Modern derivatives in Islamic perspectives in Pakistan: Shari'ah issues on current Islamic derivative practices

• Published date: 01 May 2022
• Author: Muhammad Saeed Meo,Farah Durani,Robina Kouser,Muhammad Haris,Tahira Iram
• Date: 01 May 2022
• DOI: http://doi.org/10.1002/pa.2454

ACADEMIC PAPER

Modern derivatives in Islamic perspectives in Pakistan: Shari'ah

issues on current Islamic derivative practices

Muhammad Saeed Meo

1

| Farah Durani

2

| Robina Kouser

3

|

Muhammad Haris

1

| Tahira Iram

1

1

MS Department, The Superior College

Lahore, Pakistan, Lahore, Pakistan

2

Department of Finance, University of

Business and Technology, Jeddah,

Saudi Arabia

3

Department of Economics, University of

Sahiwal, Sahiwal, Pakistan

Correspondence

Muhammad Saeed Meo, MS Department,

The Superior College Lahore, Pakistan, Lahore,

Punjab 54000, Pakistan.

Email: saeedk8khan@gmail.com

This study examines the opinions of Shari'ah intellectuals' about Islamic derivatives.

This research utilizes a qualitative approach to figure out better comprehension of

Shari'ah intellectuals (scholars) views regarding Islamic derivatives. Therefore, five

Shari'ah intellectuals were interviewed during this study and these scholars were

actively involved in the decision making of Islamic financial institutions in Pakistan.

The findings of the study confirm that the consideration of derivative instruments in

the Islamic financial industry is significant due to the need for hedging and risk reduc-

tion within Islamic financial institutions. This article is among the scanty researches

that evaluate Islamic derivatives from the outlook of Shari'ah issues in Pakistan. This

study is helpful for the policymakers regarding Islamic derivatives.

1|INTRODUCTION

The field of Islamic finance is multiplying. According to the World

Bank report, the Islamic finance industry is growing 10–12% annually

from the last decade. Nowadays, Sharia-compliant financial resources

are assessed at generally US$2 trillion, covering bank and nonbank

financial institutions, capital markets, currency markets, and Takaful.

The Islamic banking and finance system is almost 40 years old. Aware-

ness about Islamic banking and finance developed in the late 1940s,

while many well-known Islamic banks came into existence in 1970s,

for instance, NSBC (1972)

1

, IDB (1975),

2

DIB (1975),

3

KFH (1977),

4

FIBS (1977),

5

and DAA (1980).

6

The Islamic financial system provides

lending, borrowing, and investment facilities on a risk-sharing basis.

This permits market forces to decide the efficiency of capital instead

of settling it in prior as an “interest rate”to undermine the free market

system and energize speculative utilize and accumulating of capital. A

value-based framework goes for guaranteeing good and material pros-

perity of the individual and society in general (Naqvi, 1982;

Siddiqi, 2000; Zarqa, 1983).

Risk management hinges on the scope of public interest or

maslahah in fiqa muamalat, which is considered to be an admissible

foundation of consideration in Shari'ah principles—in accordance to

the law of al-kharaj bil al-daman (that is with profit, responsibility

arises) as well as al-ghorm bil al-ghonm (that is risk appears with

profit) and while at the same time refraining from gharar (increased

uncertainty), maisir (gambling), and riba (usury), risk-taking is governed

by Shari'ah principles. The creation of Islamic derivatives by Islamic

banking and finance industry was elicited by the search for better risk

management tools.

Derivative gives a device to off-balance sheet method to fence

the risk of financial loss emerging from the instability in the estimation

of the underlying assets. Derivatives are utilizing as a risk manage-

ment instrument to cover the on-balance transaction. Islamic banks

have exposure to various risks, that is, exchange rate and commodity

price risk because of fluctuation in the value of underlying assets uti-

lized to facilitate the transaction. Therefore, due to these multiple

risks, Islamic banks hedging activities are necessary. Hedging and risk

management are legal, economic activities, which are allowed in

Shari'ah. Gharar is prohibited in Islam because of the element of spec-

ulation inherited in such instruments (Obaidullah, 1998). The argu-

ments for the permissibility of derivatives in Islamic finance stems

mainly from the risk management and reduction financial instruments

such as futures and options provide (Kamali, 1999).

The study at hand is qualitative, which is carried out in Pakistan

to examine potential issues, challenges for the Islamic derivative in

modern financing system. This study is a significant contribution to

the literature regarding Islamic derivative matters. Pakistan is an

Islamic country where it is a dire need of its risk management system

for the Islamic financial institution for the growth of institutions. Still,

unfortunately, this issue is highly ignored by the researcher, and in the

Received: 14 August 2020 Revised: 28 August 2020 Accepted: 31 August 2020

DOI: 10.1002/pa.2454

J Public Affairs. 2022;22:e2454. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons Ltd 1of8

https://doi.org/10.1002/pa.2454