Operative Principles of Islamic Derivatives - Towards a Coherent Theory
Juan A. Sole
International Monetary Fund (IMF)
Andreas A. Jobst
Bermuda Monetary Authority (BMA); International Monetary Fund (IMF) - Monetary and Capital Markets Department (MCM)
IMF Working Paper No. NO.12/63
Derivatives are few and far between in countries where the compatibility of financial transactions with Islamic law requires the development of shari'ah-compliant structures. Islamic finance is governed by the shari'ah, which bans speculation and gambling, and stipulates that income must be derived as profits from the shared generation of goods and services between counterparties rather than interest or a guaranteed return. The paper explains the fundamental legal principles underpinning Islamic finance with a view towards developing a cohesive theory of derivatives subject to shari'ahprinciples. After critically reviewing accepted contracts and the scholastic debate surrounding existing financial innovation in this area, the paper offers an axiomatic perspective on a principle-based permissibility of derivatives under Islamic law.
Number of Pages in PDF File: 33
Keywords: Derivatives, Islamic Risk Management, Islamic Finance, Shari'ah Compliance, Sukuk, Mudaraba, Ijarah, Murabaha, Riba, Istisna, Gharar, Maisir, Maslaha, Financial Instruments, Islamic Banking
JEL Classification: D81, G15, M20working papers series
Date posted: March 25, 2012
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