The Islamic debate on derivatives

Abstract

Despite their demonstrable importance for financial sector development, derivatives are few and far between in countries where capital market transactions are governed by Islamic law (shari’ah). This chapter explores the validity of the risk shifting proposition of derivatives in accordance with fundamental legal principles of the shari’ah and summarizes the key issues related to the prohibition of excessive uncertainty (gharar), speculative behavior (maisir) and unilateral enrichment without the creation of real values under Islamic jurisprudence (fiqh al-muamalat) which have circumscribed the use of derivatives. The chapter also presents a classification scheme of existing shari’ah-compliant derivatives, whose characteristics inform general axioms for the permissibility of certain types of contracts.

Asian Studies, Economics and Finance,