Islamic Banking and Finance: Fundamentals and Contemporary Issues

Option Contracts in Shari[ah

most cases, the seller of the financial option does not own the
subject matter be it share or commodity.
In line with the above concept and features of options, the permissibility
or non-permissibility of options may be examined from two Shari[ah aspects.
The first principle is to examine options within Shari[ah nominated contracts
or concepts that are comparable to options in terms of concept, qualities or
properties. The second principle is to consider options as novel financial
instrument created due to current circumstances of market volatility and
which have no parallel in Islamic commercial law. This means options should
be adjusted under the general principle of permissibility and other similar
principles.

8. Similarities of Shari[ah and Financial Options

There are similarities between financial options and Shari[ah options.
These similarities may be summarized in the following:

1. The Shari[ah and financial options agree on providing a right to
   either of the parties or both to confirm or to cancel the contract
   within a stipulated period. In essence, both options give the
   concerned party some period for re-evaluation of the benefits and
   costs involved, before giving final consent or accent to the contract.


2. The Shari[ah and financial options are mainly intended to manage a
   wide range of risks, although it is not ruled out that financial options
   may be intended for gambling.^14


3. The Shari[ah options are created as a result of asset-based
   contractual relationship. This also exists in the transactions of
   financial options that involve shares.


4. The Shari[ah options and financial options agree on that both give
   the buyer an upper hand to decide on the direction of the contract.

9. The Differences of Shari[ah and Financial Options

The examination of Shari[ah options shows that they differ in substance
and form from financial options from various perspectives, although some of
the differences may be eliminated. The following are the main differences.^15

1. A Shari[ah option consists of three components, namely the option
   itself, the contract and the underlying assets. In other words, the