{"id":5985,"date":"2019-11-20T09:47:10","date_gmt":"2019-11-20T06:47:10","guid":{"rendered":"http:\/\/www.iifa-aifi.org\/%d9%82%d8%b1%d8%a7%d8%b1-%d8%a8%d8%b4%d8%a3%d9%86-%d8%b9%d9%85%d9%84%d9%8a%d8%a7%d8%aa-%d8%a7%d9%84%d8%aa%d8%ad%d9%88%d8%b7-%d9%81%d9%8a-%d8%a7%d9%84%d9%85%d8%a4%d8%b3%d8%b3%d8%a7%d8%aa-%d8%a7%d9%84.html"},"modified":"2019-11-20T09:47:10","modified_gmt":"2019-11-20T06:47:10","slug":"%d9%82%d8%b1%d8%a7%d8%b1-%d8%a8%d8%b4%d8%a3%d9%86-%d8%b9%d9%85%d9%84%d9%8a%d8%a7%d8%aa-%d8%a7%d9%84%d8%aa%d8%ad%d9%88%d8%b7-%d9%81%d9%8a-%d8%a7%d9%84%d9%85%d8%a4%d8%b3%d8%b3%d8%a7%d8%aa-%d8%a7%d9%84","status":"publish","type":"post","link":"https:\/\/iifa-aifi.org\/en\/5985.html","title":{"rendered":"Resolution No. 238 (9\/24)  on  Hedging Transactions in Islamic Financial Institutions"},"content":{"rendered":"<p style=\"text-align: center\"><span style=\"font-size: 14pt\"><strong>In the Name of Allah, the Entirely Merciful, the Especially Merciful<\/strong><\/span><\/p>\n<p style=\"text-align: center\"><span style=\"font-size: 14pt\"><strong>All praise is due to Allah, Lord of the worlds, may the blessings and peace of Allah be upon our master Muhammad, the seal of prophets, on his family, and all his companions<\/strong><\/span><\/p>\n<p style=\"text-align: center\"><span style=\"font-size: 14pt\"><strong><br \/>\nResolution No. 238 (9\/24)<\/strong><\/span><\/p>\n<p style=\"text-align: center\"><span style=\"font-size: 14pt\"><strong>on<\/strong><\/span><\/p>\n<p style=\"text-align: center\"><span style=\"font-size: 14pt\"><strong>Hedging Transactions in Islamic Financial Institutions<\/strong><\/span><\/p>\n<p style=\"text-align: justify\">\n<span style=\"font-size: 14pt\">The Council of the International Islamic Fiqh Academy of the Organization of Islamic Cooperation, held its twenty-fourth session in Dubai (United Arab Emirates), on 7-9\u00a0 Rabi al-Awal 1440, corresponding to 4-6 November 2019,<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">Having reviewed the recommendations of the scientific seminar on <strong>Hedging Transactions in Islamic Financial Institutions, <\/strong>held by the Academy in Jeddah (Kingdom of Saudi Arabia), in cooperation with the Iqra Waqf for Development and Employment, on 24-25 Rajab 1440, corresponding to 31 March-01 April 2019,<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">Having listened to the discussions on the subject,<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\"><strong>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Resolves the following<br \/>\n<\/strong><\/span><br \/>\n<span style=\"font-size: 14pt\"><strong>First, <\/strong>confirming the resolutions of the IIFA (OIC member) regarding hedging in financial transactions; in particular, the Academy resolution no. 224 (8\/23) on Hedging in Financial Transactions, Regulations and Rulings, adopted at its twenty-fourth Session in al-Madinah al-Munawarah on 19-23 Safar 1440, corresponding to 28 October-01 November 2018, including all its paragraphs, as follows:<\/span><\/p>\n<p style=\"text-align: justify\">\u00a0<\/p>\n<ul style=\"text-align: justify\">\n<li><span style=\"font-size: 14pt\">&#8211; The concept of<\/span><\/li>\n<li><span style=\"font-size: 14pt\">&#8211; The concept of<\/span><\/li>\n<li><span style=\"font-size: 14pt\">&#8211; The concept of<\/span><\/li>\n<li><span style=\"font-size: 14pt\">\u2013 Shariah position towards risks hedging.<\/span><\/li>\n<li><span style=\"font-size: 14pt\">\u2013 Shariah regulations for hedging formulas and methods.<\/span><\/li>\n<\/ul>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\"><strong>Second, <\/strong>the general meaning of hedging (i.e. covering) transactions:<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">There is a range of transactions that can generally serve as a basis for hedging and covering formulas. It is one of the activities of financial institutions, and it is deemed permissible under Shariah law, in particular :<\/span><\/p>\n<ol style=\"text-align: justify\">\n<li><span style=\"font-size: 14pt\"><strong>Economic hedging: <\/strong>It consists of a diversity of assets, investment portfolios and formulas. It is required according to Shariah, in order to achieve good resources<\/span><\/li>\n<li><span style=\"font-size: 14pt\"><strong>Cooperative hedging<\/strong>: It is based on takaful formulas by concluding takaful insurance contracts to compensate for damages and losses that the Islamic financial institution may face. This formula is not objected by Shariah, due to the lawfulness of cooperative insurance on projects, as well as on physical and financial assets. Hence, the Academy resolutions no. 9 (9\/2) and no. 200 (21\/6) confirmed the lawfulness of cooperative insurance and its different formulas.<\/span><\/li>\n<li><span style=\"font-size: 14pt\"><strong>Parallel contractual hedging: <\/strong>It is a contractual contract parallel to the original contract, with the same terms and specifications, whereby the financial institution protects itself against the risks of the original contract, such as-salam (i.e. advance payment sale), parallel salam (salam muwazi), istisna&#8217; (i.e manufacturing), and parallel Istisna (parallel manufacturing) contracts, as stated in the recommendations of Academy resolution no. 224 (23\/8) on hedging.<\/span><\/li>\n<\/ol>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">One of the essential regulations of Shariah regarding the lawfulness of parallel contracts is not to associate the first contract with the second contract, but each contract should remain independent in all its rights and commitments.<\/span><\/p>\n<ol style=\"text-align: justify\" start=\"4\">\n<li><span style=\"font-size: 14pt\"><strong>Combined contracts: <\/strong>combining contracts to cover risks for the purpose of combination, neither as a requirement, nor to include a contract within a contract. Example; the combination between a sale and binding commitment, between wakala (agency) and murabaha. Among the most important of these formulas are as follows:<\/span><\/li>\n<li><span style=\"font-size: 14pt\">The combination of <em>Murabaha and Musharaka<\/em>: by dividing the investment portfolio into two parts: the first part is allocated to <em>Murabahah(s) <\/em>with creditworthy entities, at a fixed profit; and the second part is invested in a <em>Musharaka <\/em>contract, such as trading stocks or real estate shares, and so on. Therefore, capital hedging is achieved through a <em>Murabaha <\/em>contract, with the possibility of loss for the second part.<\/span><\/li>\n<li><span style=\"font-size: 14pt\">The combination of <em>ijara and musharaka<\/em>: hedging mechanism in this formula is equivalent to the previous method. However, hedging is applied with an <em>ijara <\/em>contract instead of a <em>murabaha <\/em>contract, such as investing a part of the investment portfolio in the purchase of <em>sukuk al-ijara, <\/em>with an income enough to cover the capital. The remaining amount shall be invested in <em>musharaka <\/em>contracts.<\/span><\/li>\n<li><span style=\"font-size: 14pt\">The combination of <em>Murabahah and Bai&#8217;yul Urbun (i.e. earnest money) <\/em>by dividing the capital into two parts: the first part consists of <em>Murabaha <\/em>with solvent companies and a certain profit, while the second part consists of <em>bai&#8217;yul urbun <\/em>for the purchase of shares.<\/span><\/li>\n<\/ol>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">If an asset rate increases, the purchasing contract shall be concluded, the shares shall be received and sold, and its selling amount should be delivered to the seller, and the profits shall return to the fund.<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">However, if rates do not increase, the first party should cease proceeding the contract and might lose in the sale. The capital remains covered thanks to the murabaha contract. In this process, it is compulsory to comply with Shariah regulations for <em>bay&#8217;ul urbun<\/em> (advanced deposit sale), which includes keeping the subject matter of the deposit without trading it from the moment the contract was signed until the settlement between the two parties.<\/span><\/p>\n<ol style=\"text-align: justify\" start=\"5\">\n<li><span style=\"font-size: 14pt\"><strong>Hedging using conditional options (Khayar al-Shart) to cover against the insubordination of the client:<\/strong> For example; <em>Murabaha, and Ijara <\/em>contracts ending with ownership. The Academy resolutions on the two commitments confirm that it is permissible under conditional options for committing parties, or for one of them. Without this condition, the transaction is not permissible.<\/span><\/li>\n<\/ol>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">It should be noted that in the resolutions in which the Academy allowed the &#8220;binding commitment&#8221; by one of the parties, regarding it as a hedge against insubordination of the client, and protection of the company against losses, the right to opt shall then be given to the other party.<\/span><\/p>\n<ol style=\"text-align: justify\" start=\"6\">\n<li><span style=\"font-size: 14pt\"><strong>Hedging using guarantees to protect the investment capital:<\/strong><\/span><\/li>\n<\/ol>\n<p style=\"text-align: justify\">\u00a0<\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">There are diverse mechanisms which are included within the guarantee formulas to cover risks arising from loss or non-profit in investment projects. The Academy resolutions confirmed its permissibility. Such formulas are as follows:<\/span><\/p>\n<ul style=\"text-align: justify\">\n<li><span style=\"font-size: 14pt\">Third-party guarantee: It is a natural or legal person independent from both parties in the contract if he undertakes to donate the guarantee in a specified project. The Academy resolution no. 30 (4\/3) confirmed that this guarantee is permissible if the guarantor is independent in his personality as well as in his financial responsibility towards both parties of the contract, by donating an interest-free contribution to compensate the loss of a specified project providing that it is an independent<\/span><\/li>\n<li><span style=\"font-size: 14pt\">Charging the <em>mudarib (<\/em>mudaraba operator) to prove the loss: the Academy stressed in its resolution no. 212 (22\/8) that transferring the responsibility of proving the loss to the bank <em>(of the mudarib\/mudaraba operator<\/em>) is contrary to basic Shariah principles providing that there is evidence contrary to his claim of non-violation.<\/span><\/li>\n<\/ul>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">Third, hedging transactions that are generally prohibited by Shariah include:<\/span><\/p>\n<ol style=\"text-align: justify\">\n<li><span style=\"font-size: 14pt\">Hedging mutual loans in two different currencies under conditions:<\/span><\/li>\n<\/ol>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">This formula is utilized to cover against currency rate fluctuations and disclosure of correspondent accounts. If a financial institution has a surplus of a particular currency that it lends to another institution; that institution would lend it another currency that it needs, under an explicit, implicit or customary condition. It is a kind of lending a loan per the condition of receiving\/borrowing another loan, which is not permissible in Shariah, based on a consensus by legal schools, because of the association between two loans (i.e. when the lender requires the borrower to give him a loan in return) whether the deadlines of the two loans are similar or different.<\/span><\/p>\n<ol style=\"text-align: justify\" start=\"2\">\n<li><span style=\"font-size: 14pt\">Hedges to secure financial capitals in assets and sukuk:<\/span><\/li>\n<\/ol>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\"><em>Sukuk<\/em> issuance includes a number of hedges, requirements and commitments which are incompatible with Shariah regulations and to the Academy resolution no. 30 (3\/4) adopted in 1988 on <em>Muqarada <\/em><em>(<\/em>i.e. an arrangement between one or more investors and an agent\u00a0) and investment securities; and to the Academy resolution no. 188 (3\/20) on completing the resolution concerning <em>Islamic Sukuk<\/em>, notably:<\/span><\/p>\n<ul style=\"text-align: justify\">\n<li><span style=\"font-size: 14pt\">Guaranteeing the nominal value by the issuer (mudarib, managing partner, investment agent).<\/span><\/li>\n<li><span style=\"font-size: 14pt\">The <em>Mudarib <\/em>undertaking to lend the <em>sukuk<\/em> portfolio to guarantee a certain rate in the distribution of<\/span><\/li>\n<\/ul>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">(3) Requiring that <em>sukuk <\/em>holders shall not have the capacity to utilize the leased assets in case of installments payment default.<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">(4) Non-transfer of<em> sukuk <\/em>assets ownership to investors or<em> to sukuk <\/em>holders means that they are not included in the guarantee and not entitled to disbursement, as their holders and investors did not bear covering the profits. This is proved by the fact that these assets often remaining part of the issuer&#8217;s budget.<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">(5) Requiring to include in the issuance prospectus the manager&#8217;s loan to <em>sukuk <\/em>holders if the actual profits falls below a fixed percentage. This requirement is often backed by the fact that if the profit exceeds this percentage, the excess shall fully be returned to the manager as an incentive.<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">Fourth, Alternative hedging instruments for financial derivatives and their Shariah rulings:<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">These instruments can be divided into three essential types:<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\"><strong>Type I: <\/strong>Hedging against the risk of future currency rate fluctuations. Among its most significant transactions are:<\/span><\/p>\n<ol style=\"text-align: justify\">\n<li><span style=\"font-size: 14pt\">A binding commitment between the two parties to enter into a disbursement agreement in the future:<\/span><\/li>\n<\/ol>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\"><strong>Formula: <\/strong>Both parties make a binding commitment to enter into a disbursement agreement on a specified future day and at a fixed currency rate.<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">Shariah Ruling:<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">\u00a0(A) It is not permissible to utilize the binding commitment as the hedging formula for disbursement agreement. The Academy resolution no. 102 (11\/5) on trading currencies, stated that it is not permissible to sell currencies in <em>bay&#8217; al-aajil<\/em> (i.e. forward sale with cash advance) or to make of it a disbursement commitment.<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">This is because the binding commitment is similar to the contract\/agreement, as stated in the Academy resolution no. 40 (5\/2) on fulfilling commitment, and on the <em>murabaha with order to purchase (Murabahahat lil-amir bi al-shera), <\/em>which stated that the sale binding commitment is equivalent to the sale itself.<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">(B)This formula does not include exceptional cases mentioned in the Academy resolution no. 157 (17\/6), on binding commitment and agreement in contracts; but it allowed binding commitment in exceptional cases while confirming that in such exceptional cases, binding commitment should not include <em>riba.<\/em><\/span><\/p>\n<ol style=\"text-align: justify\" start=\"2\">\n<li><span style=\"font-size: 14pt\">The two mutual commitments (the binding commitment with specific conditions, faced with a binding commitment with diverse conditions in a future disbursement agreement).<\/span><\/li>\n<\/ol>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\"><strong>Formula: <\/strong>The first party shall make a binding commitment to the second party to sell an amount of a currency at a fixed rate, at a specified time if currency rate direction is not compatible with his interest. But if rates are in his favour, he shall not make a commitment. The second party shall also make a binding commitment to purchase the same currency, at the same fixed rate, at the same specified time, if the currency rate direction is compatible with his interest. However,\u00a0 if it is not compatible with its interest, nothing shall be undertaken on his behalf.<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\"><strong>Shariah ruling:<\/strong><\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">Mutual commitments are not allowed to hedge against currency rate fluctuations, as their real form is similar to disbursement binding commitment that is prohibited by Shariah, by virtue of the Academy resolutions above.<\/span><\/p>\n<ol style=\"text-align: justify\" start=\"3\">\n<li><span style=\"font-size: 14pt\">An offer extended for a fixed period requiring the offeror to enter into disbursement agreement.<\/span><\/li>\n<\/ol>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\"><strong>Formula: <\/strong>The first party issues an offer, extended to a given day, in which the disbursement agreement is concluded, by selling the currency at a fixed rate and amount. The other party makes a binding or non-binding commitment to issue its agreement within the agreed deadline.<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">Shariah ruling:<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">(A) It is not permissible to apply the principle of extended offer to the disbursement agreement, due to the existence of the condition of <em>taqabud (<\/em>i.e. to take delivery of the object of sale and to pay its price) during the contract meeting; whether or not it is faced with a binding commitment on behalf of the other party, as stated in the Academy resolution no. 52 (3\/6) on concluding contracts by modern communication devices. See Article IV.<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">(B) If the extended and binding offer is faced with binding commitment from the other party, it is then similar to the binding commitment, but even worse because of the existence of an offer, regarded as one of the two pillars of the contract.<\/span><\/p>\n<ol style=\"text-align: justify\" start=\"4\">\n<li><span style=\"font-size: 14pt\">Execution of two mutual tawaruq transactions <em>(tawaruq mutaqabil)<\/em>:<\/span><\/li>\n<\/ol>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\"><strong>Formula: <\/strong>The execution of <em>structured tawaruq<\/em> results in the demonstration of debt with the amount of the first currency required to be paid, then a <em>reverse tawaruq<\/em> transaction is carried out to result in a debt with the amount of the second currency required to be received. This will result in two mutual debts on both sides of the transaction, each in a different currency.<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">Shariah ruling:<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">It is prohibited because it is based in its structure on a type of <em>Tawaruq <\/em>prohibited by Shariah. The Academy resolution no. 179 (5\/19) on <em>tawaruq <\/em>and its types, confirmed that both types of <em>tawaruq (<\/em>structured or reverse) are prohibited, as there is explicit, or implicit, or customary agreement between the financier and the mustawriq (securitizer), to collect money deceitfully \u00a0more than that&#8217;s owed, and that is <em>riba<\/em>.<\/span><\/p>\n<ol style=\"text-align: justify\" start=\"5\">\n<li><span style=\"font-size: 14pt\">The bilateral binding commitment to conclude a <em>murabaha <\/em>transaction or a future sale with loss; whose profit or loss is based on an agreed index.<\/span><\/li>\n<\/ol>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\"><strong>Formula: <\/strong>This transaction is executed through a binding commitment by both parties to <em>make a murabaha \/ sale with loss<\/em> transaction, from the first party to the second party, or from the second party to the first party on a future day. The profit or loss is calculated based on the positive\/negative variance in a future day agreed for the calculation of the index.<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\"><strong>Shariah ruling:<\/strong><\/span><\/p>\n<ul style=\"text-align: justify\">\n<li><span style=\"font-size: 14pt\">The basic principle is that it is not permissible to make a bilateral (mu&#8217;awada) binding commitment between the two parties, in accordance with the Academy resolution no. 40 (5\/2).<\/span><\/li>\n<li><span style=\"font-size: 14pt\">This formula does not include exempted cases allowed by the Academy resolution no. 157, as stated above in paragraph IV, article I\/I\/A.<\/span><\/li>\n<\/ul>\n<ol style=\"text-align: justify\" start=\"6\">\n<li><span style=\"font-size: 14pt\">Both mutual commitments (a binding commitment with specific conditions faced with a binding commitment with different conditions, to execute murabaha \/ sale with loss transaction in the future).<\/span><\/li>\n<\/ol>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\"><strong>Formula<\/strong>: The first party makes to the second party a binding commitment to execute a <em>Murabaha <\/em>\/ sale with loss transaction at a specified moment if the direction of the currency rate index is not compatible with his interest. However, if the direction of the currency rate index is compatible with his interest, therefore he does not make a commitment.<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">The second party shall also execute a <em>murabaha \/ sale with loss<\/em> transaction at the same specified moment if the direction of the currency rate index is contrary to his interest. However, if the currency rate index is favourable to his interest, he shall not make a commitment. The profit or loss of the sale is calculated based on the agreed index.<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">Shariah ruling:<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">The two mutual commitments are not permissible as their real form resembles a binding commitment that is prohibited by Shariah according to the above paragraph IV, article V.<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\"><strong>Type II: <\/strong>Hedging against fluctuations in interest-rate indices associated with profit rates in Islamic formulas.<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">1.The binding commitment of both parties to enter into a future<em> Murabaha or sale with loss<\/em> contract, whose profit or loss will be calculated on an agreed index.<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\"><strong><br \/>\nFormula: <\/strong>This transaction is made with a binding commitment by the two parties to carry out a series of <em>Murabaha\/sale with loss<\/em> transaction from the first party to the second party, or from the second party to the first party, in a series of days in the future. The positive\/negative variance is used to calculate the profit or loss of each transaction in each coming day, agreed upon to calculate its index.<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">Shariah ruling:<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">(A) It is not permissible to utilize the bilateral binding commitment as a hedging form to exchange fixed and floating interest rates, because bilateral sale binding commitment is similar to the disbursement agreement, as stated in the Academy resolution no. 40 (5\/2) on commitment observance, and <em>murabaha lil-amir bi al-shera <\/em>(i.e. murabaha with order to purchase) because sale binding commitment is similar to the sale itself.<\/span><\/p>\n<p style=\"text-align: justify\">\n<span style=\"font-size: 14pt\">(B) This formula does not include exempted cases allowed by the Academy resolution no. 157, and described above in paragraph IV, article 1\/1\/A.<\/span><\/p>\n<ol style=\"text-align: justify\" start=\"2\">\n<li><span style=\"font-size: 14pt\">The two mutual commitments (a binding commitment with specified terms, faced with a binding commitment with different conditions, to execute a future <em>Murabaha\/sale with loss <\/em>transaction)<\/span><\/li>\n<\/ol>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\"><strong>Formula: <\/strong>The first party makes a commitment to the second party to undertake a series of <em>Murabaha <\/em>\/ sale with loss transactions at a specified time, if the direction of the interest rate index is not compatible with his interests. If the direction of the interest rate index is compatible with his interests, he shall make no commitment.<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">The second party also undertakes to execute a series of <em>Murabaha\/sale with loss<\/em> transactions at the same specified times if the direction of the interest rate index is not compatible with his interests, but if the direction of the interest rate index is compatible with his interests, he shall make no commitment. The profit in <em>Murabaha <\/em>or the sale with\u00a0 loss is calculated based on the agreed index.<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">Shariah ruling:<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">It is not permissible to make two mutual commitments, as their real form is equivalent to the bilateral binding commitment prohibited in Shariah, in accordance with paragraph VI, mentioned above.<\/span><\/p>\n<ol style=\"text-align: justify\" start=\"3\">\n<li><span style=\"font-size: 14pt\">Execution of <em>mutual tawaruq transactions<\/em>:<\/span><\/li>\n<\/ol>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\"><strong>Formula: <\/strong>Executing a <em>structured tawaruq <\/em>transaction resulting in the demonstration of indebtedness at the required fixed interest rate. Then proceeding to a reverse tawaruq transaction resulting in the demonstration of indebtedness at variable interest rates. This will allow the two debts to be offset against each other on each day up to their deadlines. Compensation is then made by paying only the variance.\u00a0 Three methods can be utilized to achieve a variable interest rate in <em>\u00a0tawaruq<\/em> transaction:<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">(1)-Contracting <em>variable-rate tawaruq<\/em>.<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">(2)<em>-Contracting fixed-rate tawaruq <\/em>with a commitment to discount any excesses in interest rate index for each future instalment day.<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">(3)- <em>Cyclical tawaruq <\/em>by executing a series of short-term <em>tawaruq <\/em>transactions, each at a fixed price to create a floating rate debt at the end.<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">Shariah ruling:<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">It is not permissible because the transaction is based on a formula prohibited by Shariah (<em>tawaruq<\/em>), as stated in paragraph IV, Article IV.<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\"><strong>Type III: <\/strong>The one-party binding commitment as an alternative to options transaction<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\"><strong>Formula: <\/strong>Issuance of a binding commitment by one party to execute a <em>murabaha <\/em>transaction with the second party, with the amount of the positive variance, on an agreed day or within an agreed period, at the request of the second party.<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">This binding commitment is sold at a fixed price which shall be paid in the beginning.<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">The first party issues a binding commitment that shall be equal to the option seller, and the second party with the binding role of making the commitment shall be equal to the option purchaser.<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">Shariah Ruling:<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">It is not permissible to compensate for the binding commitment.<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">The IIFA resolution (no. 63) on financial markets stated the following points:<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">&#8220;Second: Options<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">A- Options contracts: The meaning of options contracts is to offset the commitment to sell or purchase a specific item at a fixed price, within a given period, either directly or through an authority guaranteeing the rights of both parties.<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">B- Shariah ruling: Options contracts, as currently traded in the international financial markets, are new contracts that do not fall under any of the Shariah-compliant contracts. Furthermore, the subject matter of the contract is neither an amount of money, nor a benefit, nor a financial right that can be compensated, so this is why Shariah prohibits such contracts. Moreover, since these contracts are basically not permissible, their dealing is not permissible as well.&#8221;<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">The International Islamic Fiqh Academy also adopted resolution no. 224 on hedging that included hedging regulations that Shariah permits. It stated that: &#8220;Hedging formulas should not lead to the sale of abstract rights, such as the options sale, whose prohibition was confirmed by the Academy resolution no. 63(1\/7), paragraph 2\/B. Neither should it lead to the offsetting of the commitment, such as payment for the guarantee, which the Academy prohibited in resolution no. 12 (12\/2)&#8221;.<\/span><\/p>\n<p style=\"text-align: justify\"><span style=\"font-size: 14pt\">Recommendations<\/span><\/p>\n<ol style=\"text-align: justify\">\n<li>\n<span style=\"font-size: 14pt\">The Academy recommends Shariah Councils, Fatwa and Shariah Supervisory Boards, scholars and researchers, to reconcile between compliance with the fundamental objectives of Shariah and its specific regulations regarding contracts when practicing Ijtihad in structuring Islamic financial products in general, and in drafting hedging contracts in particular. Also, to consider the outcomes of these contracts and their effects, because the consideration of outcomes is a basic principle in Shariah.<\/span><\/li>\n<\/ol>\n<p style=\"text-align: justify\">\u00a0<\/p>\n<ol style=\"text-align: justify\" start=\"2\">\n<li><span style=\"font-size: 14pt\">The Academy recommends investment and treasury departments at the institutional level (local), as well as authorities in charge of drafting monetary and financial policies on states level (global), to ensure a balance between commitments and debts on the one hand, and between wealth and real activities on the other, and to avoid dumping in debts that affects economic activity in general.<\/span><\/li>\n<\/ol>\n<p style=\"text-align: justify\">\u00a0<\/p>\n<p style=\"text-align: center\"><span style=\"font-size: 14pt\"><strong><br \/>\nAllah Knows Best<\/strong><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>In the Name of Allah, the Entirely Merciful, the Especially Merciful All praise is due to Allah, Lord of the [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":26953,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[191,192],"tags":[],"acf":[],"_links":{"self":[{"href":"https:\/\/iifa-aifi.org\/en\/wp-json\/wp\/v2\/posts\/5985"}],"collection":[{"href":"https:\/\/iifa-aifi.org\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/iifa-aifi.org\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/iifa-aifi.org\/en\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/iifa-aifi.org\/en\/wp-json\/wp\/v2\/comments?post=5985"}],"version-history":[{"count":0,"href":"https:\/\/iifa-aifi.org\/en\/wp-json\/wp\/v2\/posts\/5985\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/iifa-aifi.org\/en\/wp-json\/wp\/v2\/media\/26953"}],"wp:attachment":[{"href":"https:\/\/iifa-aifi.org\/en\/wp-json\/wp\/v2\/media?parent=5985"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/iifa-aifi.org\/en\/wp-json\/wp\/v2\/categories?post=5985"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/iifa-aifi.org\/en\/wp-json\/wp\/v2\/tags?post=5985"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}