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BY : KUMAIL RIZVI NABEEL HUSSAIN MURTAZA ABIDI FURQAN SYED KASHAF JAMAL
Introduction of derivatives
A type of a contract between two parties in which one party will deliver a pay off (in money, commodity or a good) to another, sometime in the future It depends on
Types of derivatives
Futures Forwards Options Swaps
The first Islamic bank explicitly based on shariah principles was established by the Organization of Islamic countries (OIC) in 1974
The Shariah compliant institutions avoid riba(interest), risk/uncertainty (gharar) and speculation(maysir)
1. According to Shariah that sale or purchase cannot be affected for a future date.
2. In most of the Futures transactions, delivery of the commodities or their possession is not intended. In most cases, the transactions end up with the settlements of difference of prices only, which is not allowed in the Shariah.
Since the options (both put and call) transactions are based on charging fees on these promises, they are not valid according to the Shariah.
Islamic Derivatives
Bai salam : is essentially a transaction where two parties agree to carry out a sale/purchase of an underlying asset at a predetermined future date but at a price determined and fully paid for today.
Bai Salam is subject to several conditions:
Full payment by buyer The underlying asset must be standardized
Istisna : under this contract the underlying asset is yet to be manufactured. The buyer contracts a manufacturer for the product with the specifications. The price is agreed upon and fixed but not paid The contract can be cancelled before production starts.
Bail bil-wafa : 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. However, the resale price must be the same as the original purchase price
Ishtijrar : a newly introduced instrument, some what like an option. A typical Istijrar transaction could be as follows; a company seeking short term working capital to finance the purchase of a commodity like a needed raw material approaches a bank. The bank purchases the commodity at the current price (Po ), and resells it to the company for payment to be made at a mutually agreed upon date in the future for example in 3 months. The price at which settlement occurs on maturity is contingent on the underlying assets price movement from t0 to t90. Where t0 is the day the contract was initiated and t90 is the 90th day which would be the maturity day.
The embedded option is the right to choose to fix the price. At the initiation the two parties agree on
1) pre-determined murhaba price which could be p* = Po (1+r), or an average of the price of 90 days. 2) the upper and lower bounds of Po
Futures
Shariah advisory council of securities commission Futures trading of commodities is approved as long as underlying asset is halal Crude Palm Oil Futures Contracts are approved for trading
Futures Trading is Halal if the practice is based on Darurah and the Needs or Hajaat of the Ummah
Ustaz Ahmad Allam; Islamic Fiqh Academy (14/5/1992) Until and unless the underlying asset or basket of securities in the SIF is all Halal; SIF trading is not approved. Mufti Taqi Usmani Sale and purchase cannot be affected at a future date In most futures transactions delivery or possession is not intended. Futures contracts are prohibited whether they are used for speculation or hedging.
Options
Ahmad Muhayyuddin Hassan Maturity beyond three days is unacceptable on grounds of khair al- shart (object to stipulation)
Conclusion
Conventional derivative instruments are not acceptable under Shariah due to presence of speculation and unnecessary risk present.