The Kuala Lumpur-based International Shari’ah Research Academy for Islamic Finance (ISRA) is drafting rules to regulate the use of derivatives in order to boost risk management in Islamic finance. The proposed guidelines may help the industry to develop Shari’ah-compliant hedging tools. Backed by BNM, ISRA aims to prescribe the boundaries that Islamic institutions are required to observe to ensure that the usage of derivatives complies with Islam's ban on gambling. “Islamic derivatives are still a controversial instrument even though the objectives where the instrument was introduced are clear and noble to hedge against potential risks,” said ISRA's Head of Research Affairs, Dr. Asyraf Wajdi Dato' Dusuki in an interview with Reuters. “What is the difference between speculative trading and hedging? We have to define clearly what is hedging.” ISRA's rules, which have to be approved by the Malaysian central bank, would ensure that Islamic lenders use derivatives only for hedging by showing proof of an underlying economic transaction, Asyraf said. The guidelines would also tackle legal and Shari’ah issues arising from the popular practice of using the Waad and Tawarruq concepts to structure Islamic derivatives, he said. Waad or promise is frequently used to underpin Islamic derivatives but such a pledge is only binding on one party while bilateral promises are prohibited as they are tantamount to legal contracts. Asyraf said ISRA's rules would consider the use of unrelated bilateral promises that
contained different sets of conditions to avoid the issue of a legal contract arising. |
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