Operative Principles of Islamic Derivatives: Towards a Coherent Theory

Juan Sole and Andreas Jobst ()

No 2012/063, IMF Working Papers from International Monetary Fund

Abstract: Derivatives are few and far between in countries where the compatibility of financial transactions with Islamic law requires the development of shari'ah-compliant structures. Islamic finance is governed by the shari'ah, which bans speculation and gambling, and stipulates that income must be derived as profits from the shared generation of goods and services between counterparties rather than interest or a guaranteed return. The paper explains the fundamental legal principles underpinning Islamic finance with a view towards developing a cohesive theory of derivatives subject to shari'ahprinciples. After critically reviewing accepted contracts and the scholastic debate surrounding existing financial innovation in this area, the paper offers an axiomatic perspective on a principle-based permissibility of derivatives under Islamic law.

Keywords: WP; capital market; asset ownership; reference asset; derivatives transaction; asset performance; terms agreement; derivatives; Islamic risk management; Islamic finance; shari’ah compliance; sukuk; mudaraba; ijarah; murabaha; riba; istisna; gharar; maisir; maslaha; derivative element; purchase price; asset transfer; cash settlement; Islamic law; fair value; Futures; Options; Hedging; Currencies; Global (search for similar items in EconPapers)
Pages: 33
Date: 2012-03-01
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Citations: View citations in EconPapers (23)

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