Fitch: Industry Headwinds Challenge Growing Need for the Use of Islamic Derivatives as Hedging Instruments

Fitch Ratings (Fitch) has highlighted the importance of using Shariah-compliant derivatives as tools for hedging (Tahawwut) amidst the on-going uncertainty in key Islamic finance markets, led by COVID-19, oil price declines and central bank repo rate cuts. According to Fitch, derivatives play a crucial role in hedging and mitigating risks arising from volatility in profits, exchange rates, as well as commodity prices.

Despite its increasing necessity, however, Fitch notes that derivatives markets remain extremely under-developed in these Islamic markets. More than 30% of Fitch-rated Islamic banks do not use derivatives as a hedging tool, whilst most of the remaining 70% only use it sparingly, limiting their usage to pro...