An Overview on the Practice and Issues of Hedging in Islamic Finance

Oubdi, Lahsen and Raghibi, Abdessamad (2017): An Overview on the Practice and Issues of Hedging in Islamic Finance. Published in: International Journal of Contemporary Research and Review , Vol. 08, No. 10 (13 October 2017): pp. 20216-20223.

Abstract

In terms of Islamic banking, which relies on three main pillar of prohibiting Riba, Gharar& Maysir, risk management is still not sufficiently developed. Indeed, Islamic use traditional types of risk management instruments used by conventional banks. Despite Islamic banking has a specific characteristic related essentially to the Profit & Loss Sharing (PLS) principle in Mudarabah & Musharakah contracts. Such instruments change the classic concept of risk in comparison with conventional banks adding new types of risk such as Commodity/Asset price risk and Bundled risk along with neutralizing other type of risks like the liquidity risk. Nevertheless, the rigidity of some Sharia’a scholars has impeded some financial instruments that try to match the real risk management demands by business entities in the global Islamic finance industry. Indeed, it has been widely acknowledged by many observers that the Islamic finance industry will not be able to sustainably continue on this growth trajectory, and may even regress, without a proper market risk management framework that can effectively deal with the complex risks that exist in today’s globalized economy (Chapra& Khan, 2000; Moody's, 2010).The present research article is an attempt to analyze hedging instruments from an Islamic finance perspective. It will approach different fiqhi ruling on them along with the applicability of these instruments in the reality.

• Item Type: MPRA Paper
• Language: English
• Keywords: Risk Management, Islamic Finance, Hedging, Future
• Subjects: G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing ; Futures Pricing; G - Financial Economics > G2 - Financial Institutions and Services > G23 - Non-bank Financial Institutions ; Financial Instruments ; Institutional Investors

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