Browsing by Author "Agha, Syed Ehsanullah"

Volatility in global financial markets made ‘exchange rate risk’ a disturbing phenomenon in the modern age for financial and non-financial institutions alike. As firms expand businesses beyond their original jurisdictions, they are exposed to many types of risks including exchange rate risk. Islamic financial institutions (IFIs) are also exposed to this risk like their conventional peers. Several hedging products have been developed through Islamic financial engineering such as Islamic FX forwards, Islamic options, Islamic swaps etc. which are being utilized by IFIs to hedge their exposure to FX risk and to accommodate their customers in mitigating FX risk. However, a review of the existing literature reveals that despite the Sharīʻah resolutions on the legality of hedging and its mechanism, the contemporary hedging practices in Islamic finance industry are still controversial in their design and operations. This study aimed to critically analyze contemporary Islamic currency hedging facilities from a Sharīʻah perspective using qualitative research method. The research found that these products are heavily criticized due to the involvement of (1) zero-sum-game, (2) tawarruq, (3) currency salam, and (4) the absence of actual loss determination mechanism in the event of premature termination and mark-to-market computation. Furthermore, the problematic nature of these products resulted in its low adoptability (10-15%) in hedging markets due to high cost and sophisticated documentation. To address these challenges, the present study proposed a cooperative currency-hedging model (CCHM) where the concept of mutual risk sharing with the integration of cash waqf has been advocated. A financial simulation run on the historical data of the State Bank of Pakistan showed the commercial adoptability of this model. To further examine viability of the model, semi-structured interviews were conducted with selected Sharīʻah scholars, academicions, regulators and practitioners. The informants considered CCHM as a viable alternative of contemporary Sharīʻah compliant hedging products. Besides some challenges in the model which requires further research, the informents were satisfied with the Sharīʻah structure and business model of CCHM. Among other aspects of the model, zero-sum free hedging, mutual risk sharing and the integration of cash waqf gained special appreciation from the interviewees. The development of such a cooperative hedging mechanism would facilitate IFIs as they participate in the global financial market. The findings might enable Islamic financial engineers to avoid Sharīʻah non-compliance risk in developing hedging products. The future research may focus on utilising Islamic cooperative contracts (due to their flexible nature) to address some of the complicated business needs of modern commercial world.

“Nothing ventured, nothing gained” is the first principle of investment. The possibility of an adverse outcome is an essential part of business activities. This uncertainty about future outcomes is defined as risk. The broad perspective on risk and its management is embodied in the essential objectives of Shari’ah, which is wealth protection. However, in the light of the Shari’ah legal maxim that states ‘al-ghurm Bi al-ghunm’ (liability accompanies gain) and ‘al-kharaj Bi al-Daman’ (benefit goes with liability) risk cannot be isolated from economic affairs. The legitimacy of revenue generation requires that it has to be created based on real economic activities that involve real business risk and liability. On the other hand, exposing to excessive risk not only hurdles investment, but also deters economic growth, which might be against the maqasid al-Shari’ah (objectives of Shari’ah). As Islamic finance industry grows 15 to 20 percent annually, the need of hedging tools to mitigate certain risks in a volatile market increases. For instance, with a rapidly emerging market of Sukuk, both investors and issuers are exposed to currency fluctuation risk. Similarly, in the case of Islamic REITS, if the fund is invested in overseas properties. Islamic Profit Rate Swap (IPRS) is a contract designed as a hedging mechanism to minimize market participants` exposure to the risk of inflation and rate of return. By nature Swap products are derivatives which violate Shari`ah principles. According to Sami Al- Suwailem 97.30% of derivatives products are being used for speculation. This research aims to review from Shariah perspective the legality of the structure and mechanism of Islamic profit rate swap as currently offered by many Islamic financial institutions in Malaysia. Specifically the paper highlights the Shariah parameters and guidelines in structuring IPRS. It is observed that IPRS products may involve the following Shariah Issues: Combination of Several Contracts, Use of the same commodity for various Murabaha transitions, Organized Twarruq, Premature Termination and Mark to Market. Finally, an improved new structure of IPRS is proposed to reduce operational cost and Shari`ah non-complaint risk for Islamic financial institutions.