The examination of the topic of market risk management in Islamic finance is a
complex endeavour. At a basic level, the subject matter, being multifarious in a
manner that mixes religion and economics, requires the conjoining of religious faith
with scientific objectivity in order to ascertain the truth contained in the scripture as
it pertains to the Mua’amalat (dealings between individuals) matter of entering into
financial contracts with others to manage market risk exposures.
Moreover, the complexity is compounded due to the need to disentangle the
ambiguity that has beset the discourse on the topic due to historically being mostly
legal-centric with a focus on debating the contractual elements rather than attempting
to comprehensively address the myriad issues that relate to market risk management
in contemporary contexts. These issues, for the most part, revolve around the reliance
on market risk transfer as a strategy and derivative contracts, with monetary
underlying variables, as tools to implement that strategy.
Thus, the journey of investigating the rationale, permissibility, and usage of
derivative hedging instruments for market risk management in Islamic finance is,
essentially, an undertaking that seeks to engage in a wide-ranging and multi-layered
examination of the subject matter as well as the exploration of new areas of relative
significance. This, in turn, and subsequent to the analysis of data generated from
documentary sources and forty-one interviews which were collected from numerous
sources within four locations, led to the elaboration of the contention that market risk
management through derivative instruments for legitimate hedging purposes should
not be prohibited in the Shari’a, albeit with certain conditions that limit unproductive
behaviour.
The basis for the aforementioned contention is built on the fact that market risk
management has undergone a paradigm shift in how exposures are identified and
measured as well as in the emergence of innovative tools which can result in a better
ability to address the opportunities and challenges facing institutions that provide
value to society (i.e., the real sector). Moreover, there is little substantive evidence
that proves that the utilization of derivative instruments for hedging purposes leads
its users to partaking in transactions that circumvent the prohibition of Riba (usury),
Gharar (excessive uncertainty), and Maysir (gambling).
In effect, the derivative instruments used for the management of market risks are not
only disassociated from usurious debt transactions, they are also transacted in the
financial markets in a manner that is transparent to all the parties involved. Along the
same lines, the prohibition of Maysir, which is apparently an overarching concern,
should be conceptualized with the focus on the proscription of the act of gambling,
not necessarily the instruments (e.g., derivatives) and/or any particular framework
(e.g., zero-sum arrangements).
Ultimately, one should be cognizant of the fact that the true intentions of Islamic
jurisprudence in Mua’amalat (as a manifestation of divine guidance) always centre
on human well-being. Accordingly, the religious prohibitions are, in essence, within
the realm of acts that adversely affect human well-being. This is a constant theme
that is present throughout the thesis; and is one that exists at the heart of a wider
aspiration of its adoption to a greater extent than is currently present in the Islamic
finance discourse