Operative Principles of Islamic Derivatives - Towards a Coherent Theory

33 Pages Posted: 25 Mar 2012

See all articles by Juan A. Solé

Juan A. Solé

International Monetary Fund (IMF)

Andreas (Andy) Jobst

International Monetary Fund (IMF) - European Department

Date Written: March 2012

Abstract

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.

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, M20

Suggested Citation

Sole, Juan A. and Jobst, Andreas A., Operative Principles of Islamic Derivatives - Towards a Coherent Theory (March 2012). IMF Working Paper No. NO.12/63, Available at SSRN: https://ssrn.com/abstract=2028239

Juan A. Sole (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street N.W.
Washington, DC 20431
United States

Andreas A. Jobst

International Monetary Fund (IMF) - European Department ( email )

700 19th Street NW
Washington, DC 20431
United States
+1-202-538-2898 (Phone)

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