Monetary and Banking Research Institution
Date:9/11/2018 10:01:09 AM   |   Code : 293853
A policy paper on “Challenges of FX Futures Contracts based on Islamic Fiqh and Shariah-Compliant Substitute Instruments” has been published by the Monetary and Banking Research Institute (MBRI)
A policy paper on “Challenges of FX Futures Contracts based on Islamic Fiqh and Shariah-Compliant Substitute Instruments” has been published by the Monetary and Banking Research Institute (MBRI)

 

Derivative is a financial asset whose value is dependent on an underlying asset or a known variable. Foreign exchange derivative (FX derivative) is a financial derivative whose payoff depends on the foreign exchange rate(s) of two (or more) currencies. These instruments are commonly used for currency speculation and arbitrage or for hedging foreign exchange risk.

The lack of formal “FX derivative market” is one of the important challenges of Iran’s financial system. This missing market is very useful in many areas. For example, firms can hedge their currency mismatches by using different types of FX derivatives. In addition, both exporters and importers may reduce the uncertainty of their expected cash flow by fixing a future exchange rate with FX derivatives.

In addition, the Central Bank can enter the FX derivative market and pursue its main goal of reaching “financial stability” in the FX market.

Since the FX derivative market is not available in Iran’s financial system, market players have created an informal illegal substitution. This unlawful market is called: “Next-day FX Transactions” In this market, players trade next day dollars (and other foreign currencies) based on their expectations about the next-day rate.   However, Iran’s banking system is based on the Usury-free Law and all the transactions are supposed to be Shariah-compliant.

The authors try to evaluate the jurisprudential nature of next-day FX market. They organize a structured interview with the participants of this market. In addition, they discuss the challenges of FX futures contracts based on Islamic Fiqh and suggest substitute Shariah-compliant instruments. The main questions are: “What are the jurisprudential challenges of next-day FX transactions based on Islamic Fiqh? What are the substitute Shariah-compliant instruments?”.

The results, based on a descriptive-analytical approach, show that it is possible to analyze the next-day FX transactions based on “Gambling”. If these transactions considered as gambling (wagering of money or something of value on an event with an uncertain outcome with the primary intent of winning money), then they are Qimar and Gharar (the sale or transaction of probable items whose existence or characteristics are not certain, due to the risky nature). Qimar and Gharar are not accepted in Islamic Fiqh. The substitute instrument for next-day FX transactions in the short-run is conducting these transactions based on “Future Legal Commitment” contract and in the long-run, is forming a formal derivative market in Iran’s financial system.

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