The Development of Salam as Hedging Instrument

Ehab Mohammad Injadat

Abstract


The current derivatives markets, undoubtedly, provide many important advantages for the participants in the financial markets, namely the hedging services. However, the current derivatives contracts are prohibited by Islamic law, because they include many prohibited elements: gambling, gharar, and riba. On other hand, the financial markets in Islamic countries are witnessing steady growth in the trading volume, number of participants, investors, and size of Islamic financial institutions, which show an increasing demand on the Islamic products. Consequently, it is usual that there will also be an increase in the size of the exposure to various risks, and thus generates the need to use hedging instruments that are compatible with the Islamic law and provide the means of protection and risk prevention in the financial markets of Islamic countries. Therefore, this paper attempt to develop effective hedging instrument based on the structure of salam contract, compatible with Islamic law and appropriate to provide hedging alternative of using conventional derivatives. This study follows the qualitative research, involves using in-depth interviews with experts and scholars in hedging, finance and Islamic finance. This study concluded the ability of using salam to offer hedging on tangible commodities, nevertheless the original salam has some obstacles in offering hedging, This study also found other two instruments derived from the original salam can offer better performance in offering Shari’ah compliant hedging and overcome the obstacles existed in original salam, the first instrument is separately parallel salam SPS and second instrument salam with right to sell.


Keywords


Development of Salam, Hedging Instrument

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