-wafa
Baibil-wafa &
& Bai
Bai bil
bil Istighlal
Istighlal Contracts
Contracts
Under this contract, one party sells an asset to a buyer who pledges to sell
back the asset to the original owner at a predetermined future date.
The rahnu (pledge) being to sell back to the owner and not to a third party.
But like a REPO, the buyer has rights to benefits from ownership of the
asset.
The Bai bil-Istighlal is really a combination of the Bai wafa and Ijarah.
Looks like a REPO? Except that the resale price must be the same as the
original purchase price.
Overview
Overview of
of Istijrar
Istijrar
22
PLB
where
P0
P*
PUB
Po
P*
PLB
PUB
=
=
Ps =
or (ii)
Ps =
Payoff
Payoff to
to Istijrar
Istijrar
If Pt < lower bound
(bank losses, buyer gains until exercise)
if; lower bound Pt upper bound
Ps
Ps =
where
Ps
P
Pt
P*
FUQAHA (JURISTS)
VIEWPOINTS ON
CONVENTIONAL DERIVATIVE
INSTRUMENTS
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Future
1
s) Fatwa of Omam Al-Haramaini Al-Jauwaini
Futures Trading is Halal if the practice is based on Darurah and
the Needs or Hajaat of the Ummah
b)
c)
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Options
Options have generally been examined under the fiqh doctrine of alkhiyarat (contractual stipulations) or under the bai-al-urbun concept.
Urbun being a transaction in which a buyer places an initial good faith
deposit.
3)
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31
Warrants
TSRs
Call Warrants
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Conclusion
The overall stance of Fuqaha, of conventional derivative
instruments appears to be one of apprehension even suspicion.
That these instruments could easily be used for speculation
appears to be the key reason for objection.
That derivatives form the basis of risk-management appears to
have been lost.
Key Problem: Evaluation has always been from a purely juridical
viewpoint. And like most juristic evaluation, have relied on
precedence? But there isnt a precedence nor equivalence for
the kind of risk-management problems faced today.
When extrapolating/inferring : template may be wrong.
The object of juridical analysis appears to be a micro
examination of each and every feature of a derivative instrument
to see if it passes, a often subjective religious filter.
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Obvious
Muslim