Finance

Published on: April 21, 2026

Islamic Derivatives – Issues with Futures Contracts

General view:
- Muslim scholars have differing opinions
- Many argue futures contracts do not fully comply with Shari’ah principles

1. Absence of Countervalues at Contract Stage

No immediate payment and no delivery of goods/services
Transaction exists only on paper (speculative intent)
Shari’ah requirement:
- At least one countervalue must be present for validity
Comparison with Salam:
- Buyer pays in advance
- Seller delivers later
Issue:
- Futures defer both payment and delivery, which is not permitted

2. Short Selling (Selling Without Ownership)

Seller sells commodities not owned or possessed
Violates principle:
- Sale must involve transfer of ownership
Ownership cannot transfer if seller does not own the asset

3. Lack of Actual Possession Before Resale

Many futures trades occur without physical delivery
Shari’ah requires:
- Ownership and possession before resale
This condition is often not fulfilled

4. Sale of Debt for Debt (Prohibited)

Both payment and delivery are deferred
Results in:
- Bai al-kali bil-kali
This type of transaction is prohibited in Shari’ah

5. Speculation, Gambling, and Uncertainty

High level of speculation in futures markets
Linked to:
- Maisir (gambling)
- Gharar (uncertainty)
Both are strictly prohibited
Can lead to:
- Price volatility in real markets

Overall Conclusion

Key concerns:
- Lack of ownership
- Deferred countervalues
- Speculative nature
These issues make conventional futures contracts problematic under Islamic law

Published on: April 21, 2026

Islamic Derivatives – Bai al-Kali bil-Kali (Debt for Debt)

Definition:
- Bai al-kali bil-kali refers to:
  - A transaction where both countervalues are deferred
  - In simple terms: exchanging one debt for another debt

How it works:
- Buyer promises to pay later
- Seller promises to deliver later
- At the time of contract:
  - No money is paid
  - No goods are delivered
- Result → both sides hold future obligations (debts)

Why it is prohibited in Islam:
- No real exchange at the time of agreement
- Leads to:
  - Uncertainty (gharar)
  - Higher risk of default or dispute
- Goes against Shari’ah requirement:
  - At least one countervalue must be immediate

Key Shari’ah concern:
- Contracts should involve certainty and fairness
- Debt-for-debt creates:
  - Weak contractual foundation
  - Potential for speculation and exploitation

Simple example:
- A sells goods to B:
  - Payment: after 3 months
  - Delivery: after 3 months
- → Nothing exchanged now → both are debts → prohibited

Contrast with permissible contracts:
- Salam:
  - Payment made upfront
  - Delivery later
  - Only one side deferred → allowed
- Murabaha:
  - Goods are owned and sold with known cost and profit
  - Clear structure → permissible

Key takeaway:

Bai al-kali bil-kali = both sides deferred
Considered invalid in Shari’ah
One of the main reasons why conventional futures contracts are problematic in Islamic finance

Published on: April 21, 2026

Islamic Derivatives – What is “Debt” in Islam?

Basic meaning:
- Debt (Arabic: dayn) = an obligation owed by one party to another
- It can be:
  - Money owed
  - Goods or services owed (to be delivered later)

Key characteristics of debt in Islam:
- It is a binding responsibility that must be fulfilled
- Created when:
  - Payment is delayed, or
  - Delivery of goods/services is postponed
- Recognized and regulated under Islamic commercial law (fiqh al-muamalat)

Examples:
- Borrowing money → you must repay later
- Buying goods now, paying later → price becomes a debt
- Paying now, receiving goods later (like Salam) → goods become a debt on the seller

Important rules in Islam:
- Debt must be:
  - Clearly defined (amount, time, terms)
  - Free from injustice or exploitation
- Charging interest (riba) on debt is strictly prohibited
- Debts should be:
  - Repaid on time
  - Written/documented (encouraged in the Qur’an)

Connection to futures contracts:
- In cases like Bai al-kali bil-kali:
  - Both sides (payment & delivery) become debts
- This is problematic because:
  - Islam discourages exchanging one debt for another

Simple takeaway:

A debt in Islam is anything owed and deferred
It is taken seriously, must be fair, and should not involve interest or excessive uncertainty

Published on: April 21, 2026

Islamic Derivatives – What is Short Selling?

Definition:
- Short selling = selling an asset you do not own with the intention of buying it later at a lower price

How it works (simple steps):
1. A trader sells a commodity/asset at the current market price
2. The trader does not actually own the asset at that time
3. Later, the trader buys it back at a lower price
4. Profit = difference between selling price and buying price

Example:
- Sell a stock at $100 (without owning it)
- Later buy it at $80
- Profit = $20

Why people do it:
- To profit from falling prices
- Common in financial markets like stocks and futures

Shari’ah Perspective

Main issue:
- Selling something not owned or possessed
Violates key Islamic principle:
- “Do not sell what you do not own”

Related concerns:
- Involves uncertainty (Gharar)
- May include speculation similar to Maisir
- Ownership transfer is not valid at time of sale

Key takeaway:

Short selling = selling first, owning later
Generally considered not permissible in Islamic finance because:
- No ownership
- High uncertainty
- Speculative nature

Published on: April 21, 2026

Islamic Derivatives – Options Contracts

Islamic Derivatives – Options Contracts

Basic Concept of Options

An option contract gives the buyer:
- Right (not obligation) to buy or sell an asset
- At a fixed price
- On or before a future date
Buyer must pay a premium:
- Fee paid to seller for this right
- Loss is limited to this premium amount

Types of Options
1. Call Option (Right to Buy)

Gives buyer the right to purchase an asset
Price is fixed in advance
Used when expecting price increase

Outcome:

If price rises → buyer profits
If price falls → buyer lets option expire (loss = premium only)

2. Put Option (Right to Sell)

Gives buyer the right to sell an asset
Price is fixed in advance
Used when expecting price decrease

Outcome:

If price falls → buyer sells at higher fixed price → profit
If price rises → buyer lets option expire (loss = premium only)

Example – Call Option (A)

A expects stock price to increase
Choices:
- Buy stock fully, or
- Pay premium for call option
If price rises:
- A benefits
If price falls:
- A does not exercise option
- Loss = premium only

Example – Put Option (B)

B expects stock price to decrease
Choices:
- Sell stock now, or
- Buy put option
If price falls:
- B sells at fixed higher price → profit
If price rises:
- B lets option expire
- Loss = premium only

Key Takeaways

Options = right without obligation
Premium = cost of flexibility
Helps manage risk and speculation
Widely used in financial markets, but raises Shari’ah concerns (ownership, uncertainty, speculation)

Published on: April 21, 2026

Islamic Derivatives – Combined Options

Islamic Derivatives – Combined Options

Use of Combined Options

Businesses use:
- Call + Put options together
Purpose:
- Hedge risk from:
  - Currency fluctuations (e.g. USD)
  - Commodity price changes

What is a Combined Option?

Combination of:
- Call option → right to buy
- Put option → right to sell
Designed so that:
- One option offsets the loss of the other

Corrected Example (C and USD Fluctuation)

C is worried that USD value may change and affect a contract
To reduce risk, C buys a combined option (call + put)

Outcomes
1. If USD value increases

✅ Call option is exercised
- C can buy at lower fixed price
- → Gains profit / saves cost
❌ Put option is not used
✔️ Profit from call helps offset premium cost

2. If USD value decreases

✅ Put option is exercised
- C can sell at higher fixed price
- → Gains profit
❌ Call option is not used
✔️ Profit from put helps offset premium cost

Key Idea

Combined options provide:
- Protection in both directions (price up or down)
- A form of risk management (hedging)

Important Insight

Only one option is useful at a time:
- Call → when prices rise
- Put → when prices fall

Shari’ah Note

Despite hedging benefits, concerns remain:
- Gharar
- Maisir
Therefore, permissibility is debated among scholars

Final Takeaway

✔️ The corrected logic:
- Call = benefit when price rises
- Put = benefit when price falls
✔️ Combined options = balanced risk protection, not contradiction

Published on: April 21, 2026

Islamic Derivatives – Stand-alone vs Embedded Options

Islamic Derivatives – Stand-alone vs Embedded Options

A. Basic Concept of Options

Option = right (not obligation) to:
- Buy or sell an asset
- At a fixed price
- On or before a future date
Buyer pays a premium for this right

B. Types of Options

Call option:
- Right to buy
- Used when expecting price increase
Put option:
- Right to sell
- Used when expecting price decrease

C. Stand-alone Options
Definition

Options that are:
- Separate and independent contracts
- Bought and sold individually in markets

Key Features

Require separate premium payment
Can be traded freely (stocks, currencies, commodities)
Often used for:
- Speculation
- Risk hedging

Examples

Buying a call option on shares:
- Pay premium → right to buy shares later
Buying a put option on USD:
- Pay premium → right to sell currency at fixed rate

Scenario

Pay RM500 for option to buy gold at RM10,000
If price rises → exercise → profit
If price falls → do nothing → lose premium only

Nature

Pure financial instrument
Not tied to a real transaction
Exists on its own

D. Embedded Options
Definition

Options that are:
- Built into another contract
- Not sold separately

Key Features

No separate premium:
- Cost included in overall contract price
Not traded independently
Provide flexibility in real business transactions

Examples

Cancellation option:
- Buyer/seller can cancel contract before execution
Lease (Ijarah) with purchase option:
- Customer may choose to buy asset at end
Early settlement option:
- Buyer can repay financing earlier
Callable sukuk:
- Issuer can redeem earlier than maturity

Scenario

Contract to buy goods at RM10,000
Clause allows cancellation before delivery
If price drops → cancel contract
If price rises → continue contract

Nature

Part of a real economic transaction
Provides practical flexibility, not speculation

E. Key Differences (in points)

Stand-alone options are separate contracts; embedded options are part of another contract
Stand-alone options require separate premium; embedded options have cost included in price
Stand-alone options are actively traded; embedded options are not tradable separately
Stand-alone options are often used for speculation; embedded options are for contract flexibility

F. Similarity

Both provide:
- Right without obligation

G. Shari’ah Perspective

Stand-alone options:
- Involve:
  - Gharar
  - Maisir
- Generally questionable or not permissible
Embedded options:
- More acceptable when:
  - Linked to real contracts and assets
  - Not purely speculative

H. Final Takeaway

Stand-alone options = independent, tradable, speculative
Embedded options = built-in rights within real contracts
Main difference = purpose and structure, not just the “right” itself

Published on: April 21, 2026

Islamic Derivatives – Minority View & Warrants

Islamic Derivatives – Minority View & Warrants

A. Minority View on Options

Some scholars (minority opinion):
- Believe options can be approved
Reason:
- Useful for:
  - Risk management (hedging)
  - Business needs

B. Role of Shari’ah Boards

Shari’ah boards in Islamic Financial Institutions (IFIs):
- Adopt minority opinions
Aim:
- Develop Shari’ah-compliant alternatives to conventional options
Approach:
- Modify structure to:
  - Avoid Maisir
  - Avoid Gharar
  - Link to real assets and transactions

C. Warrants (Basic Concept)
Definition

Warrant = corporate security similar to a call option
Gives holder:
- Right (not obligation) to buy company shares
- At a fixed price
- Within a specific time period

Key Features of Warrants

Specify:
- Number of shares
- Exercise price
- Expiry date
Often:
- Attached to bonds when issued
Buyer:
- Can choose whether to exercise or not

Investor Perspective

Warrants are similar to:
- Call options on shares
Benefit:
- Buy shares at fixed (possibly lower) price

D. Difference Between Warrants and Call Options
1. Issuance

Call option:
- Issued by individual investors/traders
Warrant:
- Issued by the company itself

2. When Exercised

Call option:
- Buyer purchases shares from another investor
- Company is not directly involved
Warrant:
- Buyer purchases shares directly from company
- Company:
  - Receives money
  - Issues new shares

3. Effect on Company

Call option:
- No change in company shares
Warrant:
- Increases number of shares outstanding

E. Shari’ah Insight

Warrants may be viewed more favorably than options if:
- Linked to real shares (underlying asset)
- Not purely speculative
Still debated depending on:
- Structure and usage

F. Final Takeaway

Minority scholars support developing Islamic alternatives
Warrants:
- Function like call options
- But differ in:
  - Issuer (company vs investor)
  - Impact on shares
Seen as a possible bridge toward Shari’ah-compliant option-like instruments

Published on: April 21, 2026

Islamic Derivatives – How Warrants Work

Islamic Derivatives – How Warrants Work

A. Basic Idea of a Warrant

Warrant = right (not obligation) to buy shares
Very similar to a call option only
Issued by the company, not traders

B. Does a Warrant Have Call or Put?

✔️ Warrant = like a CALL option
- Right to buy shares at fixed price
❌ No “put warrant” in the usual sense
- It does not give right to sell

C. Is There a Premium?

✔️ Yes, but different from options:
- You pay to get the warrant
- Cost may be:
  - Paid directly, or
  - Included in another product (e.g. bond)

👉 So:

It behaves like a premium, but:
- Not always shown separately
- Sometimes embedded in price

D. How It Works (Step-by-Step)

You receive or buy a warrant
- Example: Right to buy shares at RM10
Wait until future date
Two outcomes:

If market price = RM15:
- ✔️ Exercise warrant
- Buy at RM10 → profit
If market price = RM8:
- ❌ Do not exercise
- Let it expire → loss limited to cost of warrant

E. Key Difference from Call Option

Call option:
- Buy shares from another investor
Warrant:
- Buy shares directly from the company
- Company issues new shares

F. Simple Comparison

Warrant:
- ✔️ Right to buy
- ✔️ Issued by company
- ✔️ May have implicit premium
- ❌ No selling right

G. Shari’ah Insight

More acceptable (in some views) because:
- Linked to real shares
But still debated due to:
- Gharar
- Maisir

H. Final Takeaway

Warrant = company-issued call option (only buy right)
Has cost like premium, but may be embedded
Used to buy shares in future at fixed price

Published on: April 21, 2026

Islamic Derivatives – Why Warrants Are Linked to Real Assets but Options Are Not

Islamic Derivatives – Why Warrants Are Linked to Real Assets but Options Are Not

A. Warrants → Direct Link to Real Asset

Warrant gives:
- Right to buy actual company shares
When exercised:
- ✔️ You receive real shares
- ✔️ Company issues new shares
So:
- There is a clear underlying asset (equity/shares)
- Leads to real ownership

👉 Key idea:

Warrant → ends in actual asset transfer

B. Options → Often Not Linked in Practice

Option gives:
- Right to buy or sell
BUT in reality:
- Most options are:
  - Traded repeatedly
  - Closed before expiry
  - Settled in cash (no delivery)

👉 So:

❌ No actual asset exchanged
❌ No real ownership happens

C. Nature of Trading
Warrants

Usually:
- Held until exercised
Purpose:
- Investment in company shares

Options

Commonly used for:
- Speculation
- Price betting
Traders:
- Rarely intend to own the asset

D. Shari’ah Concern

Options involve:
- Gharar
- Maisir
Because:
- Focus is on price movement, not ownership

E. Key Conceptual Difference

Warrant:
- Right tied to real shares issued by company
- Leads to actual ownership
Option:
- Right often treated as a tradable financial claim
- May never lead to real asset transfer

F. Important Clarification

It’s not that options cannot involve real assets
The issue is:
- How they are used in practice
- Heavy speculation + no delivery