The importance of financial derivatives for an efficient Islamic financial system is very high. That helps to fulfil the funding needs of any Islamic financial system and the top of that there (derivatives) acceptability in the market under the Sharia'h Compliance is very important. It is the responsibility for all Muslims jurist to offer such types of Islamic products that permitted by the Law Giver and has the elimination of "riba", "gambling" and "Gharar".
In 1970's Muslims scholars have different views over "future" and "options" base trading. According to some school of thoughts it is permissible and some have their argument that option and future base trading are not permissible, but still the matter open for further consciences. The whole discussion based on the development of the Islamic derivatives according to the Sharia Compliance that would appeal the market participants and guarantee the possibility and existence of this way of trading on the market floor.
In the mid 1980s future trading began in Malaysia they established the Kulala Lumpur options and financial future exchange (KLOFFE) and Malaysian Monetary Exchange (MME) just few years ago. The response of option and future commodity trading in Malaysian market is very small but having attraction for rest of the Muslim world where these types of services are not being offerd. The derivatives just can be use for trading purpose but can't be use independently because of the Shariah objections or limits and Islamic derivatives require careful engineering whose core assets are clear of riba and gharar.
Trading according to the Islamic point of view is fully "Halal", and all the school of thoughts are agree on it that trading is permissible according to the Sharia.
For the development of any derivatives two most important aspects of derivatives are the standardization of contracts and securitisation. Derivatives are normally use for the goods that are easily interchangeable. An Islamic future and option derivatives just only use for the commodities that should be oils, timber, corn, storable foods and any seasonal commodities that can be store over the period of time, it could be some weeks and months. While the basic principle of future and options derivatives to increase the liquidity for the basic need of any financial institution and trade into the secondary market.
Options are standardized because of its features such as contract size. Expire date, price of the commodity, nature, position, price and quality and the only element which was allowed the change of price due to supply and demand. Before 1973 options were not deals as securities and now options deals in secondary market like Chicago Board of Options Exchange.
Securitization basically developed for the trading of derivatives. In the Malaysian market some Islamic derivatives are already introduces that have the attraction of the traders and can be negotiating into the derivative market. Securitization mainly consists of the pooling and covering of loans into securities that are than offer to investors. The basic purpose of the securitization includes enhance the liquidity with a more efficient way and the development of new and less expensive funding source for the original lender. The securitization also provides the cover from the future uncertainties like fluctuation on interest rate especially for long term investors.
The purpose of the securitization is to create the secondary market were derivatives are easily trad. Following Islamic financial derivatives are already introduced in the Malaysian secondary market like "IPSD" Islamic private debt securities, Mudarabah certificates and Musharkah bonds etc.
The major theme is to designed derivatives that have permitted by Shariah, according to some Holy Quran verses first in "al Baqara, 2:275 and secondly in "al Nisa, 4:29, in the both Quranic ayah God permitted sale and prohibited interest "riba", and allow trade but on the bases on mutual consents which is the principal theme of these ayah. These Quranic ayah also focus on the Halal business transactions which does not only mean that riba free also eliminate ghara and the factor of gambling that includes commercial fraud, bribery, trade in just halal food items, measure the proper weight and quality. The creations of Islamic derivatives due to its permissibility are limited and cannot trade into the secondary market as like commercial derivatives.
If the dealings of derivatives base just only on the halal business with mutual consents than there is no underhand activity and no untruthful trading involves in options and future contracts.
In Malaysia trading in derivatives is regulated by the future industry act 1993 under the supervision of the finance and security commission Ministry. The contract registered with its full description into the exchange. Science from the 1995 derivative instruments and derivative products (commodities) offered in Malaysia according to the ruled of Nagara bank.
The nature of the future contract is both parties are bound to buy and sail the commodity or the financial instruments on the agreed price, quantity and quality at the specific time in
future, while in the option contract buyer are not legally bound to buy the financial instruments or commodities, but for the seller risk averse buyer offer some deposit money in advance and over the specified period if you are willing you buy the instrument otherwise the deposit money you offer the seller as a gift.
The Shariah also validate the Salam and Istasna base contracts. In the Salam contracts you pay in advance at the time of contract and the delivery of the commodity or instruments in future while in the Istasna base contract delivery at the time of contract and the price paid on tater. Nothing any element of gharar found in the future and option base trading if the guarantees are 100% and there is no chance of failure from the both parties.
The nature of future and option derivatives are reduce the risk for the both parties for instance a buyer looking at the increase of the commodity price in future and taking risk, it is nothing any guarantee that the price of the specific commodity will rise in future may be it goes down and he face loss and for the future risk reduction if he go for the Islamic option derivative he is no legally bound to buy the commodity and reduce his risk by offering the principal amount to the seller as a gift and as well as the seller point of view if he needs capital at the time of the mutual cosecants he received the principal amount from the buyer. The same in the Murabha contract rab ul mall takes the risk of his investments while the Mudarib take the risk of his job. Rab ul mall offer the capital while the Mudarib utilize his expertise in order to reduce the market risk.
According the Hadith it is declared that "sell not what is not with you", in the light of Hadith some jurist gives the opinion that a contract is valid if you have the commodity of the same quality and size at the time of contract. Jurist gives the different views over the interpretation
on the Hadith according to some it is for fungible goods because goods can easily changeable there is element of gharar in future exist
Majority of jurist from the different school of thoughts are agreed over "bay al daya" (sale of debt) because in the Holy Quran ayah Allah (s.w.t) said when you deal with each other for the transaction for future obligation write it carefully and faithfully between both parties. Future sales are all credit sales which proceed over dayn.
In the Quran and Sunnah there is nothing mention that the debt derivatives are not permitted but the main thing according to Quran and Sunnah everything should be mentioned clearly and faithfully with the mutual consents of both parties at the time of contract, and deals in the halal business and avoid your dealings from riba, gharar and gambling.
Conclusion:
Quran and Sunnah allow for the future dealing but on the bases of faithfulness. Derivatives instruments have the heaps of participants and trading volume that can be helpful for the risk averse and increase the volume of the Islamic capital market volume. Islamic derivatives trading is a new phenomena in the Malaysian market and as well as new for the rest of the Muslim world but it is the responsibility of the Muslim jurist to offer the riba, gharaa and gambling free instruments after the detail consciences
