Derivative Instruments, Risk Management and Shariah Compliance

The acceptability of financial derivative instruments like forwards, futures, options and swaps for Shariah-compliant businesses remains unresolved. As of now, there appears to be no consensus on whether Muslim businesses can use derivative instruments for their risk management needs. While the issue is still being debated and deliberated, risk management remains the soft underbelly of Islamic banking and finance. Still, there has been some progress. Shariah scholars have allowed the use of wa’ad (promise) based contracts in the case of managing exchange rate risk. Today, wa’ad based contracts that mimic currency forwards and currency options are available both in the Gulf and in Malaysia as Shariah-compliant ways of hedging exchange risk. The al...