Islamic forward exchange contracts as a hedging mechanism: An analysis of wa cd principle

Azlin Alisa Ahmad, Shofian Ahmad, Hailani Muji Tahir, Shahida Shahimi, Saadiah Mohamad, Mat Noor Mat Zain

Research output: Contribution to journalArticle

3 Citations (Scopus)

Abstract

Although, FX forward contract is required for hedging purposes, the issue arises of whether FX forward fulfill al-sarf ruling. The question is how to ensure that this contract is free from prohibited elements in Islam as it is needed in the context of the global economy? As FX forward involves the exchange of currency in the future, it violates the sarf requirement of spot exchange thus, incurring riba al-nasi'ah. This study therefore, seeks to examine Islamic forward exchange contracts that are structured by applying wacd binding only to one party. This study has found that in order to make forward exchange contracts meet the condition of spot exchange of currencies, the majority of banks have adopted the principles wacdmulzim at an early stage and the actual contract takes place or is executed on the delivery date. However, the practice of wacd mulzim has its drawbacks as it only protects the right of banks while customers who are commonly the promissor in the contract are exposed to the risk of default. To overcome this problem, the principle of wacdan should be explored to study its suitability and potentiality as a basis in structuring Islamic hedging products.

Original languageEnglish
Pages (from-to)47-54
Number of pages8
JournalInternational Business Management
Volume6
Issue number1
DOIs
Publication statusPublished - 2012

Fingerprint

Hedging
Currency
Islam
Forward contracts
Global economy
Make-to-order

Keywords

  • Al-sarf
  • FX forward contract
  • Hedging
  • Principle
  • Ruling
  • Wa d
  • Wa dan

ASJC Scopus subject areas

  • Business and International Management
  • Strategy and Management

Cite this

Islamic forward exchange contracts as a hedging mechanism : An analysis of wa cd principle. / Ahmad, Azlin Alisa; Ahmad, Shofian; Tahir, Hailani Muji; Shahimi, Shahida; Mohamad, Saadiah; Mat Zain, Mat Noor.

In: International Business Management, Vol. 6, No. 1, 2012, p. 47-54.

Research output: Contribution to journalArticle

@article{8e96ac5b014a407f9b3d188dd61094b2,
title = "Islamic forward exchange contracts as a hedging mechanism: An analysis of wa cd principle",
abstract = "Although, FX forward contract is required for hedging purposes, the issue arises of whether FX forward fulfill al-sarf ruling. The question is how to ensure that this contract is free from prohibited elements in Islam as it is needed in the context of the global economy? As FX forward involves the exchange of currency in the future, it violates the sarf requirement of spot exchange thus, incurring riba al-nasi'ah. This study therefore, seeks to examine Islamic forward exchange contracts that are structured by applying wacd binding only to one party. This study has found that in order to make forward exchange contracts meet the condition of spot exchange of currencies, the majority of banks have adopted the principles wacdmulzim at an early stage and the actual contract takes place or is executed on the delivery date. However, the practice of wacd mulzim has its drawbacks as it only protects the right of banks while customers who are commonly the promissor in the contract are exposed to the risk of default. To overcome this problem, the principle of wacdan should be explored to study its suitability and potentiality as a basis in structuring Islamic hedging products.",
keywords = "Al-sarf, FX forward contract, Hedging, Principle, Ruling, Wa d, Wa dan",
author = "Ahmad, {Azlin Alisa} and Shofian Ahmad and Tahir, {Hailani Muji} and Shahida Shahimi and Saadiah Mohamad and {Mat Zain}, {Mat Noor}",
year = "2012",
doi = "10.3923/ibm.2012.47.54",
language = "English",
volume = "6",
pages = "47--54",
journal = "International Business Management",
issn = "1993-5250",
publisher = "Medwell Publishing",
number = "1",

}

TY - JOUR

T1 - Islamic forward exchange contracts as a hedging mechanism

T2 - An analysis of wa cd principle

AU - Ahmad, Azlin Alisa

AU - Ahmad, Shofian

AU - Tahir, Hailani Muji

AU - Shahimi, Shahida

AU - Mohamad, Saadiah

AU - Mat Zain, Mat Noor

PY - 2012

Y1 - 2012

N2 - Although, FX forward contract is required for hedging purposes, the issue arises of whether FX forward fulfill al-sarf ruling. The question is how to ensure that this contract is free from prohibited elements in Islam as it is needed in the context of the global economy? As FX forward involves the exchange of currency in the future, it violates the sarf requirement of spot exchange thus, incurring riba al-nasi'ah. This study therefore, seeks to examine Islamic forward exchange contracts that are structured by applying wacd binding only to one party. This study has found that in order to make forward exchange contracts meet the condition of spot exchange of currencies, the majority of banks have adopted the principles wacdmulzim at an early stage and the actual contract takes place or is executed on the delivery date. However, the practice of wacd mulzim has its drawbacks as it only protects the right of banks while customers who are commonly the promissor in the contract are exposed to the risk of default. To overcome this problem, the principle of wacdan should be explored to study its suitability and potentiality as a basis in structuring Islamic hedging products.

AB - Although, FX forward contract is required for hedging purposes, the issue arises of whether FX forward fulfill al-sarf ruling. The question is how to ensure that this contract is free from prohibited elements in Islam as it is needed in the context of the global economy? As FX forward involves the exchange of currency in the future, it violates the sarf requirement of spot exchange thus, incurring riba al-nasi'ah. This study therefore, seeks to examine Islamic forward exchange contracts that are structured by applying wacd binding only to one party. This study has found that in order to make forward exchange contracts meet the condition of spot exchange of currencies, the majority of banks have adopted the principles wacdmulzim at an early stage and the actual contract takes place or is executed on the delivery date. However, the practice of wacd mulzim has its drawbacks as it only protects the right of banks while customers who are commonly the promissor in the contract are exposed to the risk of default. To overcome this problem, the principle of wacdan should be explored to study its suitability and potentiality as a basis in structuring Islamic hedging products.

KW - Al-sarf

KW - FX forward contract

KW - Hedging

KW - Principle

KW - Ruling

KW - Wa d

KW - Wa dan

UR - http://www.scopus.com/inward/record.url?scp=84860795750&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=84860795750&partnerID=8YFLogxK

U2 - 10.3923/ibm.2012.47.54

DO - 10.3923/ibm.2012.47.54

M3 - Article

AN - SCOPUS:84860795750

VL - 6

SP - 47

EP - 54

JO - International Business Management

JF - International Business Management

SN - 1993-5250

IS - 1

ER -