Innovative Islamic Hedging Products: Application of Wa'd in Malaysian Banks

Capital Markets Review, Vol. 19, No.1 & 2, pp. 33-51, 2011

20 Pages Posted: 9 Nov 2012  

Saadiah Mohamad

Universiti Teknologi MARA, Malaysia

Azlin Alisa Ahmad

National University of Malaysia (UKM)

Shahida Shahimi

Date Written: 2011

Abstract

The principle of Wa’d or promise can be used to structure innovative shariah compliant hedging instruments. Conventional hedging products such as forward currency contracts and currency swaps are prohibited in Islamic Finance principally due to the issue of riba and to the violation of bay al-sarf rule which requires currency trading to be done on 'spot' basis only. The usage of wa’d has grown rapidly in recent years since it offers great flexibility and many of the world’s first shariah compliant derivatives such as Islamic cross currency swaps and Islamic profit rate swaps have been developed by Malaysian banks using wa’d. This paper discusses and examines wa’d applications in seven selected Malaysian Islamic banks, specifically in its application as an Islamic hedging instrument. Based on a survey of the banks’ official information disclosed to the public, the finding of this research indicates that all Islamic banks under study have used wa’d in structuring their Islamic hedging products. This paper represents an early study of wa’d applications in the Malaysian banks and the study shows that wa’d is a flexible mechanism and has the prospect to play a vital role in facilitating Islamic financial institutions manage their business risks and liquidity effectively.

Keywords: Islamic hedging, wa’d, shari’ah compliant, Islamic banks

JEL Classification: E44, F31, G29, G13

Suggested Citation

Mohamad, Saadiah and Ahmad, Azlin Alisa and Shahimi, Shahida, Innovative Islamic Hedging Products: Application of Wa'd in Malaysian Banks (2011). Capital Markets Review, Vol. 19, No.1 & 2, pp. 33-51, 2011. Available at SSRN: https://ssrn.com/abstract=2070574

Saadiah Mohamad (Contact Author)

Universiti Teknologi MARA, Malaysia ( email )

40450 Shah Alam
Johor
Dungun, MA Selangor 23000
Malaysia
+6013 346 4310 (Phone)
+603 5521 1442 (Fax)

Azlin Alisa Ahmad

National University of Malaysia (UKM) ( email )

43600 Bandar Baru Bangi
Faculty of Islamic Studies
Bangi, MS Selangor 43600
Malaysia

No contact information is available for Shahida Shahimi

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