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Islamic Derivatives – Minority View, Warrants & Shari’ah Issues

A. Minority View on Options
  • Some scholars (minority opinion):
    • Support approval of options
  • Reason:
    • Useful for:
      • Risk management (hedging)
      • Protecting against market uncertainty
  • Islamic Financial Institutions (IFIs):
    • Through Shari’ah boards, adopt this view
    • Develop Shari’ah-compliant alternatives to conventional options


B. Warrants (Concept & Features)
Definition
  • Warrant = corporate security similar to a call option
  • Gives holder:
    • Right (not obligation) to buy shares
    • At a fixed price
    • Within a specific time period


Key Features
  • Specifies:
    • Number of shares
    • Exercise price
    • Expiry date
  • Often:
    • Attached to bonds when issued
  • Buyer:
    • Has choice to exercise or not


Investor Perspective
  • Similar to:
    • Call option on shares
  • Benefit:
    • Buy shares at pre-agreed price


Company Perspective
  • Key difference from call options:
    • Warrant issued by company
    • Call option issued by investors/traders


When Exercised
  • Call option:
    • Shares bought from other investors
    • Company not involved
  • Warrant:
    • Shares bought directly from company
    • Company:
      • Receives money
      • Issues new shares (increase in shares outstanding)


C. Shari’ah Concern on Warrants (Embedded Options)
Main Issue: Uncertainty (Gharar)
  • Concern:
    • Gharar
  • Reason:
    • Future price of shares is unknown
    • Decision to:
      • Exercise or cancel is uncertain


Speculation Issue
  • Some investors may:
    • Use warrants for speculation only
  • Leads to:
    • Maisir


Scholarly View (Jobst, 2007)
  • Options may involve:
    • Gharar fahish (excessive uncertainty)
  • Due to:
    • Lack of clarity about future outcomes


D. Legal Maxim (Qawa’id Fiqhiyyah)
  • Dar’ al-mafasid muqaddam min jalb al-masalih
  • Meaning:
    • Avoiding harm is prioritized over gaining benefit
  • Used to argue:
    • Options may be prohibited due to risk and speculation


E. Alternative View (Permissibility with Conditions)
  • Some jurists allow embedded options (like warrants) because:
    • Obligations are:
      • Between two parties only
      • Not transferable to third parties
  • This reduces:
    • Speculative trading


Important Consequence
  • Restricting transferability:
    • May limit or eliminate organized options markets


F. Role of Options in Modern Economy
  • Seen as:
    • Hedging instruments (risk reduction tools)
  • Important for:
    • Managing economic fluctuations
  • Serve:
    • Public interest (maslahah)
    • Welfare of the ummah (community)


G. Balanced View
  • Issues like:
    • Gharar
    • Maisir
    • Often arise due to:
      • Speculative misuse by some investors
  • Argument:
    • Cannot generalize prohibition for all options


H. Final Insight
  • No exact equivalent in classical Fiqh al-Muamalat
    for modern derivatives like:
    • Futures
    • Options
    • Warrants


Conclusion
  • Must evaluate:
    • Both benefits and risks
  • Use:
    • Islamic principles to assess permissibility
  • Outcome:
    • Ongoing debate between:
      • Prohibition (majority)
      • Conditional permissibility (minority)

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