Shari’ah issues, challenges, and prospects for Islamic derivatives: a qualitative study

Abstract

Purpose The purpose of this study is to investigate shari’ah scholars’ views and experiences pertaining the shari’ah issues, challenges and prospects in Islamic derivatives. Specifically, this paper critically examines the criticisms toward conventional derivative instruments and the controversies surrounding underlying contracts and current Islamic derivative products. Design/methodology/approach This study uses qualitative methods to form a deeper understanding of shari’ah scholars’ perception and experience on Islamic derivatives. Semi-structured interviews were conducted with five shari’ah scholars who are currently working in Islamic financial institutions in Malaysia and Singapore. This study used phenomenological techniques for its data analysis. Findings This study has found that shari’ah scholars are aware of the shari’ah issues surrounding Islamic derivatives and have provided comprehensive insight on the solution to these issues. It was found that it is important to take into account the derivatives instruments in Islamic financial industry because of the need for hedging and risk mitigation within Islamic financial institutions. Nonetheless, the study has also found that the use of wa’ad contracts to structure Islamic profit rate swaps and foreign currency exchanges are problematic because of it having features of bay’ al-kali’ bil-kali (the sale of one debt for another). Originality/value This study is one of few studies that highlight the shari’ah issues of Islamic derivatives in Islamic banking and finance industry. This paper is of value in discussing risk management and Islamic derivatives in Islamic financial institutions and how there are many issues under the investigation process, particularly issues related to controversial underlying contracts and products.

An Article Review on Islamic Derivatives: Theory and Practice, Global Islamic Finance Report (GIFR) 2010

“…This is imperative to note that development of idea to search derivatives features in Islamic finance classical contracts has been tremendously significant where comprehensively programmed in the early academic literature works in some talent development institutions. Impressively many has agreed on the ground elements of derivatives salam, istisna and joala while few has shown disagreement (INCEIF, 2012b;Hisham & Jaffar, 2014;Munir & Ryan, 2016;Sakti et al, 2016).…”

Islamic finance and food commodity trading: is there a chance to hedge against price volatility and enhance food security?

“…Current challenges for the Islamic derivatives market were studied by Sakti et al (2016), who interviewed five Shariah scholars working with Islamic financial institutions in Malaysia and Singapore. As a result, the authors question the legibility of certain alternatives contracts, particularly, Islamic profit rate swaps through wa'd (promise) contracts.…”

“…Kunhibava and Shanmugam (2010) refer to Zahra and Mahmor (2002), who also maintained that non-existence of the goods does not always imply the sale prohibition, and to the decision of the Shariah Advisory Council of the Malaysian Securities Commission, which permitted futures contracts for palm oil, based on the opportunities to minimize contract uncertainty. This decision is reported to be based on the common commercial practice ('urf tijari), public interest (maslaha) and avoidance of impediments (Sakti et al, 2016).…”

“…One of the sound alternatives in case Islamic finance architecture develops a new type of product within the taureed group of contracts with further approval from IIFA/AAOIFI 8 Commodity funds A hedging instrument as alternative to conventional index funds Usmani, 2016 Certain amount of tangible assets should be always available in order to secure the fund tradability A solution which could contribute to Islamic finance infrastructure and requires broader practical implementation 9 Wa'd (a binding promise from one party) Suggested by AAOIFI as an alternative to options AAOIFI, 2004a Kahf, 2011 Certain practical implementation as alternatives to swaps is questionable from the Shariah point of view (Sakti et al, 2016) There is a risk that in practice it would be converted to a binding contract rather than a promise.…”

Can Turkey Implement Malaysian Takaful Know-How into Turkish Market?: A Qualitative Inquiry

“…Qualitative analysis methods have been widely used in recent literature. Various qualitative studies have been conducted in the field of home financing (Loke Ke Wei & Mohd Thas Thaker, 2017), Islamic banking (Ayedh & Echchabi, 2015;Echchabi & Abd Aziz, 2014), Islamic stock markets and derivatives (Jaiyeoba & Haron, 2016;Sakti et al, 2016), andtakaful (Faisal Nazir Hussain &Noor, 2018;Mohammed et al, 2014;Mohd Fauzi & Abdul Rashid, 2014;Noordin & Fares, 2017). Different countries investigated by qualitative analysis, and most of these studies used semi-structured interviews.…”