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Derivative Instruments and Islamic Finance: Some Thoughts for a Reconsideration

Author

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  • Bacha, Obiyathulla I.

Abstract

This paper examines contemporary derivative instruments and the Islamic viewpoint of these new instruments. The validity and permissibility of these instruments appears to vary by scholar. Even where Islamic scholars have found them to be objectionable, their reasons for objection differs. Much of the work by Islamic scholars has been of a highly juridical nature. They examine derivatives within narrow confines of contractual arrangements and thereby miss the broader picture of why instruments like futures and options are needed in modern business environments. This paper analyzes forwards, futures and options, examines the evolution of these instruments, their unique benefits and makes a case for why they are needed. Islamic Finance instruments with derivative like features such as the Ba’i Salam and Istijrar contracts are also examined. Some of the key concerns that Islamic scholars have regarding derivatives is addressed. The paper is divided into four parts. Part 1, outlines the objective and introduces derivative instruments. Part 2, examines the Islamic viewpoint and shariah conditions for financial instruments. Part 3, examines Ba’i Salam and Istijrar contracts. Part 4, clarifies why some of the objections of Islamic scholars regarding features and trading mechanism may be misplaced and concludes.

Suggested Citation

  • Bacha, Obiyathulla I., 1999. "Derivative Instruments and Islamic Finance: Some Thoughts for a Reconsideration," MPRA Paper 12752, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:12752
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    File URL: https://mpra.ub.uni-muenchen.de/12752/1/MPRA_paper_12752.pdf
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    Citations

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    Cited by:

    1. Bengana, Mohamed & Khouildi, Mohamed Yassine, 2018. "Options: From Conventional and Islamic perspectives Analyses on the Islamic solutions," MPRA Paper 84499, University Library of Munich, Germany.
    2. Ehab M. M. INJADAT, 2014. "Futures and Forwards Contracts from Perspective of Islamic Law," Journal of Economics and Political Economy, KSP Journals, vol. 1(2), pages 241-252, December.
    3. Ebrahim, M. Shahid & Rahman, Shafiqur, 2005. "On the pareto-optimality of futures contracts over Islamic forward contracts: implications for the emerging Muslim economies," Journal of Economic Behavior & Organization, Elsevier, vol. 56(2), pages 273-295, February.
    4. repec:hur:ijarbs:v:7:y:2017:i:4:p:232-246 is not listed on IDEAS
    5. Juan Sole, 2007. "Introducing Islamic Banks into Conventional Banking Systems," IMF Working Papers 07/175, International Monetary Fund.
    6. repec:hur:ijarbs:v:7:y:2017:i:8:p:602-614 is not listed on IDEAS
    7. Injadat, Ehab M. M., 2014. "Futures and Forwards Contracts from Perspective of Islamic Law," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 241-252.

    More about this item

    Keywords

    Islamic Finance and Derivative Instruments; The need for a reconsideration of their acceptability;

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • Z12 - Other Special Topics - - Cultural Economics - - - Religion

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