Title: Derivatives in Islamic finance: the need and mechanisms available

Authors: Syed Aun R. Rizvi; Shaista Arshad; Ahcene Lahsasna

Addresses: International Centre for Education in Islamic Finance, Lorong Universiti A, 59100 Kuala Lumpur, Malaysia ' IIUM Institute of Islamic Banking and Finance, International Islamic University Malaysia, Selangor, Malaysia ' International Centre for Education in Islamic Finance, Lorong Universiti A, 59100 Kuala Lumpur, Malaysia

Abstract: The research is an attempt to have an overview of the need for derivatives and their possible role in Islamic finance, stressing on the Shariah qualification and prohibitions on the controversial conventional derivative products. This research focuses on the derivative products and their role in risk management measures. Islamic financial industry has shown tremendous growth over the past decade but the management of risk is still an unresolved issue in the trillion-dollar Shariah-compliant industry. This paper attempts at having a continuous elaboration on the derivatives from a conventional perspective and closest alternatives that are available in Islamic finance. The findings suggest that conventional derivatives in their original form do not comply with Shariah norms and parameters. But in contemporary literature and thought, there exist Shariah-compliant mechanisms and instruments which provide similar risk management measures for Islamic financial markets.

Keywords: derivatives; Islamic finance; financial markets; Shariah norms; Shariah parameters; futures; options; Islam; risk management.

DOI: 10.1504/IJFSM.2014.065572

International Journal of Financial Services Management, 2014 Vol.7 No.3/4, pp.177 - 195

Available online: 29 Oct 2014 *

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