Contracting with Gharar (Uncertainty) in Forward Contract: What Does Islam Says?

Nordin, Nadhirah; Aziz, Siti Aishah Abdul; Ahmad, Azlin Alisa; Daud, Nadwah

doi:10.5539/ass.v10n15p37

Cited by 5 publications

(4 citation statements)

References 2 publications

(1 reference statement)

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“…In essence, hedging as a strategy to reduce risks or gharar is consistent with the objectives of shariah ( maqasid al-syariah ), which specifically uphold wealth preservation from adverse factors (Nordin et al , 2014; Sakti et al , 2016). However, as argued by Ahmad et al (2012), conventional forex hedging contradicts the other more important shariah rule, riba’.…”

Section: Literature Reviewmentioning

confidence: 92%

Impact of shariah-compliant status on firms’ decision to practice forex hedging

Abdul-Rahim

Wahab

Yusoff

2019

JIABR

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Purpose The purpose of this paper is to investigate whether the shariah-compliant status of the firms negatively influences their use of foreign exchange hedging instruments. Design/methodology/approach This paper uses a logit panel regression on 350 firm-year observations from 70 nonfinancial listed firms over the period from 2010 to 2014. Shariah-compliant companies account for about 84 per cent of the sample firms. Findings Preliminarily, the results show that none of the samples of the shariah-compliant firms report any use of Islamic hedging instrument, either in the form of wa’d or tawarruq. The results of the study’s logit panel regression contradict the authors’ prediction that the shariah-compliant status negatively influences firms’ decision to hedge. In contrast, shariah-compliant companies are twice as likely as their conventional counterparts in adopting forex hedging. Research limitations/implications This study is limited to information disclosed in the items 31, 36 and 37 of financial management policies in the annual report. However, given that shariah-compliant firms must abide by the limit of 5 per cent profits before tax from clearly prohibited activities (including riba’), the need for exclusive disclosure on the adoption of Islamic or conventional hedging appears to be imperative for the viability of the Malaysian Islamic capital market. Practical implications In evaluating the shariah compliance of a company, investors (individual or institutional) must look further than just interest-based riba’ in mixed-business companies to ensure that they comply with the 5 per cent maximum requirement on the non-halal business contribution to profit. This is because the finding of this study indicates that shariah-compliant companies are twice as likely to adopt forex hedging, when none of them reports the use of Islamic hedging tools. Investors must therefore give ample allowance to riba’ that can be induced through the use of conventional forex hedging instruments. This is until the security market regulator imposes a requirement on shariah-compliant companies an explicit disclosure of the use of Islamic versus conventional hedging tools, as they had done in the case of Islamic versus conventional debt instruments. Social implications Muslim and socially responsible investors rely on the Shariah-compliant status of the company in ensuring that their wealth grows according to the Shariah principles. To sustain and develop the Islamic capital market which the firms have been relying on for external capital, Shariah-compliant firms and the authority awarding the status are equally responsible for honoring the trust that these investors by ensuring the permissibility (halal) of the business and the conduct of their business. Originality/value Conventional forex hedging instruments are criticized for violating as-sarf, a shariah principle, which requires the exchanges of particular assets (gold, silver and currency) to be delivered on the spot, and thereby infusing riba’ al-fadhl. Although Islamic (wa’d- or tawarruq-based) hedging instruments are widely available by Islamic banks in this country since they were introduced by Bank Negara Malaysia in 2010, paradoxically, the authors’ observation indicates that none of the studied firms reports the adoption of these instruments in their annual reports.

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Section: Literature Reviewmentioning

confidence: 92%

Impact of shariah-compliant status on firms’ decision to practice forex hedging

Abdul-Rahim

Wahab

Yusoff

2019

JIABR

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“…In Islamic finance context the main concept related to asymmetric information is gharar. As the Quran and the saying of the Prophet did not refer to just one case of gharar a number of definitions exist for the concept (Ahmad, 2004;Nordin et al, 2014). Al-Darir (2004) divides the definitions given by scholars to gharar to three clusters.…”

Section: Asymmetric Information In the Islamic Finance Contextmentioning

confidence: 99%

Asymmetric Information and Islamic Financial Contracts

Benamraoui¹,

Alwardat²

2018

IJEF

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This research paper aims to examine the relevance of asymmetric information to the two main financial contracts used by Islamic banks or conventional banks with Islamic windows, mudaraba and musharaka. We use theoretical proofs to explain how asymmetric information affects mudaraba and musharaka contract in terms of bank cost and yield and how to account for the adverse selection and moral hazard costs when calculating bank net profit or loss. We also provide suggestions supported by key modern theories including signalling, comparative advantage and incentives to resolve asymmetric information problems in the Islamic financial contracts. The research paper shows that asymmetric information is relevant to both mudaraba and musharaka contracts and directly affects Islamic banks and conventional banks with Islamic windows cost and yield. The paper also reveals that signalling and incentives are effective tools to deal with asymmetric information in Islamic financial contracts. Finally, the paper shows that Islamic finance providers need to opt for more secure financing, particularly with small borrowers.

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“…In this vein, Doney et al (1998) identify Muslim societies as having little tolerance to uncertainty (high uncertainty avoidance) and risk resulting in a much lower propensity to trust (also in Zak & Knack, 2001). In this respect, the Islamic stance concerning the Quranic instruction to avoid uncertainty and unnecessary risk "gharar" (Arabic: ‫)غرر‬ is widespread throughout the literature (Al-Suwailem, 2000;Berg & Kim, 2014;Elgari, 2003;Nordin, Aziz, Ahmad, & Daud, 2014). Kühlmann (2005) concludes that increased levels of uncertainty in high uncertainty avoidance collectivist societies not only results in a reduced propensity to trust, but can also in a propensity to distrust.…”

Section: High Uncertainty Avoidance Culturesmentioning

confidence: 99%

“…In this regard, interviewees exposed community opinions that where there is doubt then the prevailing Islamic instruction is to treat uncertainty as haram (forbidden), and as such, it should be avoided. The Islamic instruction to avoid uncertainty ("gharar" -Arabic: ‫)غرر‬ and its associated risk when making decisions is notably present throughout the literature (Al-Suwailem, 2000;Berg & Kim, 2014;Elgari, 2003;Nordin et al, 2014). Gudykunst (1995) asserts that failure on the part of low uncertainty avoidance societies (including Australia) to recognize the implications of high uncertainty avoidance societies (including Muslim societies) can result in problematic relationships.…”

Section: A Climate Characterized By Uncertaintymentioning

confidence: 99%

Community engagement with Muslim communities: pitfalls and opportunities in a climate of counter-terrorism

Hartley¹

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In a climate of counter-terrorism, police engagement of Muslim communities can be a difficult enterprise. The vast majority of literature in relation to counter-terrorism community engagement recognises the importance of trust and Muslim leadership as the foundation of relations with Muslim communities. This study attempts to understand the role and implications of uncertainty on community engagement in Muslim communities. Secondly, the research seeks to better understand and characterise the cultural nuances associated with Muslim decisions to bestow trust and engage police. The research investigates the implications for Muslim leaders when trying to simultaneously engage police and appease their own community. This study adopts a qualitative approach, drawing on interviews with Muslims (N = 29) and police officers (N = 14) in South East Queensland. The analysis exposes community perceptions of an over-reaction by authorities that has moved suspicion from a handful of terrorists to the entire Muslim community, resulting in community perceptions that Muslim communities are being targeted by police. The analysis suggests that the intentionality of police is a highly significant consideration in trust negotiations between police and Muslims. The study exposes a number of cultural preferences considered critical to trust negotiations in a manner that further highlights opportunities to enhance the development of trust and avoid pitfalls that can be problematic to community engagement. Results show that community engagement with police can also negatively impact the efforts of Muslim leaders to win and retain legitimacy in their own communities. The lessons learned from the analysis seek to further enhance the existing body of literature regarding strategies and resources to improve counter-terrorism community engagement with Muslim communities.

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Contracting with Gharar (Uncertainty) in Forward Contract: What Does Islam Says?

Cited by 5 publications

References 2 publications

Impact of shariah-compliant status on firms’ decision to practice forex hedging

Impact of shariah-compliant status on firms’ decision to practice forex hedging

Asymmetric Information and Islamic Financial Contracts

Community engagement with Muslim communities: pitfalls and opportunities in a climate of counter-terrorism

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