Abstract:The debate concerning permissibility and use of options in Islamic finance is ongoing, and the issue is far from settled. Current analyses on this issue appear to focus on taking of unnecessary risks ( gharar), the perceived lack of a physical asset in an options contract, and the possibility of exploitation of the ignorant. To the extent that these factors are involved, options are not permitted under Islamic teachings (the Shariah).
In this article, we investigate whether options may be permitted for hedging… Show more
“…He observes that in the absence of derivative markets, the funds belonging to Muslim investors may move to foreign markets to the detriment of community as a whole. Smolarski, Schapek, and Tahir (2006) highlight many advantages of derivatives contracts and claim that the criticism does not take into account various functions performed by them. To them, derivatives are beneficial in risk reduction and protect the buyers from financial loss.…”
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 Sharī'ah 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 Sharī'ah. Muslim countries and scholars need to develop distinguished instruments for hedging risk in a Sharī'ah compliant manner. This study thus provides with an extensive overview of scholarly views and contemporary practices and offers objective evaluation of derivative contracts.
“…He observes that in the absence of derivative markets, the funds belonging to Muslim investors may move to foreign markets to the detriment of community as a whole. Smolarski, Schapek, and Tahir (2006) highlight many advantages of derivatives contracts and claim that the criticism does not take into account various functions performed by them. To them, derivatives are beneficial in risk reduction and protect the buyers from financial loss.…”
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 Sharī'ah 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 Sharī'ah. Muslim countries and scholars need to develop distinguished instruments for hedging risk in a Sharī'ah compliant manner. This study thus provides with an extensive overview of scholarly views and contemporary practices and offers objective evaluation of derivative contracts.
“…Owing to the lack of professional expertise in the area, many banks in different countries stick to generic products like Mudarabah and Musharakah without taking into consideration customer preferences and market needs. Though hedging instruments are not been used extensively by IBs, Smolarski, Schapek, and Tahir (2006) studied alternatives from Islamic perspective and concluded that derivative choices might be allowed for supporting purposes in Islamic finance. They contended that if the basic financial service is itself admissible from Islamic perspective then there should be no problem in usage of derivative securities based on that financial service.…”
This paper aims to examine the challenges posed to the global banking environment with the advent of phenomenal growth in Islamic banking and the changing macroeconomic environment. The paper reviews different approaches to analyze the banking sector performance and the success or failure thereof. The paper also identifies the main factors affecting banking sector performance and their relative impact on the overall stability and resilience of banks. The approach of this paper is more judiciously diagnostic and synthesizing in nature. The paper covers significant studies undertaken in banking sector and synthesizes the nature of elements used to predict the predilection status of Islamic and conventional commercial banks. The findings suggest that return on equity (ROE) and weighted capital adequacy ratio (WCAR) are the most important bank-specific factors that may be used to analyze bank's performance. The findings also suggest that not only bank-specific but macroeconomic factors also play an important role in determining a bank's performance in an economy, though the effect is usually widespread. Amongst macroeconomic factors, GDP growth rate, inflation, and real interest rate are most common factors affecting bank performance. This research is different from other researches as it takes into consideration the methodological, aeon and acclimatization perspective. Most researches do not see Islamic banking as a challenge to conventional commercial banking and the banking sector in general. The paper not only reviews Islamic banking as a major element of change in the overall banking environment but also as a potential intimidator to the conventional banking stream.
“…Arguments valid the acceptability of option contract a) (Smolarski, Schapek, & Tahir, 2006) argument emphasis on unnecessary risks (gharar) consumption, the anticipate lack of a physical asset in an options agreement, and tendency to manipulate the ignorant. They argue due to these issue, options may be permitted under Shariah teaching for hedging purposes as long as the economic underlying activities are themselves permissible (halal) from Islamic point of view.…”
Abstract:The popularity of derivative instruments especially in managing uncertainty (risk) had become popular after several financial crises that occurred since the Great Economic Depression. There are various tools have been developed in managing risk such as the Options, Forwards, Futures and Swaps. In addition, these kinds of tools are commonly used by institutional and individual investors. Given this popularity, conventional risk management strategies is completely against from Islamic risk management as Islamic financial market are keep on growing drastically at Cumulative Average Growth Rate (CAGR) of 15% on yearly basis (Mckinsey, 2005). This is clearly shows that, Islamic finance development are in line with conventional financial development. Therefore, there is need to maintain consistency in product structures offered by these two financial markets. The complexity is mainly contributed by the structures and the design of the products especially on Islamic derivatives tools. Therefore, to get a significant picture of the Islamic risk management tools, this paper will only examines the contemporary derivative instruments namely; Option and the Islamic viewpoints of this instrument . As we know, Islamic finance is governed by Shariah principle and guidelines which prohibit Riba, Gharar, and Masir etc. Therefore, this paper attempts to explore the validity of options from Islamic and Shariah perspectives by reviewing Islamic scholar's opinions on an options market.
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