UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Islamic Hedging, Speculation, and Risk Management

 

 

Hedging v Speculation in Islamic Finance

 

According to AMANIE, Islamic hedging mitigates risk which arises from a real transaction such as a sale, lease, or investment.  Speculation is an activity used to enter the market using derivative instruments without having any real and bona fide interest for protection.

The difference between Islamic and conventional derivative instruments can be summarized as follows:

  1. Islamic derivative instruments are motivated by real risk and not speculative venture with the purpose of benefiting from market performance.
  2. Islamic derivative instruments are not tradable (i.e.) options, swaps, forwards, and futures.

According to Amanie, although Islamic Finance allows some risk management tools, it is still essentially an asset-based transaction free from speculation. (AMANIE)

Opinion Number TWO: (Hedging is a Form of Speculation)

“Question:: Why is hedging haram?

Answer: As a method for protecting a profit position from risk, it is easy to understand why hedging is popular. In conventional finance, risk-hedging takes the form of derivatives, swaps, futures, options, and other risk-shifting devices. The common perception of hedging in Islamic law is that it interferes with one of the law’s basic principles, which is that gain accompanies liability for loss or the link between risk to gain. Moreover, derivatives often contain elements of gharar which clearly renders them unacceptable in an Islamic legal framework for the reason that they lead to undue speculation, which is the practical equivalent of gambling. Even so, hedging in the sense of risk management is not prohibited outright because the management of risk may take many forms, from portfolio diversification to leveraging equity capital through Islamically-acceptable leases.” (http://muslim-investor.com/answers/hedging.html)

Download Paper:  Islamic Hedging: Gambling or Risk Management? http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1260110

Tahawwut Master Agreement

http://www.isda.org/media/press/2010/press030110.html

http://arabnews.com/economy/islamicfinance/article42061.ece

The launch of the Tahawwut (Hedging) Master Agreement (TMA) earlier in March 2010 by the Bahrain-based International Islamic Financial Market (IIFM) in cooperation with the International Swaps and Derivatives Association, Inc. (ISDA) gives the global Islamic financial industry the ability to trade Shariah-compliant hedging transactions such as profit-rate and currency swaps, which are estimated to represent most of today’s Islamic hedging transactions.” (Read More)

Explanation of Tahawwut Master Agreement Given at the World Islamic Banking Conference 2010 in Bahrain ( I was in this seminar!)

http://www.iifm.net/media/PDF/WIBC-2010/tahawwut%20master%20agreement%20-%20intro,%20iifm%20seminar%20@%20wibc%20nov%202010,%20bahrain%20-%20mr.%20alvi.pdf

UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

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