Sharia and securities trading
Following sharia it banned from its practices riba (usury) – which it defined as any interest paid on all loans of money[1][2] – and involvement in haram (forbidden) goods or services such as pork or alcohol.
They are used in a large number of financial procedures,[11] help manage risk and volatility (among other things),[12] and provide incentives for employee productivity and innovation.
While the Quran does not specifically mention gharar (risk), several hadith prohibit selling products like "the birds in the sky or the fish in the water", "the catch of the diver", or an "unborn calf in its mother's womb".
One modern scholar of Islam, Mustafa Al-Zarqa, defines gharar as "the sale of probable items whose existence or characteristics are not certain, due to the risky nature that makes the trade similar to gambling.
[22] One source (Investopedia) states "gharar is observed within derivative transactions such as forwards, futures and options, as well as in short selling and in speculation.
"[23] Juan Sole and Andreas Jobst write that "legal scholars" have alleged that derivatives "contain excessive uncertainty (gharar)" and "encourage speculative behavior akin to gambling (maisir)".
[24][25] Taqi Usmani forbids most futures transactions because their "delivery or possession is not intended and therefore the niah [goal, purpose] of the contracting parties is questionable".
[26] Investopedia states "In Islamic finance, most derivative contracts are forbidden and considered invalid because of the uncertainty involved in the future delivery of the underlying asset.
[Note 5] At least one scholar (Mohammed Hashim Kamali) finds "nothing inherently objectionable" in selling and using options, which like other kinds of trade (he believes) is mubah (permissible) in fiqh, and "simply an extension of the basic liberty that the Quran has granted".
[12] Agil Natt, chief executive of the International Centre for Education in Islamic Finance, asks, "when does risk management end and gambling begin?
"[12] One defender of the use of options in Islamic banking is Andreas A. Jobst of the International Monetary Fund,[13] Along with Juan Sole, Jobst writes that "many" shariah scholars "now accept the application of hedging of actual exposures as an essential element of sound risk management and acknowledge the opportunity cost imposed by a lack of Islamic hedging tools.
[Note 7] However "some Shariah-compliant hedge funds" in at least one country with a large financial sector (the United States) have created a way to short shares of stocks that has been "Shariah-certified", according to Feisal Khan.
[39] El-Gamal criticizes this practice as an imitation of conventional "ribawi" finance in "synthesizing" Islamic versions of short sales (as well as other instruments).
[40][41] Feisal Khan and El-Gamal also complain that using a "down-payment" rather than borrowed "margin" funds in shorting a stock is simply a workaround little different than the conventional process, but charging "substantially higher fees".
[46] By 2010 they had become common enough for a global standard to be developed by the Bahrain-based International Islamic Financial Market and New York-based International Swaps and Derivatives Association[46] This standard, called the Tahawwut or the "Hedging Master Agreement"[47] provides a structure under which institutions can trade derivatives such as profit-rate and currency swaps,[48][49] or as the ISDA/IIFM describes it, is "designed to govern the legal and credit relationship between two parties embarking on a bilateral trading relationship involving Shari’a-compliant hedging transactions based on murabaha transactions.
"[50]Juan Sole and Andreas Jobst describe the standard as an "innovative" pan-madhab agreement spanning "all five major schools of Islamic jurisprudence".
[52] Irfan urges Islamic financers to use this Tahawwut or "Hedging Master Agreement"[47] and benefit from the cost saving of its standardization, but lamented that it has not being widely used as of 2015.
[46] In March 2012 the ISDA and IIFM issue another product standard, the ISDA/IIFM Mubadalatul Arbaah, to provide "an Islamic risk mitigation framework for the industry".
[62] In 2007, Yusuf DeLorenzo (chief Sharia officer at Shariah Capital at the time) issued a fatwa disapproving of the double wa'd[63] in situations where the assets reflected in the benchmark were not halal,[64][65] but this has not curtailed its use.
"[74] Feisal Khan quotes Ayoub as describing the use of the urbun down payment for a call option as "extremely controversial among `traditional`" Islamic banking and finance scholars.
