130 AN INTRODUCTION TO ISLAMIC FINANCE
by Shari’ah scholars, fi nancial derivatives as independent fi nancial contracts
that can be traded have no precedents in classical Islamic jurisprudence. As
a result, the research in this area is still evolving. While there have been a
number of studies, these have not resulted in any concrete conclusions.
The majority view of Shari’ah scholars is that an option is a promise to
sell or purchase a thing at a specifi c price within a stipulated time, and such
a promise cannot be the subject of a sale or purchase. As the resolution of
the Islamic Fiqh Academy, Jeddah, asserts:
Option contracts as currently applied in the world fi nancial mar-
kets are a new type of contract which do not come under any one of
the Shari’ah nominate contracts. Since the subject of the contract is
neither a sum of money nor a utility nor a fi nancial right which may
be waived, the contract is not permissible in Shari’ah.^3These objections are based on the prohibition of mysir and gharar. The
Qur’an prohibits speculative risk, warning the faithful to avoid games of
chance in which the probability of loss is much higher than the probability
of gain. Conventional fi nance argues that speculators play an important role
in price discovery and price stabilization, but what it does not recognize is
that excessive and large - scale speculation can become a factor for instability
in the system. In Islam, gambling of any form is strictly discouraged on the
grounds that it does not create value in society and an addiction to gambling
is detrimental to economic growth.
In short, the debate on derivatives will continue but, at present, they
have very limited acceptability in Islamic fi nance and are unlikely to be
as widespread as in conventional markets in the near future. However, as
Islamic fi nance grows, its own version of hedging mechanisms and fi nancial
products with embedded options will emerge. The prohibition of deriva-
tives, however, does not preclude an Islamic fi nancial intermediary from
designing a risk-sharing or risk-mitigating scheme. This can be achieved
through the creation of a risk-mitigating instrument synthetically using
existing instruments. While it was shown in Chapter 5 that Islamic fi nancial
instruments promote risk sharing across the system, there will be opportu-
nities for fi nancial intermediaries to utilize these contracts and the freedom
to contract in designing products and services to hedge against exposures.
Primary, Secondary and Money Markets
The development of a secondary market is important and essential to the
development of a primary market. All savers, to some degree or another,
have a liquidity preference. This liquidity preference, although perhaps
to a different extent and magnitude, can exist in an Islamic system or in
any other system. To the extent that savers can, if necessary, sell securities
quickly and at low cost, they will be more willing to devote a higher portion
of their savings to long - term instruments than they would otherwise. Since