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DERIVATIVES: AN ISLAMIC PERSPECTIVE
| Detail | |
|---|---|
| Author | NEVI DANILA |
| ID | 202.710.123 |
| Published Date | 10-09-2009 |
Abstract
In conducting business, the presence of risk cannot be avoided. By employing derivatives, companies and individuals can transfer for a price any undesired risk to other parties who have risks that offset or who want to assume that risk (Chance, 2004). The growth of derivatives has accelerated rapidly in the last thirty years. However, there is a severe shortage of research that examines the Islamic (Shariah) principles to address derivatives and the use of derivatives in the Islamic environment. The objective of this paper is to examine whether derivative products are allowed or prohibited by Islamic principles. Despite the fact that various researchers accept the use of derivatives under certain circumstances, the conservative point of view suggests that conventional derivatives are not in harmony with Shariah rules. In this paper, we contend that the reasons for the arguments for the use of derivatives have some flaws and are not completely in compliance with Shariah rules. On this ground, we conclude that the use of conventional derivative instruments is not acceptable in the Islamic environment. However, we point out that Shariah has some risk management strategies that may be compatible with Shariah principles and at the same time can achieve the same objectives as conventional derivatives. Thus, the market participants who are concerned with Shariah principles will be able to identify and use similar instruments without violating the Islamic principles.