Conventional Futures: Derivatives from Islamic Law of Contract Perspective

Md Akther Uddin

MPRA Paper from University Library of Munich, Germany

Abstract: Islamic finance has emerged as a sustainable alternative of conventional finance for last two decades or so thanks to development of Islamic banking industry and more recently Islamic capital market. As Islamic finance industry is based on the principle of Islamic Law of Contract, there are certain rules that need to be followed in every financial transaction to be complaint with Shari’ah. As risk is inherent in business and finance, investors across the world use various risk mitigating tools or instruments including derivative instruments like futures contract. Although, the necessity of this kind of instrument is essential for development of Islamic finance industry but the permissibility of using them is still a debatable issue. In this research paper, a humble attempt has been made to explain the concept of conventional futures contract from Islamic Law of Contract perspectives. It is found in this study that there are arguments for and against the futures contract. On the one hand, majority scholars consider futures contracts are non-compliant with Islamic Law because of selling something that does not exist, deferment in the both counter values, excessive risk taking, uncertainty, pure speculation, and sale of one debt for another. In support of their argument they provided references from the Quran and Sunnah, also views of classical scholars and Jurists. On the other hand, many scholars argue that futures contracts are permissible while refuting the arguments provided against its impermissibility; while others argue that contemporary business environment demand to use them, so it is considered as custome (urf), while others argue it is permissible on the basis of Istihsan (juristic perference), maslaha (public benefits), dharurah (necessity). After analyzing the arguments for and against the futures contract, it can be concluded that contemporary scholars and Jurists in the field of Islamic Law are still divided on this issue as it is quite a new area of research from Islamic Law of Contract perspectives. However, it is safe to assume that conventional futures contracts in its current form do not comply with the Islamic Law.

Keywords: futures contract; derivatives; Islamic Law of Contract; gharar; maysir; riba (search for similar items in EconPapers)
JEL-codes: A1 G23 K00 K12 (search for similar items in EconPapers)
Date: 2015-11-12
New Economics Papers: this item is included in nep-law
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