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Derivatives under shariah

Financial Derivatives Term Report

Submitted to: Ms Shazia Farooq

Submitted by: Muhammad Faraz Haleem (10226)

Muhammad Jazib Soofi (10157)

Faraz Illahi (10245)

Madiha Saeed (10696)

December 17th

2012

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Letter of Transmittal

December 17, 2012

Maam Shazia Farooq

Financial Derivatives

Institute of Business Management

Dear Maam,

We are submitting you the report, the report is based on the research of Islamic derivatives. The

purpose of the report is to inform you regarding our research work. The content of this report

concentrates on how we have identified the detail of Islamic derivatives and also have given the

criticism and its response by conventional scholars. We have tried our level best to cover all aspects of

the subject and we hope that this report will serve its purpose.

Thanking You,

M.Faraz Haleem (10226)

M.Jazib Soofi (10157)

Madeeha Saeed (10696)

Faraz Illahi (10245)

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Acknowledgement

Firstly, we would like to thank Allah, the Almighty for His utmost assistance during this work.

We are deeply indebted to our Financial Derivatives Course Instructor Ms. Shazia Farooq, whose help

and stimulating suggestions assisted us in the making of this report.

Maam, we are immensely grateful to you for all that you have taught us, for your time and your effort.

We appreciate the effort you put in to give us detailed explanations with simplicity on really lengthy

areas of learning.

This note comes in appreciation for all you have imparted and contributed in our personal andintellectual growth. Thank You Maam.

Moreover, we are also grateful to Institute Of Business Management (IoBM) for giving us the right path

to show our skills and capabilities.

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Table of ContentsExecutive Summary: ...................................................................................................................................... 5LITERATURE REVIEW ..................................................................................................................................... 6INTRODUCTION TO ISLAMIC FINANCE .......................................................................................................... 7

Islamic derivatives History ........................................................................................................................ 7TYPES OF ISLAMIC FINANCE .......................................................................................................................... 8ESTABLISHING ISLAMIC DERIVATIVES ........................................................................................................... 9CRITERIA OF HALAL INSTRUMENTS ............................................................................................................ 10

RIBA ......................................................................................................................................................... 10GHARAR .................................................................................................................................................. 10MAYSIR .................................................................................................................................................... 10JAHL ......................................................................................................................................................... 11

ISLAMIC VIEW OF CONVENTIONAL DERIVATIVES ....................................................................................... 11OPTIONS .................................................................................................................................................. 11FUTURES .................................................................................................................................................. 12

ISLAMIC DERIVATIVES ................................................................................................................................. 13BAI SALAM: ................................................................................................................................................. 13ISTISNA AND JOALA CONTRACT: ................................................................................................................. 15

Joala contract: ......................................................................................................................................... 15Baibil-wafa & Bai bil Istighlal Contracts: ................................................................................................... 15ISTIJRAR CONTRACT: ................................................................................................................................... 16CONCLUSION ............................................................................................................................................... 18

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Executive Summary:

Derivatives are lacking in states whereas the compatibility of financial transaction deals

alongside Islamic regulation needs the progress of shariah-compliant structures. Islamic finance is

administrated by the shariah that bans speculation and gambling, and stipulates that income have to bederived as profits from the public creation of goods and services amid counterparties rather than

attention or a guaranteed return.

This report examines present derivative instruments and the Islamic viewpoint of these new

instruments. The validity and permissibility of these instruments appears to vary by scholar. Even

whereas Islamic scholars have discovered them to be objectionable, their reasons for objection differ.

Far of the work by Islamic scholars has been of an exceedingly juridical nature. They scrutinize

derivatives inside slim confines of contractual arrangements and thereby miss the broader picture of

why instruments like futures and options are demanded in present company environments.

This report analyzes forwards, futures and options, examines the progress of these instruments,

their exceptional benefits and makes a case for why they are needed. Islamic Finance instruments

alongside derivative like features such as the Bai Salam and Istijrar contracts are additionally examined.

A little of the key concerns that Islamic scholars have considering derivatives is addressed.

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LITERATURE REVIEW

Derivatives from Islamic perspective are an issue which many scholars have different opinions

on its permissibility with different reasoning for approving and prohibiting such contracts. An extensive

review was done by Obiyatullah Ismath Bacha in 1999 regarding the evolution of modern financial

derivatives, the financial instruments from shariah perspective point of view, some of the Islamic

instruments that are similar to derivatives and the objection of Islamic scholars regarding derivatives

that might need some rethinking and evaluation (Obiyatullah, 1999).

He explained the instruments in details by laying out critical issues on why the Islamic

communities need these instruments in the market place as well as highlighting several consequences

that would affect the Islamic business if these instruments are ignored. In contrast, Mohammed

Obaidullah (1999) has laid out that future and options are prohibited with emphasis on the definition of

sarf from two different points of views. The first view stated that only gold and silver would be governed

in the rules of bai as-sarf while the fiat or paper currencies do not fall into bai-sarf category. He cited

Ibnu Taymiyah definition of sarf, as gold and silver that could perform as a medium of exchange and the

fiat money is not considered as sarf or currency. Therefore selling and buying fiat money with other fiat

money with deferred delivery if the currencies are not made of gold and silver is acceptable because fiat

money is not categorized as sarf. The latter view states that fiat or paper currencies fall into bai as-sarf

category therefore deferring delivery is riba as stated by a hadith that the sale of sarf of different types

must be hand-to-hand or immediate (Obaidullah, 1999). This is also supported by the decree issued by

the OIC Fiqh academy regarding bai-as-sarf. Another prominent Islamic scholar, Monzer Kahf also

prohibits the sale of currency with deferred delivery based on the same hadith. An urge to reconsider

derivatives to be accepted in the light for the maslahah of ummah was evidenced from the work of Ali

Salehabadi and Mohamad Aram especially for the Iranian export of oil and commodities (Salehabadi and

Mohamad Aram, 2002). All scholars discussing the extensive details of the permissibility and prohibition

of derivatives analyze the instruments based in the current capitalist monetary system, which uses the

fiat money as currency.

None of the scholars discuss the instruments viability and applications of the Dinar and Dirham

except for Mohammed Obaidullah who touches on the differing opinions of the categorical of fiat or

paper currencies as al-sarf as laid out in the hadith when he stressed on the existence of riba in currency

forward, future and options (Mohammed Obaidullah, 2001).

If we revisit the derivative instruments in the light of the bimetallic currencies, consensus there

is likely to be more agreement among scholars on the rulings. Application of bimetallic currencies will

eliminate deviation of interpretation of sarf and rules regarding sarf itself. This is because the regulation

of sarf is clearly stated in Al-Quran and hadith. This is in accordance with Islam where the source of

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jurisprudence is the Al-Quran and hadith. Therefore, the implementation of gold dinar would probably

be the catalyst for the reformation of the complexity of derivatives to the simplicity of derivatives.

INTRODUCTION TO ISLAMIC FINANCE

Islamic Banking is saving money movement which is reliable with the standards of Islamic sharia law and

its down to earth provision is finished through the improvement of Islamic mass trading. Sharia

precludes the altered or gliding installment or reception of any particular premium or charges, which is

regarded as riba, for credits of cash. Putting resources into those professions that furnish merchandise

or aids thought about in spite of Islamic standards is moreover disallowed.

Islamic derivatives History

With the assistance of Bahrain-based International Islamic Financial Market and New York-based

International Swaps and Derivatives Association, worldwide measures for Islamic derivatives were set in

March 2010. The Hedging Master Agreement furnishes a structure under which organizations can

exchange in derivatives, for example benefit-rate and cash swaps.

The International Islamic Financial Market (IIFM) and the International Swaps and Derivatives

Association (ISDA) started the ISDA/IIFM Tahawwut (Hedging) Master Agreement on 1st March, 2010.

The infrastructure is a breakthrough in Islamic back and hazard administration. It stamps the

presentation of the first all inclusive standardized documentation for secretly arranged Islamic

supporting features. The ISDA/IIFM Tahawwut (Hedging) Master Agreement is the first money related

industry schema archive that is pertinent opposite all locales, wherever Islamic back is rehearsed. Thelaunch of the Tahawwut Master Agreement was formally proclaimed at a launch occasion in Bahrain,

which was accommodated by IIFM and ISDA under the support of H. E. Rasheed Mohammed Al Maraj,

Governor, Central Bank of Bahrain.

Given the developing nature of the Islamic fund industry, the organization s managing on Shariah

standards would not be able to manage to leave their positions un-supported. Thus, some key

supporting items are now ending up being normal crosswise over locales so that the danger could be

alleviated. The ISDA/IIFM Tahawwut Master Agreement gives the industry access to a worldwide

skeleton archive, which is nonpartisan regarding medicine to both the transacting gatherings and it

likewise strictly adjusts to Shariah standards.

This archive is planned to be utilized between two key counterparties as an expert acquiescence.

Moreover, gatherings grasp that no investment ought be payable or receivable and no settlement

dependent upon valuation or without unmistakable possessions is permitted.

It is a comprehensively revamped schema report, however the structure of the archive is essentially

comparative to the ordinary ISDA Master Agreement. Be that as it may, the nexus systems and

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provisioning, for example early termination occasions, closeout and mesh are improved dependent

upon the Islamic Shariah standards.

Notwithstanding their vitality in the budgetary area improvement, derivatives are few and particularly

far between in nations where the similarity of capital business sector transactions with Islamic law needs

the growth of Shariah-agreeable structures. Islamic fund is administered by the Shariah, which boycotts

theory, however stipulates that earnings must be inferred as benefits are from imparted business hazard

instead of premium or ensured return.

The Islamic back industry has headed forward to develop notwithstanding the budgetary emergency-to

about $1 trillion.

TYPES OF ISLAMIC FINANCE

In light of the fact that just without premium fund is recognized allowable in Islamic fund, fiscal

connections between lenders and borrowers are not represented by capital-based venture increases

however are imparted business chance and profits in legal actions (which are halal). Any fiscal

transaction which is under the Islamic law means steer interest in possession exhibition, which

constitutes entrepreneurial transaction that passes on obviously identifiable rights and commitments,

and for which speculators are qualified for appropriate equivalent return in the type of state-

unexpected installments with respect to possession exhibition.

The Shariah does not question installment for the utilization of a holding, provided both loan specialist

and the borrower impart the speculation hazard as a single unit and benefits are not ensured ex-risk

however collect just if the speculation itself yields some salary. Be that as it may, in the light of ethical

blocks to uninvolved backing and secured investment as manifestation of payment, Shariah-consistent

loaning needs the replication of premium-bearing accepted fund through additional complex structuralplans of unforeseen claims, which are subject to the plan to make of an impartial framework of

distributive equity and advertise allowed exercises and available products.

The admissibility of dangerous capital speculation without unequivocal premium gaining outcomes to

several essential manifestations of Islamic financing for both speculation and exchange:

i. Synthetic credits (liability-based): It is finished through a deal-repurchase assention or back-to-

back deal of borrower or third gathering-kept holdings

ii. Lease contracts (holding-based): It is finished through a deal-leaseback assention (working rent),

or the lease of third-gathering obtained stakes with buy commitment parts (financing rent)

iii. Profit-imparting contracts (value-based): It is defeated destiny holdings. Rather than value-

based contracts, both duty-and holding-based contracts are started by an impermanent exchange of

existing (destiny) possessions from the borrower to the bank, or the procurement of third-gathering

holdings by the bank for the borrower.

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ESTABLISHING ISLAMIC DERIVATIVES

The heterogeneity of academic assumption regarding the Shariah agreeability of derivatives is

extensively persuaded by distinct understandings of the Shariah and diverse information concerning the

mechanics of its derivative structures.

Countless policymakers, business members and also controllers are often unfamiliar with the

multifaceted mechanics and the exceptionally specialized dialect of numerous derivative transactions.

They block a more inclusive comprehending and in addition objective energy about the part of

derivatives in the fiscal framework and their commonness in an imperative mixed bag of business and

fiscal transactions. Hazard broadening done through derivatives donates to the nonstop finding of the

honest business sector value of danger, and improves dependability to any detectable degree levels of

the monetary framework and in addition upgrades general welfare.

In guideline, prospects and alternatives may be good with Islamic law provided that they are:

- employed to location certified supporting interest on holding exhibition connected with

immediate possession investment;

- Disavow shared postponement without real possession exchange; and

- Eschew avertable lack of determination as disallowed wicked action (which is haram) in an offer

to make an impartial framework of distributive equity regarding free investment.

Shariah-agreeable derivatives could additionally keep up danger imparting that favours a win scenario

from alterations in the holding esteem. For example, the issuance of stock choices to the workers could

be a perfect contestant for a Shariah-agreeable derivative. By setting motivators for higher gainfulness,

firm possessors procure more extensive corporate benefits, that counterbalance the minor cost of more

amazing worker investment in stock value's exhibition.

Be that as it may, the true requisition of numerous derivative contracts is still particularly offensive,

because of the potential of theory (or insufficient supporting ought to violate the tenets of distributive

equity and equivalent hazard imparting, subject to religious confinements giving and moreover benefit-

taking without veritable monetary action and holding exchange.

Well known deliberations of the administrative combination and standard setting have delivered a

speech to budgetary imperatives and the lawful doubt, infringed by both Islamic law and inadequately

improved uniformity of business practices.

Private area drives, for example an Islamic essential business task advanced by Bahrain-basedInternational Islamic Financial Market (IIFM) in collaboration with the International Capital Markets

Association (ICMA), have bring about the selection of a update of grasping on the documentation

guidelines and ace acquiescence methodologies for Islamic derivatives.

Likewise, national explanations are adding on additional traction. In November 2006, Malaysia's just

totally-fledged Islamic banks, Bank Islam and Bank Muamalat Malaysia, complied to execute a derivative

ace acquiescence for the documentation of Islamic derivative transactions.

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Accordingly, business sector inefficiencies and concerns about contract enforceability initiated by

heterogeneous prudential standards and differing elucidations of Shariah consistence are needed to be

disseminated in the close fate.

As Islamic back contributes more than its fair share and associations turn to method of supporting their

exposures powerfully, money related foundations in Bahrain, Kuwait and Malaysia have been intending

up for additional Shariah-consistent fiscal instruments and structured back, for both, on the holding and

in addition on obligation side. Budgetary advancement will donate to further improvement and more

refinement of Shariah-agreeable derivative contracts.

CRITERIA OF HALAL INSTRUMENTS

All financial instruments in general must meet a number of criteria in order to be considered

halal. At a primary level, all financial instruments and transactions must be free of at least the

following five items:

(i) riba (usury)(ii) rishwah (corruption)(iii)maysir(gambling)(iv)gharar(unnecessary risk)(v)jahl(ignorance)

RIBA

Riba can be in different forms and is prohibited in all its forms.

GHARAR

As for gharar, there appears to be no consensus on what gharar means. It means taking

unnecessary risk in trade.In the context of financial transactions, gharar could be taken as looseness

of the underlying contract such that both parties are uncertain about possible results.

MAYSIR

Masyir refers to the situation from a financial instrument viewpoint where the outcome is

dependent on chance as in gambling.

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JAHL

Finally,jahlrefers to ignorance. In the context of financial transaction, it would be objectionable

if one party to the transaction gains because of the other partys unawareness. In addition to these

requirements for financial instruments, the shariah has some basic provision with regards to the sale

of an asset . According to the shariah for a sale to be applicable,

(a) the commodity must currently exist in its physical sellable form and

(b) the seller should have legal possession of the asset in its final form.

These restrictions for the validity of a sale would obviously render impossible the trading of

derivatives. However, the shariah gives exceptions to these general rules to enable deferred sale

where needed.

ISLAMIC VIEW OF CONVENTIONAL DERIVATIVES

OPTIONSA number of scholars, notably Ahmad Muhayyuddin Hasan (1986), Abu Sulayman (1992)

and Taqi Usmani (1996) have all found options objectionable. Each of these scholars has objected

for a different reason. Ahmad Myhayyuddjn Hasan objects on two foundations, firstly, that maturity

ahead of three days as per khiyar-alshart (option of stipulation) is objectionable. And second, that

the buyer of an option is approved much more benefits than the seller and that "this is repression

and injustice".

Abu Sulayman (1992) of the Fiqh Academy of Jeddah; finds options acceptable when viewed

in the light of bai- al-urbun but concludes that options should be prohibited since he considers

options to be detached and independent of the underlying asset and therefore unjustified for the

seller to charge to premium. Mufti Taqi Usmani (also of the Fiqh Academy, Jeddah) writes in

response to a question about a sale of stock with put options attached that while an option contract

when viewed as a promise is satisfactory, charging a fees and trading them are not. He also says the

sale of stock with a put option to resell the stock to the issuer at a future date objectionable since a

precondition is placed on the original sale of stock.

Mohammad Obaidullah (1997) writes, "suitability to usual options is generally left without

by a majority of scholars on the ground that these involve gharar and are primarily transacted for

speculative gains". Accepting that gharar does not have a consent, gharar is said to be the result of

jahl, inadequate information and a lack clearness. Citing that some scholars have criticize that in

modern options markets standardized contract specification and other controls have rendered

invalid the gharar argument, he goes on to state that this argument is rejected since there is no

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physical delivery but mere cash settlement; implying that cash settlement induces gharar and

excess speculation.

He further adds that "If the gains happen are in the nature of maisir or unearned gains the

possibility of equally massive losses do indicate a possibility of default by the loser and hence

gharar".

Hashim Kamali (1995) examines the permissibility of modern day options and its trading in

the light of Islamic Commercial Law: analyzing the basic option contract, and the validity of its

parameters, like, premiums, time to maturity and delivery, he summarize that "there is nothing

naturally objectionable in giving way an option, exercising it over a period of time or charging a

Islamic Derivatives fee for it, and that options trading like other varieties of trade is permissible and

as such it is simply an extension of the basic liberty that the Quran has granted "

FUTURES

Mufti Taqi Usmani writing in the some article states that modern day futures contracts are

invalid for two reasons.

"Firstly, it is a well recognized principle of the Shariah that sale or purchase cannot be affected

for a future contract date. Thats why, all forward and futures contarct transactions are invalid in

Shariah; Also, because in most of the futures contract transactions delivery of the commodities or their

ownership is not intended. In most cases the contract ends up with the settlement of difference of prices

only, which is disallowed in the Shariah".

Yet Fahim Khan (1995) states,

"we should realize that even in the modern degenerated form of futures trading, some of the

basic concepts as well as some of the conditions for such trading are exactly the same as were laid downby the Prophet (PBUH) for forward trading. For example, there are unambiguous sayings of the Prophet

(PBUH) that he who makes a Salaf (forward trade) should do that for a detailed quantity, detailed weight

and for a specified period of time.

But while proposing an Islamic futures market based on Bai Salam, Fahim Khan's harshest

criticism of modern futures contract is that it is necessarily exploitative of small farmers since it gives

"incorrect" signals, "The idea of hedging through futures in the modern futures markets, though is an

indirect way of reducing the farmers risk; but the futures market being totally independent and separate

from the cash market is quite likely to give wrong signals to the farmer and the farmer not being a player

of the futures market and having forced to compete the speculators, they may frequently end up beingdemoralized by the wrong signals."

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The contract might additionally form the basis for the ability of working capital financing by

Islamic commercial institutions. As commercial institutions should not desire ownership of the

underlying commodity, parallel contracts could be used. Nevertheless not all jurist are in accord

concerning its permissibility, the works cites two avenues for parallel Salam. The early is a parallel Salam

alongside the early seller as the supplementary is an offsetting transacting by the commercial

institutions alongside a third party.

In the early alternative the commercial institutions afterward going in into the early contract,

gets into a parallel Salam to vend the underlying commodity afterward a period lapse for the alike

maturity date to the early seller. The resale worth should be higher and believed justifiable as there has

been a period lapse. The difference amid the two benefits should contain the bank's profit. The shorter

the period left to maturity, the higher should be the price. Though, the necessity is that both deals ought

to be autonomous of every single other. The early deal ought to not have been priced alongside the aim

to do a consecutive parallel Salam. Below the subsequent alternative, the bank that had gone into an

early contract enters into a contract enthusing to vend the commodity to the third party on the maturity

date of that contract. As this subsequent deal is not a contract the bank does not accord advancepayment.

This price behavior is certainly different from that of conventional futures contracts where the

futures price is typically higher than the spot price by the amount of the carrying cost. The lower Salam

price compared to spot is the compensation by the seller to the buyer for the privilege given him.

Despite allowing Salam sale, Salam is still an exception within the Islamic financial system which

generally discourages forward sales, particularly of foodstuff.

It should be clear that current exchange traded futures would conform to these conditions with

the exception of the first, which requires full advance payment by the buyer. Given the customized

nature of Bai Salam, it would more closely resemble forwards rather than futures. Thus, some of the

problems of forwards; namely double-coincidence, negotiated price and counterparty risk can exist in

the Salam sale. Counterparty risk however would be one sided. Since the buyer has paid in full, it is the

buyer who faces the sellers default risk and not both ways as in forwards/futures. In order to overcome

the potential for default on the part of the seller, the shariah allows for the buyer to require security

which may be in the form of a guarantee or mortgage.

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ISTISNA AND JOALA CONTRACT:Istisnaa is a contract whereby a party undertakes to produce a specific thing which is possible to

be made according to certain agreed-upon specifications at a determined price and for a fixed date of

delivery. This undertaking of production includes any process of manufacturing, construction,

assembling or packaging. In Istisnaa, the work is not conditioned to be accomplished by the undertaking

party and this work or part of it can be done by others under his control and responsibility. Istisnaa, an

instrument of pre-shipment financing and it is a contract where the deal can be referred to something

not in existence at the time of concluding the contract

The Istisna Contract has as its underlying, a product to be manufactured. Essentially, in an

Istisna, a buyer contracts with a manufacturer to manufacture a needed product to his specifications.

The price for the product is agreed upon and fixed. While the agreement may be cancelled by either

party before production begins, it cannot be cancelled unilaterally once the manufacturer begins

production.

Istisnaa provides medium term financing to meet financing requirement formanufacturing/supplying/sale of identified goods, such as industrial/construction equipment,

machinery, cargo vessels, oil tankers, trawlers, dredgers, locomotives, etc., transport equipment,

pipelines for water and oil distribution, gas and electricity and their transmission/ distribution lines,

electric generators and transformers, telecommunication equipment, oil rigs, hospital equipment, etc.

Under this mode of financing, it is possible to finance intangible assets like gas, electricity, etc. It is also

possible, unlike under leasing and installment sale, to finance working capital. Istisnaa financing period

is determined by the time required for procurement of necessary materials and manufacturing of the

goods according to the agreed contract.

Joala contract:The Joala Contract is essentially a Istisna but applicable for services as opposed to a

manufactured product.

Baibil-wafa & Bai bil Istighlal Contracts:

A sale with the right of redemption, literally, a sale of honor. Typically, such a sale takes place when a

commodity is sold on the condition that the seller be allowed to redeem the commodity upon paying its

price; and the buyer agrees to honor the condition.

The Bail bil-wafa is a composite of bai (sale) and rahnu (pledge). 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.

The rahnu (pledge) being to sell back to the owner and not to a third party. Looks like a REPO? Except that the resale price must be the same as the original purchase price. But like a REPO, the buyer has rights to benefits from ownership of the asset. The Bai bil-Istighlal is really a combination of the Bai wafa and Ijarah.

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Essentially, he would notify the bank that he is exercising his option and that the settlement would be

P*. Should spot prices be falling such that it breaks the lower bound, the seller. In this case the bank

would have the option to fix the settlement price at P*. Analyzing the Istijrar contract entirely from an

options viewpoint is complicated since it has two different exercise styles rolled in one. Such an

instrument would be highly unusual in conventional finance. Still for our purpose here, the embedded

options in the Istijrar can simply be thought of as follows. The fact that buyer get to fix the buying price

at P* when the price goes higher implies that he has a call option at an exercise price of P* while the

bank a put option at the same exercise price. What the Istijrar contract endeavors to do is to permit the

encounter to worth adjustments but to cap the benefits that accrue, as a result. By meaning, as

adjustments are allowed merely inside a group, the supremacy to one party and the disadvantage to the

supplementary are capped. The maximum possible gain or defeat is limited. Such a contract fulfills the

demand to circumvent a fixed revisit on chance less asset that should be believed riba and additionally

avoids gharar in that both parties understand up front, P* and the scope of supplementary probable

prices. (By meaning amid the higher and lower bounds).

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CONCLUSION

We debated the progress of derivatives, debated the exceptional benefits to companies of

employing them and the Islamic viewpoint considering their use and the assessment of the arguments in

our report. It is clearly evident from the discussion that there does not materialize to be a public view.Nevertheless most scholars have assessed the standard derivatives from the frank contractual

viewpoint, every single appears to have seized a disparate way and believed them from extremely

disparate slants to appear at their conclusion on validity. Aside from differential way on the Shariah side,

their conclusion additionally appears to have been driven by their individual understanding of derivative

instruments. In countless cases the understanding appears misguided.

All presently traded derivatives should not be valid. Certainly instruments that have as their

underlying asset items that are haram should demand no more consideration. Yet the case of

derivatives on fairness instruments, currencies and halal input commodities merits attention.

Nevertheless it could seem safer for Islamic scholars to be on the side of conservatism, such a locale canhave expensive aftermath for Islamic companies in the long run. In an increasingly competitive and

urbane company nature repudiating them the use of a flexible and influential array of instruments might

locale them at a disadvantage. Therefore in assessing the permissibility of derivatives yet one more

dimension could be demanded, that is a communal welfare dimension. Aside from a slim focus on the

contractual framework, Islamic scholars have to seize into thought the possible "welfare loss" after

selecting on the permissibility of derivative instruments.

However, it is a yet an extremely debatable case alongside so countless disparate opinions;

there is a seeming demand for an extra synchronized evaluation. Unless there is a convergence amid

Shariah compliance and chance association needs, Muslim companies can be critically handicapped.