UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Archive for December 22, 2010

Risk Management Through the Salam Contract in Islamic Finance

 

 

In a Salam sale contract for a commodity, the full payment for the commodity is paid in advance in exchange for a future delivery date of the commodity.  This has the effect of locking the commodity price at the date of the execution of the contract even though the delivery of the commodity will occur in the future.  In this scenario, the Salam contract is used to hedge risk.  For example, the market price of the commodity may increase or decrease between the time of the execution of the contract and the delivery date of the commodity.  (Amanie)    However, the Salam contract really only benefits the seller of the commodity if the price of the commodity goes down in the time period between the execution of the contract and the delivery date and only helps the purchaser if the price of the commodity goes up between the execution of the contract and the delivery date of the commodity.  Therefore, fixed-price hedging … it is more like a gamble in hedging risk…which party to the contract will hedge their risk?  Only one party wins in this situation.

In the sale and purchase of shares, a Salam contract is used to hedge the risk in a similar way.  If an Islamic fund purchases a basket of shares at present for USD $100,000,000.00 with the view that the share price will increase in the future, then setting the price now and the delivery date for the future will bring a favorable return if the share price actually increases.  However, if the price of the basket of shares goes down between the execution of the contract and the delivery date, then the Islamic fund incurs a loss.  It is important to note that Salam on shares is not allowed in the AAOIFI Sharia’h standards.   (AMANIE)

Salam and Risk Management in Salam

http://www.financialislam.com/salam.html

Derivative Instruments and Islamic Finance

http://www.islamic-world.net/economics/derivative_instruments.htm

Futures, Forwards, and Islamic Law

http://hubpages.com/hub/Futures-Forwards-and-Islamic-Law

On the Pareto-Optimality of Futures Contracts over Islamic Forward Contracts: Implications for the Emerging Muslim Economies

http://web.cenet.org.cn/upfile/68807.pdf

Muw’adah  Valid for Forward Forex Contracts

http://www.arabianbusiness.com/muwa-adah-valid-for-forward-forex-contracts-scholar-342721.html

http://www.financialislam.com/2/post/2010/8/muwaadah-valid-for-forward-forex-contracts.html

UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance