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Derivative products and innovation in Islamic finance

Kiong Kok, S and Giorgioni, G and Laws, J (2014) Derivative products and innovation in Islamic finance. International Journal of Islamic and Middle Eastern Finance and Management, 7 (3). pp. 242-257. ISSN 1753-8394

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Derivative Products in Islamic Finance An Enquire (FINAL).pdf - Accepted Version

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Abstract

Purpose – The purpose of this paper is to highlight the possibility of structuring an Islamic option which includes an element of risk sharing as opposed to risk transfer.
Design/methodology/approach – The approach adopted in this research involved a combination of a wa’ad (promise) and murabaha (cost plus sale) and examining if they could form a risk-sharing Islamic option. The payoffs were assumed to be dependent on bi-period outcomes.
Findings – The paper attempted to create a hybrid risk-sharing option by combining elements of both wa’ad (promise) and murabaha (cost plus sale). The results yielded are dependent on the eventual direction of the market (in-the-money, at-the-money and out-the-money). While the results are not definitive, they do provide arguments for the adoption of a risk-sharing, as opposed to a risk-transfer, methodology when it comes to structuring risk management instruments.
Research limitations/implications – One of the major limitations of this research is the inability to assess the Shariah compliance of the proposed instrument. Shariah compliance is determined by a Shariah Supervisory Board, and every effort has been made to ensure that Shariah financial principles are adhered to in the creation of this structure.
Practical implications – The structure provides some interest arguments in the creation of risk management tools under a Shariah financial framework. The structure illustrates the benefits of having a risk-sharing mode over the conventional risk-transfer stances of most risk management tools.
Originality/value – The paper offers a new way of structuring a risk management tool in Islamic finance. It explores the highly debated area of derivatives in Islamic finance and proposes a new way of creating a risk management tool that involves some elements of risk sharing.

Item Type: Article
Additional Information: This article is (c) Emerald Group Publishing and permission has been granted for this version to appear here: http://researchonline.ljmu.ac.uk. Emerald does not grant permission for this article to be further copied/distributed or hosted elsewhere without the express permission from Emerald Group Publishing Limited." - See more at: http://www.emeraldgrouppublishing.com/authors/writing/author_rights.htm#sthash.8nixBKt5.dpuf
Uncontrolled Keywords: 1402 Applied Economics, 1502 Banking, Finance And Investment
Subjects: H Social Sciences > HG Finance
Divisions: Liverpool Business School
Publisher: Emerald
Date Deposited: 04 Dec 2015 08:41
Last Modified: 04 Dec 2015 08:41
DOI or Identification number: 10.1108/IMEFM-07-2013-0084
URI: http://researchonline.ljmu.ac.uk/id/eprint/2431

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