Commodity futures from Islamic perspective: the theory-practice gap

• Main Author: Khalil Mohammed Khalil Ahmed
• Format: Thesis
• Language: English
• Published: Universiti Sains Islam Malaysia 2015
• Subjects: Commodity futures; Finance > Religious aspects > Islam
• Online Access: http://ddms.usim.edu.my/handle/123456789/8757
• Institution: Universiti Sains Islam Malaysia

Commodity futures trading is a relatively new phenomenon in the Islamic finance, which emerged in the early 1990s. Many scholars and SharÊÑah bodies have passed prohibitive judgment against the legality of futures trading due to two reasons. First, the futures trading system contains a number of elements that oppose Islamic law e.g. sale of nonexistent object, short selling, gambling, and deferment of countervalues. Second, the practice of Islamic banks, in trading commodity futures, may not be totally in compliance with Islamic principles of muÑÉmalÉt. The scope of the present analysis is, however, limited to futures contracts based on commodities. They represent the most probable area in which an Islamic alternative is possible. The broader concept of commodity, which includes currencies, bonds, interest rates, indices and other financial futures, is beyond the scope of this study. The study begins with defining the gap between theory and practice, examining the existence of the gap in different disciplines, and reviewing the relevant literature. The study also examines related issues to the futures contracts and their markets from conventional point of view. The study, furthermore, evaluates commodity futures contracts from an Islamic perspective and critically analyzes the prohibitive arguments and judgments advanced on the futures contracts. The practice of Islamic banks related to the commodity futures was also examined. Islamic banks use commodity murÉbaÍa as a platform to trade futures. Commodity murÉbaÍa is structured to give a fixed return with minimum risk. The study found that this structure mimics conventional one where the priority is given to guarantee return and avoid risk. Results of the study revealed that the gap between theory and practice exists, on one hand, due to improper understanding of the futures trading by those scholars who declared futures invalid. On the other hand, the Islamic banks have failed to apply strict rules of Islamic law during the deal with futures markets. The practice of Islamic banks involves a mere debt creation exercise which is said to be similar to conventional loans with interest.