Full Risk management and new products developme

Risk Management and New Products Development in Islamic Finance
29 April 2008 IBFIM

Introduction New Product Development in Islamic finance
Introduction

1. Market Updates / Statistics
New Product Development in Islamic 2. Recent Development
Finance 3. Contemporary issues
4. New Products Development in Islamic Finance
5. Commodity Murabahah
By
ZAIRULNIZAD SHAHRIM 6. Islamic Exchange Traded Fund (ETF)
24th Feb 2009

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Copyright IBFIM @ 2008. All Rights Reserved

29 April 2008 IBFIM

Market Updates & Statistics Market Updates & Statistics
Introduction Introduction

REVIEW OF INDUSTRY – SUKUK MARKET INDUSTRY STATISTICS (SUKUK VS CONVENTIONAL BONDS)

of total PDS

Sukuk Approved by SC

140.0
121.3
120.0
100.0

RM'bil
80.0
60.0 43.3 42.0
38.4 35.3 32.7 33.8 37.5
40.0 26.7
19.0 17.6 19.3
Source: SC’s ICM Quarterly Bulletin- January 2008 12.0 15.2
20.0
Sukuk captured 76% of the RM-PDS market in 2007 (55% in 2006) 0.0
2001 2002 2003 2004 2005 2006 2007
Sukuk in 2007 (RM121.3b) increased by 189% from 2006 (RM42.02b)
Year
1
The Sukuk figure includes the approval of 7 combination issuances (conventional and sukuk) with a combined issue size
of RM89.5 billion and 2 ABS amounting to RM3.4 billion Conventional Sukuk
2
The combination issuance of RM60 billion by Cagamas Berhad was not included for the purpose of this calculation due to
uncertainty of the amount per multiple Syariah principles to be used.

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29 April 2008 IBFIM

Market Updates & Statistics
Market Updates & Statistics
INDUSTRY STATISTICS (DOMESTIC VS GLOBAL)
INDUSTRY STATISTICS (SUKUK VS CONVENTIONAL BONDS)
DOMESTIC

140.0
121.3
120.0

100.0

80.0
189%

R 'bil
M
60.0
43.3 42.0
40.0
19.0
17.6
20.0 15.2
12.0

0.0
Source: Securities Commission
2001 2002 2003 2004 2005 2006 2007

Source: Securities Commission

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29 April 2008 IBFIM

INDUSTRY STATISTICS (DOMESTIC VS GLOBAL) GLOBAL STATISTICS (SUKUK ISSUED BY COUNTRY)
GLOBAL
Full-Year 2007

60.0
47.8
50.0

40.0 76%
U SD $'b il

27.2
30.0
20.0 12.0
5.7 7.2
10.0
0.8 1.0
0.0
2001 2002 2003 2004 2005 2006 2007
Source: IFIS

Continuous growth in both domestic and global markets
Source: Dealogic Database

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29 April 2008 IBFIM


GLOBAL STATISTICS (SUKUK ISSUED BY COUNTRY) 2007- TYPES OF SUKUK CONTRACTS

LOCAL – 58% Musyarakah
Musyarakah
58%

Pakistan
Kuwait Qatar
1.7% 0.8%

BBA
Saudi Arabia 2.1% Bahrain
15.7% 0.5%
Indonesia
0.3%

United Arab
Em irates
30.2%
Malaysia
48.6%
2%

Istisna'
Malaysia captured the biggest 9%
market share in 2007 at
Ijarah Murabahah
11% Mudharabah 19%
48.6% 1%
Source: Raw data compiled from IFIS and SC

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29 April 2008 IBFIM

2007- TYPES OF SUKUK CONTRACTS Global view of Islamic Finance

GLOBAL – 46% Musyarakah
1. There are more than 267 Islamic financial institutions (IFIs) in the world with
capitalization in excess of USD 13 billion. This includes banks, mutual
Musyarakah
funds, mortgage companies and takaful
46%
Investment
Sukuk
2. Syariah compliant financial products estimated to exceed USD 250 billion
7% with annual growth rate of 23.5% over the past 5 years
Islamic
Exchangeable
Bond 3. The potential is huge. By 2020, there will be 2.5 billion of Muslim population
9% worldwide from the current 1.5 billion level
Others Mudharabah
9% 10% 4. Islamic banks are expected to manage 40% to 50% of total savings of
Ijarah Murabahah
Muslim population in 8 to 10 years. Therefore, potential for Islamic services
17% 2% is estimated at USD 4 trillion by 2020.
Source: Raw data compiled from IFIS and SC

Source: IFIS

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29 April 2008 IBFIM

Market Updates & Statistics Recent Development
Islamic finance in ASIA

Commitment

Malaysia, S. Arabia,
Business Bahrain, Dubai,
innovation Kuwait, Qatar, UAE

Market
innovation
Brunei, Indonesia,
Singapore, South
Competitor Africa, Morocco,
matching Turkey

Minimum Syiria, Lebanon,
presence Germany, USA,
Europe

Monitor
development
China, India, HK,
Japan, Korea, Indo-
China
Wait & see

Exploratory Development Expansion Research

Source: Internal research

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29 April 2008 IBFIM

Recent Development Recent Development
Malaysia International Islamic Financial Centre (MIFC) Malaysia International Islamic Financial Centre (MIFC)

1. 14 August 2006 marked the launch of a nationwide initiative to promote
3. It comprises a diversified range of financial institutions operating from
Malaysia as an International Islamic Financial Centre - MIFC. The MIFC
anywhere in Malaysia that offer Islamic financial products and services in any
initiative is aimed at fortifying Malaysia’s position as a vibrant, innovative and
currency to non-residents and residents. The objective of the MIFC is to
competitive Islamic financial hub, with significant roles in:
promote Malaysia as the centre for :
Facilitating relationships between the international Islamic financial
Origination, distribution as well as trading of Islamic treasury and capital
markets; and
market instruments
Bridging and expanding investment and trade relations between the
Islamic fund and wealth management services
Middle Eastern, West Asian and North African regions with East Asia
International currency Islamic financial services (including deposits and
financing)
2. The MIFC initiative is specifically undertaken by the collective efforts of the Takaful and retakaful
country's financial and market regulators, together with the participation of Islamic finance education, training, consultancy and research
the industry representing the Islamic banking, takaful and capital market in
Malaysia

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29 April 2008 IBFIM

Recent Development
Introduction Contemporary Issues
Introduction
International Currency Business Unit (ICBU)
Infrastructural support

1. An International Currency Business Unit (ICBU) of a licensed institution, 1. Syariah
namely Islamic bank, commercial bank and investment bank, is permitted to
conduct a wide range of Islamic banking business under the Islamic Banking • Lack of standardisation in financial contracts and can be a source of
Act 1983 (IBA) or Islamic banking business under Section 124 of the Banking ambiguity, dispute and higher cost
and Financial Institutions Act 1989 (BAFIA) in international currencies other • Different Syariah interpretation
than Malaysian ringgit

2. The income arising from the transactions of the ICBU is eligible for full tax 2. Legal
exemption accorded under the Income Tax Act 1967 for ten years from the • International acceptance of Islamic financial contract requires them to
year of assessment 2007 be acceptable to the Syariah as well as enforceable under Common
Law and Civil Law

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29 April 2008 IBFIM

Contemporary Issues
Introduction

Infrastructural support Image of Islamic products and services

3. Human talent 1. The credibility and sustainability of Islamic products as compared to
conventional
• Syariah experts that have adequate knowledge of banking and finance
• Resemblance to the products and services offered by conventional
• Finance specialist to have adequate knowledge of the applicable rules
players
and principles
• Whether we can integrate standard and codes of good practice
developed at national level into global practices
• Acceptance of standard used in Sukuk issuance, rating decision and
equity and project screening at international level

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29 April 2008 IBFIM

Contemporary Issues
Introduction

Market liquidity Rating and statistical reporting

1. Market 1. Rating is done using conventional methodology

• Short term liquidity management and asset liability management • Many Sukuk appear to have assets at their core, detailed analyzes of
their commercial terms and legal structures shows that performance,
• Financial risk management and hedging for issuer as well as investor for some is not governed by their assets, indeed, the credit risk is
really that of the sponsor or originator - Moody’s

2. Products and services • No substantial distinction from traditional rating criteria – Fitch

• There is a gaps between Syariah compliant products and conventional • No significant difference in the methods to rate conventional and
Islamic debt securities. Has own Syariah board and will validate
• Lack of hedging and derivatives products to be used as risk Syariah compliance structure – MARC
management tools
• No significant difference in methodology – Standard and Poor’s
• Money market instruments to manage market liquidity and set
benchmark rate of return • No significant difference in methodology - RAM

2. Different contractual relationships require different type of reporting

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29 April 2008 IBFIM

New Product Development in Islamic finance New Product Development in Islamic finance
Preamble
Issues
1. Width (increasing issuance of new products) and depth (introducing more
derivatives) of product range is one of the essential components of an efficient 1. Too few products in the market
market

2. Products are not competitive enough
2. Sell what the market want, and not what can be produced

3. Products are not compatible with the present infrastructure
3. Essential product characteristics:
a. Risk tolerance (high, medium and low risk)
4. Products are not flexible enough
b. Meeting the return expectation
c. Meeting the liquidity expectation
5. Most currently available products are based on Uqud al-Muawadah (contract
d. Meeting the unique needs (Syariah compliance and other needs) of exchange) rather than Uqud al-Isthirak (contract of participation)

4. Efficient market structure

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29 April 2008 IBFIM


Issues Product Development Process

6. All Islamic capital market products need to have endorsement from Syariah 1. It’s a dynamic management processes
adviser – Attract additional cost and time consuming

2. Market research – Identify the market needs
7. Pricing mechanism – How do we price Islamic capital market products?

3. Analysis and product design
8. Products are not well understood

4. Pricing and profitability consideration
9. Islamic capital market products are not/less liquid – difficult to exit

5. Promotion – selling aspect of the product development

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29 April 2008 IBFIM

Five key elements
Product Development - The way forward
Return from
Islamic
instruments vs
1. Develop, enhance and coordinate Islamic finance / Islamic capital market
conventional infrastructure
products
serv ture &

Dev rketing
2. Interaction between Syariah and Finance

Prod ent &
ma
ices

elop
struc

uct
m
Infra

ISLAMIC 3. Sound and establish regulatory framework
INSTRUMENTS

4. A large and diverse number of companies, investors and intermediaries
s
Co tor
& mpe fac te
Pe tit g ntia nt
in e
rfo ive
rm ne tify fer me
an ss en if ru er 5. Strong support from the Government
ce Id at d inst oth
th ne r an
o ve
o
Source: Failaka International

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29 April 2008 IBFIM

Commodity Murabahah & Tawarruq
Introduction Commodity Murabahah & Tawarruq
Introduction

1. What is Tawarruq?
3. Is it permissible? 3 opinions:
• Comes from the word al-wariq, meaning silver, because the one who
buys the product is only buying for the sake of Dirham’s (originally,
silver and coins) Opinion 1
• Majority of scholars say YES! Because Allah says (interpretation -”
whereas Allah has permitted trading and prohibited riba”)
2. Tawarruq – In practice
• Buying a commodity from a supplier on deferred payment basis, then
the purchaser sells such commodity to a third party in cash • The purchaser is buying the commodity either to benefit from the
commodity itself or to benefit from its price
• This transaction involves three parties:
a. The Trader (owner of the commodity)
• Meets the needs of people for cash as compared to Qard Hassan.
b. The purchaser (or the Mustawriq – the person who s engaging in
this transaction of tawarruq to obtain cash)
c. The second Purchaser ( who buys the said commodity from the
Mustawriq)

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29 April 2008 IBFIM

Introduction

Opinion 2 Opinion 3
• Not permissible because: • Permissible subject to certain conditions:
i. The aim is to take money for money and the commodity comes i. That the person be in need of money
in between as a means of making the transaction permissible
(hilah)
ii. That he should not be able to obtain money in any other
permissible manner
ii. It leads to creation of huge debts in the Muslim society which is
undesirable by Syariah and which cause instability in the
economy iii. That he does not sell the purchased commodity to the same
seller whom he bought it from for less price

iv. There should not be any pre-arrangement or fictional device
(hilah) in this transaction that might lead to riba

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29 April 2008 IBFIM

Introduction

Tawarruq via the Banks Tawarruq via the Banks
4. It involves an additional party (the Bank) so we have four parties:
1. Is the mode through which some Banks are facilitating the supply of cash to
their clients i. The Trader (the original owner of the commodity and the first seller)
ii. The Bank (the first Purchaser of the commodity and the second Seller
of the said commodity)
2. It involves buying a commodity by the Bank (upon the request of the client)
from a supplier, then selling the said commodity to the client on deferred iii. The Mustawriq, who is in need of cash (the second Purchaser of the
payment basis, then the client resells such as commodity to a third party in Commodity and the third Seller)
cash
iv. The Third Purchaser (who buys the said commodity from the
Mustawriq)
3. Is different than the original Tawarruq known to earlier scholars
5. It might involves authorizing the Bank to sell the commodity on behalf of the
customer

6. It involves the Banks in a new business without full practice

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29 April 2008 IBFIM

Introduction

Tawarruq via the Banks
1. Murabahah: Definition
7. Banking Tawarruq is permissible subject to certain conditions:
• Sale of goods at cost plus mark-up on a deferred basis
i. The commodity is existed
ii. The Bank has full ownership over the commodity with its rights and
liabilities 2. Commodity Murabahah

iii. The Bank acquires the commodity • A sale of certain specified commodity, on a cost plus profit basis

iv. Upon the conclusion of sale with the customer, the customer has a full • Murabahah transaction is nested in Tawarruq concept
ownership over the commodity with it rights and liabilities • Tawarruq – Purchase of commodity on deferred payment followed by
v. The customer has the right to keep or sell the commodity selling of the commodity to a 3rd party

vi. The customer is not allowed to sell the commodity back to the Bank

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29 April 2008 IBFIM

Introduction Commodity Introduction liquidity management
Islamic tools for
Murabahah
Islamic Treasury Operation
3. The users
Bank A buys commodity from
• Financial institutions providing Islamic services globally Broker A spot USD10 mil

• Islamic Financial Institutions – full fledged Islamic banks and other
banks with Islamic banking windows Bank A
Broker A
(excess)

4. What is it used for?
Bank A sells commodity to Bank
B deferred USD10 mil + profit
• To facilitate liquidity management and risk management in the
Islamic financial market

Broker B Bank B
(deficit)

Bank B sells the commodity to
Broker B spot USD10 mil

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29 April 2008 IBFIM

Commodity Murabahah
Islamic tools for liquidity management
Introduction The way forward: Commodity Murabahah House
Islamic tools for liquidity management
Introduction

Interbank Placement (CMH)
Commodity Commodity Broker A
Broker A Broker B 1

CPO Producer A
1 Bank A Bank A sells the Islamic Bank A
5
purchases commodities on
commodities behalf of BNM CPO Producer B
from Broker 2

Bank A 3
CPO Producer C
Broker B
CMH
3
2 4 (Trading & Commodity
Bank A sells BNM pays to BNM 6 Bank A Islamic Bank B/ Clearing)
commodities to Bank A on appoints credits the Client Payment
BNM (at cost deferred Bank A as
proceeds to (spot)
4
plus) basis (at an Agent to BNM Payment
mark up sell the (placement) (deferred)
price) commodity
(net off)
1. CPO Producer sells commodity straight to Islamic Bank via Broker A
2. CMH guarantees the performance of CPO Producer
BNM 3. Islamic Bank A sells commodity to its clients or another Islamic Bank B
4. The Client or Islamic Bank B appoints Islamic Bank A to sell commodity to CMH via
Broker B Source: Bursa Malaysia

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29 April 2008 IBFIM

Exchange Traded Fund (ETF)
Introduction
Exchange Introduction Fund (ETF)
Traded
ETFs Stocks Unit Trust
Definition:
Nature Units that represent Shares Units that represent
underlying basket of stocks underlying basket of stocks
1. Simply understood as index fund which is traded like stock
Traded on exchange YES YES YES

Redemption Purchases and Sales of the Purchases and Sales of the Redemption with the fund
2. An open-ended investment fund that tracks a particular index funds’ shares only take shares take place in the
place in the secondary secondary market
market

Diversification YES NO YES
3. It combines the characteristics of a closed-end fund and that of a share, i.e
it is structured as a unit trust fund with the units listed and traded on the Price Transparency YES YES NO

exchange similar to shares YES YES NO
Traded through
broker
Management fees <1% 0 1-2% for index fund
4. However, it differs from share and unit trust fund in many ways
Brokerage 0.6% 0.6% 0

Sales charge 0 0 3-5%

Cash settlement T+3 T+3 Upfront

Source: Bursa Malaysia

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29 April 2008 IBFIM

Introduction Exchange Traded Fund (ETF)
Introduction

Main Parties in an ETF Structure
In-kind Creation and Redemption

1. Fund Manager
• Managers and administers the ETF 1. In-kind Creation
• Delivery of shares of underlying stocks in the ‘basket’ by Participating
Dealer (PD) in exchange for new ETF units
2. Trustee
• There is minimum creation size in terms of number of ETF units, or
• Acts as custodian of ETF assets creation unit block
• Safeguards interests of unit holders • Number of ETF units in circulation will increase

3. Participating Dealer (PD) / Liquidity Provider
• Facilitates in-kind creation and redemption
• Provides trading liquidity for listed ETF units

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29 April 2008 IBFIM

Introduction

In-kind Creation and Redemption Benefits of Investing in an ETF

2. Redemption 1. Convenience / Accessibility
• Delivery of ETF units by Participating Dealer (PD) in exchage for • Multiple investments in a single transaction
shares of underlying stocks in the ‘basket’
• Immediate effective ownership in basket of securities
• There is a minimum redemption siza in terms of number of ETF units,
usually the same as creation unit block
2. Risk Management / Diversification
• Number of ETF units in circulation will decrease
• Simultaneous exposure to basket of securities

3. Transparency
• Constituent stocks, indicative NAV, unit price readily available

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29 April 2008 IBFIM

Introduction

Benefits of Investing in an ETF Risks of Investing in an ETF

3. Tradability / Liquidity 1. Market Risk
• Units traded anytime during trading hours of the exchage • Performance of ETF or its underlying securities may be adversely
affected by economic, political or other issues

4. Low transaction cost
2. Tracking error
• Brokerage for single purchase/sale transaction
• ETF performance may not closely track performance of underlying
benchmark/index
6. Low Expense Ratio
• Less frequent transactions
• Lower fee for passive management

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29 April 2008 IBFIM

Introduction

Risks of Investing in an ETF ETFs in Malaysia

3. Discount or Premium 1. 3 ETFs currently listed on Bursa Malaysia Securities
• ETF unit price on the exchange may be at discount or premium to its • 2 Equity ETFs, 1 Bond ETF
NAV
• Most recent launch is MyETF Dow Jones Islamic Market Malaysia
Titans 25 – 1st Syariah ETF listed in Asia & currently largest Syariah
ETF in the world
4. Manager skills
• Manager may not manage in line with ETF objectives
2. Challenges
• Investors’ understanding of products
• Performance expectations
• Competition from unit trust funds

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29 April 2008 IBFIM

Introduction
Exchange Introduction Fund (ETF)
Traded
ETFs in Malaysia Global ETF Industry

Number Share AUM (USD bn) Share
3. Moving forward US 601 51.3% 580.7 72.9%
• Continuous investor education Europe 423 36.1% 128.4 16.1%
Others 147 12.6% 87.5 11.0%
• Additional participants (i.e. PDs, market makers)
Total 1,171 100.0% 796.6 100%
Growth rate 64% 41%

Source: Morgan Stanley Investment Strategies, Bloomberg

1. Global average daily trading volume +143% in 2007 to USD 59.8 billion
• S&P 500, the largest ETF at USD 99.2 billion, accounts for about 40% of average daily
volume
2. ETF assets under management (AUM) forecast to exceed USD 2 trillion in 2011, implying CAGR
of almost 26% over next 4 years

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29 April 2008 IBFIM

Islamic Exchange Traded Fund (ETF) Islamic Exchange Traded Fund (ETF)

1. The first Islamic ETF may be that of Saudi NCB and Deutsche Bank iii. ETF securities can be traded if the assets they represent are tradable.
launched in 2001 called Islamic Equity Builder The fact that the market value of an ETF may be higher or lower than
the NAV of the underlying asset creates no Syariah problem

2. The ETF would be Syariah compatible if:
i. The underlying asset is Syariah permissible. In the case of company iv. ETF’s can be bought at cash or on deferred payment basis, except for
sharesthey have to be based on an Islamically acceptable index. The gold and silver ETF’s where a deferred price sale will not be
purpose is to screen the sharesso as to select only the ones that acceptable
satisfy the Islamic equity criteria
v. For this kind of ETF’s (gold and silver) it is further required that
ii. These shares must be held in a portfolio which is legally owned by the redemption must be affected in kind if so demanded by the investor
investors

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29 April 2008 IBFIM

Islamic Exchange Traded Fund (ETF) Islamic Exchange Traded Fund (ETF)
Treatment of dividend Issuer
• The Issuer is merely a manager or rather as an agent receiving fees

1. One difference between ETF’s and mutual funds is the fact that dividend
received from constituent companies is not reinvested as this deviate • It is difficult for issuer to be Mudarib since definition of profit is not clear
ETF’s from tracking the index.

• Issuer must not guarantee the performance of ETF’s, but may occasionally
2. It remains nevertheless, that dividend is the entitlement of the investors. It provide liquidity facility to smooth the periodically payments, redemption or
should not be confiscated by the manager even as a management fees purchase of new assets

3. In Islamic ETF’s dividend should periodically be distributed to ETF • Fees can be fixed or based on formula based. In all cases must be known
securities holders. Only actual dividend received should be distributed. If or knowable.
there is any interest earning in the dividend account it must be disposed off

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29 April 2008 IBFIM

Introduction
Key Takeaways…
Introduction
Islamic Exchange Traded Fund (ETF)
1. Investment climate has evolved from a very simple structure to a more
Purification complex and problematic

• The Islamic equity investment criteria require purification of the portfolio 2. From Islamic perspective any investment can be Syariah compliant if all the
from impure income earned by constituent companies in the underlying requirements of Syariah are fulfilled
index

3. Malaysia is distinct:
• It always recommended that such purification is done by the manager.
• Clear national strategy
However, this makes it difficult for the ETF’s to track the index. Many
Syariah boards have permitted that manager only inform investors of the • Clear integrated regulatory and Syariah framework – Syariah
amount they need to dispose off to purify their investment. harmonisation is reality
• Mandate for legal clarity – common law provides supportive legal
environment
• Deepening support infrastructure
• Defined means for global outreach

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29 April 2008 IBFIM

Key Takeaways…
Introduction

4. Scholars and bankers require more interactive dialogue on a deeper level

5. “ Do not permit an error of opinion to be come a tradition for the community”

Thank you

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29 April 2008 IBFIM

Introduction DerivativesIntroduction overview
- An

What is derivatives?

Hedging Mechanism for Islamic Capital 1. A derivative security is a financial asset whose value is
dependent on the value of underlying asset.
Market Products & service
2. The underlying asset could be a basic financial asset
such as commodity, currency, common stocks, bonds,
index or the combination of such assets.
By
ZAIRULNIZAD SHAHRIM 3. Common forms – Forwards, Futures, Options, Swaps
29th April 2008 and also some exotics such as Swaptions
4. Derivatives enable the avoidance of unnecessary risks

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1

29 April 2008 IBFIM

DefinitionsIntroduction DefinitionsIntroduction

1. Hedging – Reducing a firm’s exposure to price or 4. Futures contract – A forward contract with the
rate fluctuations. Also known as immunization feature that gains and losses are realised each day
rather than only on the settlement date
2. Derivative – A financial asset that represents a claim
to another financial asset
5. Option contract – A contract that gives the
buyer/owner the right to buy/sell some asset at a
3. Forward contract – A legally binding agreement
fixed price on or before a given date
between two parties calling for the sale of an
asset/product in the future at a price agreed upon
today

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2

29 April 2008 IBFIM

DefinitionsIntroduction Benefits of Introduction
derivatives
6. Strike price – The fixed price specified in an option 1. Hedging purposes
contract at which the holder/owner can buy/sell the • Risk management tool
underlying asset. Also known as the exercise price
2. Profit from both bull and bear markets
3. Leverage / Gearing
7. Swaps – Agreement to exchange two
securities/currencies/commodities Agreement to • The use of leverage will magnify the effect of a given
exchange two securities/currencies/commodities price change
• Small investment (premium) to own the right to purchase
stocks.
• The potential loss is capped at premium paid
4. Transaction cost savings e.g SSF

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3

29 April 2008 IBFIM

Risk management for Islamic instruments
Introduction Risk management for Islamic instruments
Introduction

1. Risk management is more critical in Islamic finance Some of Islamic risk management tools are as follows:
simply because: 1. Option in equities
• The nature of contracts • Generally acceptable based on ‘urbun’ however
• Real economic transaction the trading part is still questionable by some
Shariah scholars
2. It is important to ensure the risk management tools also
must be equally Shariah compliant 2. Profit rate swap

3. Types of risk • Permissible using murabahah transaction for both
• Market risk • Rate of return risk fixed and floating mark-up
• Operational risk • Equity investment risk 3. Forward sale
• Permissible under the principle of salam.

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4

29 April 2008 IBFIM

Risk management for Islamic instruments
Introduction
Hedging Products
Introduction

4. Short-sale Syariah Compliant Hedging Instruments:
• Using salam contract is permissible, however the
usage of salam to replicate short-sale function in an 1. Futures contracts
Islamic hedge fund using both long and short sale is
disputable
2. Forward contracts

5. Futures contract 3. Swap Agreements
• Uncertainty is removed through standard contract
and clearing house to ensure delivery 4. Structured Products

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5

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