Risk Management in Islamic Finance: An Analysis of Derivatives Instruments in Commodity Markets (Brill's Arab and Islamic Law) PDF
Preview Risk Management in Islamic Finance: An Analysis of Derivatives Instruments in Commodity Markets (Brill's Arab and Islamic Law)
Risk Management in Islamic Finance Brill’s Arab and Islamic Laws Series Editorial Board H.H. Prof. Eugene Cotran Mark Hoyle Martin Lau VOLUME 1 Risk Management in Islamic Finance An Analysis of Derivatives Instruments in Commodity Markets By Muhammad al-Bashir Muhammad al-Amine LEIDEN • BOSTON 2008 This book is printed on acid-free paper. Al-Amine, Muhammad Al-Bashir Muhammad. Risk management in Islamic finance : an analysis of derivatives instruments in commodity markets / by Muhammad Al-Bashir Muhammad Al-Amine. p. cm. — (Brill’s Arab and Islamic laws series, ISSN 1871-2894 ; v. 1) Includes bibliographical references and index. ISBN: 9789004152465 (hardback : alk. paper) 1. Commodity exchanges—Law and legislation. 2. Commodity exchanges—Religious aspects—Islam. Finance (Islamic law) Option (Contract law, Islamic) Sales (Islamic law) Risk management—Religious aspects—Islam. KBP962.8 .A43 2008 332.64/4091767 22 2008029640 ISSN 1871-2894 ISBN 978 90 04 15246 5 Copyright 2008 by Koninklijke Brill NV, Leiden, The Netherlands. Koninklijke Brill NV incorporates the imprints Brill, Hotei Publishing, IDC Publishers, Martinus Nijhoff Publishers and VSP. All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission from the publisher. Authorization to photocopy items for internal or personal use is granted by Koninklijke Brill NV provided that the appropriate fees are paid directly to The Copyright Clearance Center, 222 Rosewood Drive, Suite 910, Danvers, MA 01923, USA. Fees are subject to change. printed in the netherlands CONTENTS List of Tables ......................................................................................... ix List of Statutes ...................................................................................... ix List of Cases .......................................................................................... ix Acknowledgments ................................................................................ xi List of Contemporary Scholars .......................................................... xiii The Islamic Fiqh Academies .............................................................. xix Transliteration ....................................................................................... xxi Chapter One Introduction ............................................................ 1 Background of the Research ........................................................ 1 Objectives of the Research ........................................................... 7 Research Methodology ................................................................. 8 Scope and Limitations of the Study ........................................... 10 Outline of Chapters ....................................................................... 12 Distinctive Features of the Research .......................................... 14 Literature Review ........................................................................... 15 Forward and Futures Contracts .................................................. 15 Options Contracts ......................................................................... 35 Chapter Two The Forward Commodities Market ..................... 44 Economic Benefits of the Forward Contract ............................ 45 Istisṇ āʿ and the Forward Contract .............................................. 61 Ibtidāʾ Al-Dayn Bi Al-Dayn and the Forward Contract ......... 63 Bayʿ Al-Sịfah and the Forward Contract ................................... 65 Nonexistence of the Subject Matter and the Forward Contract ...................................................................................... 67 Chapter Three Is it Permissible to Exchange Gold with Paper Money on Forward Basis? ................................................ 72 Historical Sketch of the World Monetary System .................... 72 Critical Analysis of Several Fatwās on Gold Trading .............. 75 The ʿIllah behind Trading Gold unless Its Hand to Hand ...... 84 The Effect of the ʿIllah in Gold to Its Trade on a Forward Basis ............................................................................................. 87 vi contents Chapter Four The Forward Market for Currencies ................... 94 Basic Rules of Currency Exchange and Paper Money ............ 94 Mutual Promise in Currency Exchange ..................................... 103 Mutual Loan and Currency Risk Management ........................ 109 Currency Basket and Risk Management ................................... 110 Managing Price Fluctuation through Deposit .......................... 111 Cooperative Funds and Currency Risk Management ............. 111 THE FUTURES MARKET Chapter Five Concept, Scope of Futures Contracts and Speculation ..................................................................................... 121 Concept of Futures Contracts .................................................... 121 Characteristics of a Succesful Futures Market .......................... 123 Futures Contracts and Forward Contracts ................................ 124 A Brief History of the Commodity Market .............................. 130 Scope of the Futures Market ........................................................ 133 Economic Benefits of Futures Contracts ................................... 134 The Clearinghouse and the Futures Market .............................. 139 Hedging and the Futures Market ................................................ 141 Speculation and the Futures Market .......................................... 143 Speculation and Financial Crises ................................................ 150 Arbitrage and Speculation ............................................................ 155 Margin Trading and Speculation ................................................ 157 Chapter Six Sale Prior to Taking Possession, Sale of Debt and Futures Contract .................................................................... 159 Juristic Debate over Sale prior to Taking Possession .............. 159 The Meaning of Taʿām .................................................................. 164 Salam and the Futures Contracts ............................................... 165 Parallel Salam and the Futures Market ...................................... 167 Chapter Seven Futures Market Regulation ................................. 177 Intermediaries in the Futures and Options Market ................. 177 The Fidelity Fund .......................................................................... 180 Futures Market Regulation .......................................................... 181 Trading Offences Under the Futures Industry Act and Islamic Law ................................................................................ 186 contents vii THE OPTIONS MARKET Chapter Eight Concept and Scope ............................................... 195 Concept of Options ....................................................................... 195 Definition ........................................................................................ 196 Economic Benefits of Options ..................................................... 198 American and European Options ............................................... 203 Types of Options ........................................................................... 204 Exchange Traded and Over-The-Counter Islamic Options .... 206 A Brief History of Options Trading ........................................... 207 Scope of Options ........................................................................... 208 Options and Gambling ................................................................. 210 Chapter Nine Khiyār Al-Sharṭ, Risk Management and Options ............................................................................................ 222 Concept of Khiyār Al-Shart ̣ ......................................................... 223 The Terms of Khiyār Al-Shart ̣ ..................................................... 224 Ownership of Commodity During the Period of Khiyār and Libiality for Damage ................................................................. 226 Managing Price Risk with Khiyār Al-Shart ̣ ............................... 228 Khiyār Al-Naqd .............................................................................. 234 Chapter Ten ʿArbūn Risk Management and Options ............... 237 The Legal Status of Bayʿ Al-ʿArbūn ............................................. 241 ʿArbūn in Currency Exchange or sạ rf ........................................ 242 ʿArbūn in Commodities and Services ........................................ 242 ʿArbūn in Shares Trading ............................................................. 244 ʿArbūn in Murābaḥah .................................................................... 245 ʿArbūn in Salam ............................................................................. 250 ʿArbūn in ʿIstisṇ āʿ ........................................................................... 251 ʿArbūn as the Islamic Alternative to Options ........................... 252 ʿArbūn as an Alternative to Call Option .................................... 253 ʿArbūn as an Alternative to Put Option ..................................... 254 Does Options Trading Involve the Combination of Two Contracts in One Transaction? ............................................... 264 viii contents Chapter Eleven The Sale of Pure Rights and the Legality of Options ....................................................................................... 266 Concept of Māl or Property ........................................................ 273 Haqq Al-Nuzūl ʿAn Al-Wazāʿif and the Sale of Rights ............ 276 Huqūq Al-Irtifāq and the Sale of Rights .................................... 278 Badal Al-Khulu and the Sale of Rights ...................................... 280 Sale and Exchange of the Right of Precedence ........................ 282 Intellectual Property and the Sale of Right ............................... 284 Right to Option in Khiyār Al-Shart ̣and Right of Shufʿah or Pre-Emption as Property Rights ........................................ 287 Sale and Exchange of the Right to Option in Khiyār Al-Shart ̣and the Right to Pre-Emption or Shufʿah ............ 290 Exchange of Right to Bargain for Purchase of Commodity ... 294 Sale of a Right By a Wife To Have Her Husband With Her ... 295 Earning an Exchange For Waiving the Right To Hadānah .... 295 Earning an Exchange For Waiving a Right ............................... 296 Conclusion .......................................................................................... 299 Glossary of Arabic Terms ................................................................. 309 Bibliography ........................................................................................ 319 Index .................................................................................................... 329 Abstract ............................................................................................... 333 ﺚﺤﺒﻟا ﺺﺨﻠﻣ .......................................................................................... 338 LIST OF TABLES 1.1 Opinion of Major Schools on the Conditions of Salam .... 53 2.2 Comparison Between Futures and Forward Contracts ..... 126 LIST OF STATUTES Company Act 187 Futures Industry Act 11; 12; 18; 159; 161; 162; 187; 240; 241; 242; 143; 245; 247; 252; 254; 258 Securities Industry Act 11; 12; 247 LIST OF CASES Sydney Futures Exchange Ltd v. Australian Stock Exchange Ltd (1995) 13 ACLC 369 .................................................................. 121 Richardson Greenshields of Canada(Pacific) LtD v. Keug Chak-kiu and Hong Kong Futures exchange LtD (1989) 1 HKLR 476 ........................................................................................ 210
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