In the Name of Allāh,

the Entirely Merciful, the Especially Merciful

Praise is due to Allāh, Lord of the worlds, may the blessings and peace be upon our master Muḥammad, the last of prophets, on his family, and all his companions.

Resolution No. 224 (8/23)

Hedging in Financial Transactions: Principles and Rulings

The Council of the International Islamic Fiqh Academy of the Organization of Islamic Cooperation, holding its 23rd session in al-Madinah al-Munawwarah, Kingdom of Saudi Arabia, on 19–23 Ṣafar 1440h (28 October – 1 November 2018),

Having reviewed the recommendations of the scientific seminar on Hedging in Financial Transactions: Principles and Rulings, held by the Academy in the Emirate of Dubai on 26–27 April 2016, in collaboration with the Islamic Affairs and Charitable Activities Department through the Islamic Economy Fiqh Forum in its second session,

Having listened to the in-depth discussions,

Resolves

First: Definitions of Key Concepts

1. The Concept of Hedging

   1. The general meaning of hedging is covering, avoiding and preventing,

i.e. protection as defined by Fuqahā (fiqh jurists).

1. In financial terminology, the concept of hedging means the systemic measures to manage risks by neutralizing, minimizing, or eliminating, by transferring them to another
2. In technical terminology, the concept of hedging refers to the protection against risks and reducing their effects without restricting its concept to common practices in financial markets, which are mostly based on ribā (usury), and sale of risks. These formulas include derivatives which include futures, options, and swaps. Some of these formulas have already been deemed illicit by the Academy resolutions, such as in the case of options, most of futures, as well as deferred exchanges, by virtue of the resolution concept on financial

2. The Concept of Risk

Linguistic meaning: The probability of loss (or destruction.)

In financial terminology, it is the probability of destruction of property, financial loss, lack of profit, or the profit being less than expected.

According to this definition, the risk does not dissociate from econom- ic activity, and Shariah addressed documentation contracts such as lien, guarantee (Dhaman), etc., in order to protect both parties in the ex- change contract against risks. Risks are generally undesired because they expose the property to loss.

3. As for the meaning of “protection,” it is using available means for the safeguard against loss, decrease, destruction or damage. Protection, in this context, is more general than the capital guarantee because the latter is a commitment by a particular party to assume whatever happens to the capital of loss, destruction, decrease or damage. However, protection is the preservation of the capital, and it hence includes direct and indirect

Second: Shariah Position on Risks Hedging

1. Hedging, in general, means the protection and preservation of property against In this sense, it is consistent with Maqāṣid al-Shariah (ob- jectives of Islamic law) of property preservation.
2. The Shariah ruling on the practical application depends on the extent of abiding by the formulas and mechanisms of hedging in their different forms under the rules of Shariah. Every formula requires detailed research and precision-making regarding the extent of its Shariah-compliance.

Third: Shariah Regulations for Hedging Formulas and Methods

1. Hedging formulas should not involve or pave the way to ribā, and it should not contain gharar (uncertainty) as this amount to consuming other people’s properties unjustly.
2. The hedging formula should itself be permissible in
3. The hedging formula should not lead to selling debts at other than their face value, or to exchange illicit items as it has been observed in the usu- ry-based financial markets.
4. Hedging formulas should not lead to selling pure abstract rights, like sell- ing options which are prohibited by the Academy resolution 63 (1/7) paragraph (2-B). Moreover, it should not lead to the sale of commitment, such as paying the price for the guarantee, which is prohibited by the

Academy resolution no. 12 (12/2).

5. Observance of the objectives of Shariah when formulating hedging con- Their outcomes and their various effects in different aspects should also be consistent with the objectives of Shariah because the observance of outcomes is a fundamental principle in Shariah.
6. In cases of non-infringement, or terms violation, hedging contracts should not lead to guaranteeing capital or expected profit, whether the guarantee is by the manager, the Muḍārib, or the
7. It is not permissible to make the risk in itself a subject of netting (muawada).
8. The fundamental objective of hedging instruments should be to safeguard property, not speculation on prices variances.

Recommendations

1. Given the multiplicity of hedging formulas, methods, and mechanisms in the operational applications of Islamic financial institutions, and regard- ing it as one of the contemporary issues which can be broadly adapted in the principles of Ijtihād within the framework of the exalted Shariah, the Academy recommends holding scientific symposiums in coopera- tion with Islamic financial institutions to study hedging instruments and transactions that are practiced by Islamic financial institutions or which have been approved by their councils. This is in order to verify the ex- tent of its compliance with the criteria and conditions approved by the Academy resolutions and recommendations.
2. Urging leaders and officials of Islamic financial institutions to draw on formulas and contracts approved by the International Islamic Fiqh Academy, the Islamic Fiqh Council of the Muslim World League, and other reliable Fiqh councils when it comes to formulating hedging con- tracts and transactions. For example, salam contract (forward contract for purchasing a product), parallel salam contract, Murābaḥah to the purchase orderer, istiṣnāʾ contract, parallel istiṣnāʾ contract, khiyar al-Sharṭ (condi- tional options). All these formulas should be based on Shariah criteria as stated in their respective resolutions.

Indeed, Allāh is All-Knowing.