Fahim Khan, Muhammad Ayub, Abdul Rashid
This paper discusses futures instruments and markets in conventional finance, and their possible alternatives in Islamic finance. Credit and forward contracts have been a need of people throughout history and the divine law or nature, while accepting this necessity, has provided a cushion for such valid transactions. It has been done while providing some built-in controls to ensure that any such provisions might serve as a facilitator only and not as a cause of instability, or a tool for injustice to any of the stakeholders, and exploitation of the poor and the uninformed. It’s a crucial part of valid, legitimate, upright, and inspiring system of financial intermediation between the surplus and the deficit units in any economy.
Subject to implementation of the built-in controls, forward or future markets would be playing a crucial role in any economy and finance system. It has been provided by allowing salam, istisnā‘a and jo’ālah. While focusing on salam, this paper discusses how these three contracts can facilitate the economic agents in any economy.
The paper provides a framework for establishing forward and futures markets based on the conditions suggested in Islamic commercial law and finds that such markets are possible in an Islamic economy. The conditions are to ensure that the objectives of managing uncertainties facing producers and traders and addressing the demand for genuine hedging are realized. It also discusses the potential role of Islamic banks and other financial institutions, and business opportunities that would be available to them, savers, and investors in the economy. It recommends that the Islamic countries may initiate the experiment by starting a single commodity salam based such market, of course, by providing the suggested institutional framework at national as well as the OIC countries levels.
Peer-reviewed paper: Volume 5, Issue 1, December 2021