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Part II Islamic Law and Contracts in Practice, 8 Derivatives and Islamic Finance

David M. Eisenberg

From: Islamic Finance: Law and Practice (2nd Edition)

Edited By: Craig R. Nethercott, David M. Eisenberg

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2022. All Rights Reserved.date: 06 July 2022

Islamic financial services — Credit derivatives — Swaps — Futures — Options

This chapter studies how conventional derivatives—especially futures, options, and swaps—have been or may be based on bay’ salam, bay’ ʻurbun, and other traditional Islamic transaction structures. Bridging the gap between traditional Islamic transaction structures and conventional derivatives continues to be among the most urgent challenges facing the global Islamic finance industry, not least to provide Islamic financial institutions with a crucial tool for risk management. Salam and ʻurbun clearly illustrate the nature of the challenge to create Shari’a-compliant derivatives. Paradoxically, it is their deviation from the standard conditions for a valid sale contract that allow them to function to some extent as proxies for conventional derivatives. Among jurists, a consensus (ijma’) emerged as to the validity of salam, although special conditions were imposed not only to minimize gharar (uncertainty) and the kindred contractual defect of jahl (lack of knowledge), but also to reduce the possibility of riba (unlawful gain). There is still considerable debate among the various schools of law as to whether ʻurbun constitutes a valid sale contract under the Shari’a.

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