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Operative Principles of Islamic Derivatives

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  • Juan Sole
  • Andreas Jobst

Abstract

Derivatives are few and far between in countries where the compatibility of financial transactions with Islamic law requires the development of shari''ah-compliant structures. Islamic finance is governed by the shari''ah, which bans speculation and gambling, and stipulates that income must be derived as profits from the shared generation of goods and services between counterparties rather than interest or a guaranteed return. The paper explains the fundamental legal principles underpinning Islamic finance with a view towards developing a cohesive theory of derivatives subject to shari''ahprinciples. After critically reviewing accepted contracts and the scholastic debate surrounding existing financial innovation in this area, the paper offers an axiomatic perspective on a principle-based permissibility of derivatives under Islamic law.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/63.

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Length: 33
Date of creation: 01 Mar 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/63

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Keywords: Financial instruments; Islamic banking; islamic finance; murabaha; hedging; derivative; islamic law; riba; ijara; financial institutions; islamic bank; islamic scholars; fiqh; hadith; financial market; islamic contracts; present value; hedging tools; financial markets; islamic futures; futures contracts; cash flows; hedge; islamic development; islamic principles; derivatives transactions; salam contract; islamic research; islamic jurisprudence; sukuk; derivative instruments; financial services; net present value; ijarah; future value; financial derivatives; financial stability; financial innovation; islamic bond issuance; hedges; salam contracts; commodity hedges; futures trading; contingent valuation; islamic bond; mudaraba; risk-free interest rate; stock price performance; islamic banks; islamic instruments; mudarabah; international financial markets; financial derivative; international capital; bond; islamic studies; stock price; islamic finance industry; riba al-fadl; financial globalization; musharaka; interest rate risk; sale of debt; stock exchange; stock options; discounting; international capital markets; islamic banking activities; permissible mubah; currency mismatch; bay al-dayn; islamic contract; derivatives trading; musharakah; futures market; money market; hedging instruments; islamic economics; money market deposits; islamic economy; derivatives market; financial sector; derivative product; islamic securities; bond issuance; financial intermediation; credit derivatives; financial contracts; commodity futures;

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  1. Andreas Jobst, 2007. "The Economics of Islamic Finance and Securitization," IMF Working Papers 07/117, International Monetary Fund.
  2. Heiko Hesse & Andreas (Andy) Jobst & Juan Solé, 2008. "Trends and Challenges in Islamic Finance," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 9(2), pages 175-193, April.
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