Derivatives under shariah

Financial Derivatives Term Report

Submitted to: Ms Shazia Farooq Submitted by: Muhammad Faraz Haleem (10226) Muhammad Jazib Soofi (10157) Faraz Illahi (10245) Madiha Saeed (10696)
December 17th 2012

Letter of Transmittal
December 17, 2012 Maam Shazia Farooq Financial Derivatives Institute of Business Management Dear Maam, We are submitting you the report, the report is based on the research of Islamic derivatives. The purpose of the report is to inform you regarding our research work. The content of this report concentrates on how we have identified the detail of Islamic derivatives and also have given the criticism and its response by conventional scholars. We have tried our level best to cover all aspects of the subject and we hope that this report will serve its purpose. Thanking You, M.Faraz Haleem (10226) M.Jazib Soofi (10157) Madeeha Saeed (10696) Faraz Illahi (10245)

Acknowledgement
Firstly, we would like to thank Allah, the Almighty for His utmost assistance during this work. We are deeply indebted to our Financial Derivatives Course Instructor Ms. Shazia Farooq, whose help and stimulating suggestions assisted us in the making of this report. Maam, we are immensely grateful to you for all that you have taught us, for your time and your effort. We appreciate the effort you put in to give us detailed explanations with simplicity on really lengthy areas of learning. This note comes in appreciation for all you have imparted and contributed in our personal and intellectual growth. Thank You Maam. Moreover, we are also grateful to Institute Of Business Management (IoBM) for giving us the right path to show our skills and capabilities.

Table of Contents
Executive Summary:...................................................................................................................................... 5 LITERATURE REVIEW ..................................................................................................................................... 6 INTRODUCTION TO ISLAMIC FINANCE .......................................................................................................... 7 Islamic derivatives History ........................................................................................................................ 7 TYPES OF ISLAMIC FINANCE .......................................................................................................................... 8 ESTABLISHING ISLAMIC DERIVATIVES ........................................................................................................... 9 CRITERIA OF HALAL INSTRUMENTS ............................................................................................................ 10 RIBA ......................................................................................................................................................... 10 GHARAR .................................................................................................................................................. 10 MAYSIR .................................................................................................................................................... 10 JAHL ......................................................................................................................................................... 11 ISLAMIC VIEW OF CONVENTIONAL DERIVATIVES ....................................................................................... 11 OPTIONS .................................................................................................................................................. 11 FUTURES.................................................................................................................................................. 12 ISLAMIC DERIVATIVES ................................................................................................................................. 13 BAI SALAM: ................................................................................................................................................. 13 ISTISNA AND JOALA CONTRACT: ................................................................................................................. 15 Joala contract: ......................................................................................................................................... 15 Baibil-wafa & Bai bil Istighlal Contracts: ................................................................................................... 15 ISTIJRAR CONTRACT: ................................................................................................................................... 16 CONCLUSION............................................................................................................................................... 18

Executive Summary:
Derivatives are lacking in states whereas the compatibility of financial transaction deals alongside Islamic regulation needs the progress of shariah-compliant structures. Islamic finance is administrated by the shariah that bans speculation and gambling, and stipulates that income have to be derived as profits from the public creation of goods and services amid counterparties rather than attention or a guaranteed return. This report examines present derivative instruments and the Islamic viewpoint of these new instruments. The validity and permissibility of these instruments appears to vary by scholar. Even whereas Islamic scholars have discovered them to be objectionable, their reasons for objection differ. Far of the work by Islamic scholars has been of an exceedingly juridical nature. They scrutinize derivatives inside slim confines of contractual arrangements and thereby miss the broader picture of why instruments like futures and options are demanded in present company environments. This report analyzes forwards, futures and options, examines the progress of these instruments, their exceptional benefits and makes a case for why they are needed. Islamic Finance instruments alongside derivative like features such as the Bai Salam and Istijrar contracts are additionally examined. A little of the key concerns that Islamic scholars have considering derivatives is addressed.

LITERATURE REVIEW
Derivatives from Islamic perspective are an issue which many scholars have different opinions on its permissibility with different reasoning for approving and prohibiting such contracts. An extensive review was done by Obiyatullah Ismath Bacha in 1999 regarding the evolution of modern financial derivatives, the financial instruments from shariah perspective point of view, some of the Islamic instruments that are similar to derivatives and the objection of Islamic scholars regarding derivatives that might need some rethinking and evaluation (Obiyatullah, 1999). He explained the instruments in details by laying out critical issues on why the Islamic communities need these instruments in the market place as well as highlighting several consequences that would affect the Islamic business if these instruments are ignored. In contrast, Mohammed Obaidullah (1999) has laid out that future and options are prohibited with emphasis on the definition of sarf from two different points of views. The first view stated that only gold and silver would be governed in the rules of bai as-sarf while the fiat or paper currencies do not fall into bai-sarf category. He cited Ibnu Taymiyah definition of sarf, as gold and silver that could perform as a medium of exchange and the fiat money is not considered as sarf or currency. Therefore selling and buying fiat money with other fiat money with deferred delivery if the currencies are not made of gold and silver is acceptable because fiat money is not categorized as sarf. The latter view states that fiat or paper currencies fall into bai as-sarf category therefore deferring delivery is riba as stated by a hadith that the sale of sarf of different types must be hand-to-hand or immediate (Obaidullah, 1999). This is also supported by the decree issued by the OIC Fiqh academy regarding bai-as-sarf. Another prominent Islamic scholar, Monzer Kahf also prohibits the sale of currency with deferred delivery based on the same hadith. An urge to reconsider derivatives to be accepted in the light for the maslahah of ummah was evidenced from the work of Ali Salehabadi and Mohamad Aram especially for the Iranian export of oil and commodities (Salehabadi and Mohamad Aram, 2002). All scholars discussing the extensive details of the permissibility and prohibition of derivatives analyze the instruments based in the current capitalist monetary system, which uses the fiat money as currency. None of the scholars discuss the instruments viability and applications of the Dinar and Dirham except for Mohammed Obaidullah who touches on the differing opinions of the categorical of fiat or paper currencies as al-sarf as laid out in the hadith when he stressed on the existence of riba in currency forward, future and options (Mohammed Obaidullah, 2001). If we revisit the derivative instruments in the light of the bimetallic currencies, consensus there is likely to be more agreement among scholars on the rulings. Application of bimetallic currencies will eliminate deviation of interpretation of sarf and rules regarding sarf itself. This is because the regulation of sarf is clearly stated in Al-Quran and hadith. This is in accordance with Islam where the source of

jurisprudence is the Al-Quran and hadith. Therefore, the implementation of gold dinar would probably be the catalyst for the reformation of the complexity of derivatives to the simplicity of derivatives.

INTRODUCTION TO ISLAMIC FINANCE

Islamic Banking is saving money movement which is reliable with the standards of Islamic sharia law and its down to earth provision is finished through the improvement of Islamic mass trading. Sharia precludes the altered or gliding installment or reception of any particular premium or charges, which is regarded as riba, for credits of cash. Putting resources into those professions that furnish merchandise or aids thought about in spite of Islamic standards is moreover disallowed.

Islamic derivatives History

With the assistance of Bahrain-based International Islamic Financial Market and New York-based International Swaps and Derivatives Association, worldwide measures for Islamic derivatives were set in March 2010. The Hedging Master Agreement furnishes a structure under which organizations can exchange in derivatives, for example benefit-rate and cash swaps. The International Islamic Financial Market (IIFM) and the International Swaps and Derivatives Association (ISDA) started the ISDA/IIFM Tahawwut (Hedging) Master Agreement on 1st March, 2010. The infrastructure is a breakthrough in Islamic back and hazard administration. It stamps the presentation of the first all inclusive standardized documentation for secretly arranged Islamic supporting features. The ISDA/IIFM Tahawwut (Hedging) Master Agreement is the first money related industry schema archive that is pertinent opposite all locales, wherever Islamic back is rehearsed. The launch of the Tahawwut Master Agreement was formally proclaimed at a launch occasion in Bahrain, which was accommodated by IIFM and ISDA under the support of H. E. Rasheed Mohammed Al Maraj, Governor, Central Bank of Bahrain. Given the developing nature of the Islamic fund industry, the organizations managing on Shariah standards would not be able to manage to leave their positions un-supported. Thus, some key supporting items are now ending up being normal crosswise over locales so that the danger could be alleviated. The ISDA/IIFM Tahawwut Master Agreement gives the industry access to a worldwide skeleton archive, which is nonpartisan regarding medicine to both the transacting gatherings and it likewise strictly adjusts to Shariah standards. This archive is planned to be utilized between two key counterparties as an expert acquiescence. Moreover, gatherings grasp that no investment ought be payable or receivable and no settlement dependent upon valuation or without unmistakable possessions is permitted. It is a comprehensively revamped schema report, however the structure of the archive is essentially comparative to the ordinary ISDA Master Agreement. Be that as it may, the nexus systems and

provisioning, for example early termination occasions, closeout and mesh are improved dependent upon the Islamic Shariah standards. Notwithstanding their vitality in the budgetary area improvement, derivatives are few and particularly far between in nations where the similarity of capital business sector transactions with Islamic law needs the growth of Shariah-agreeable structures. Islamic fund is administered by the Shariah, which boycotts theory, however stipulates that earnings must be inferred as benefits are from imparted business hazard instead of premium or ensured return. The Islamic back industry has headed forward to develop notwithstanding the budgetary emergency-to about $1 trillion.

TYPES OF ISLAMIC FINANCE

In light of the fact that just without premium fund is recognized allowable in Islamic fund, fiscal connections between lenders and borrowers are not represented by capital-based venture increases however are imparted business chance and profits in legal actions (which are halal). Any fiscal transaction which is under the Islamic law means steer interest in possession exhibition, which constitutes entrepreneurial transaction that passes on obviously identifiable rights and commitments, and for which speculators are qualified for appropriate equivalent return in the type of stateunexpected installments with respect to possession exhibition. The Shariah does not question installment for the utilization of a holding, provided both loan specialist and the borrower impart the speculation hazard as a single unit and benefits are not ensured ex-risk however collect just if the speculation itself yields some salary. Be that as it may, in the light of ethical blocks to uninvolved backing and secured investment as manifestation of payment, Shariah-consistent loaning needs the replication of premium-bearing accepted fund through additional complex structural plans of unforeseen claims, which are subject to the plan to make of an impartial framework of distributive equity and advertise allowed exercises and available products. The admissibility of dangerous capital speculation without unequivocal premium gaining outcomes to several essential manifestations of Islamic financing for both speculation and exchange: i. Synthetic credits (liability-based): It is finished through a deal-repurchase assention or back-toback deal of borrower or third gathering-kept holdings ii. Lease contracts (holding-based): It is finished through a deal-leaseback assention (working rent), or the lease of third-gathering obtained stakes with buy commitment parts (financing rent) iii. Profit-imparting contracts (value-based): It is defeated destiny holdings. Rather than valuebased contracts, both duty-and holding-based contracts are started by an impermanent exchange of existing (destiny) possessions from the borrower to the bank, or the procurement of third-gathering holdings by the bank for the borrower.

ESTABLISHING ISLAMIC DERIVATIVES

The heterogeneity of academic assumption regarding the Shariah agreeability of derivatives is extensively persuaded by distinct understandings of the Shariah and diverse information concerning the mechanics of its derivative structures. Countless policymakers, business members and also controllers are often unfamiliar with the multifaceted mechanics and the exceptionally specialized dialect of numerous derivative transactions. They block a more inclusive comprehending and in addition objective energy about the part of derivatives in the fiscal framework and their commonness in an imperative mixed bag of business and fiscal transactions. Hazard broadening done through derivatives donates to the nonstop finding of the honest business sector value of danger, and improves dependability to any detectable degree levels of the monetary framework and in addition upgrades general welfare. In guideline, prospects and alternatives may be good with Islamic law provided that they are: employed to location certified supporting interest on holding exhibition connected with immediate possession investment; Disavow shared postponement without real possession exchange; and

Eschew avertable lack of determination as disallowed wicked action (which is haram) in an offer to make an impartial framework of distributive equity regarding free investment. Shariah-agreeable derivatives could additionally keep up danger imparting that favours a win scenario from alterations in the holding esteem. For example, the issuance of stock choices to the workers could be a perfect contestant for a Shariah-agreeable derivative. By setting motivators for higher gainfulness, firm possessors procure more extensive corporate benefits, that counterbalance the minor cost of more amazing worker investment in stock value's exhibition. Be that as it may, the true requisition of numerous derivative contracts is still particularly offensive, because of the potential of theory (or insufficient supporting ought to violate the tenets of distributive equity and equivalent hazard imparting, subject to religious confinements giving and moreover benefittaking without veritable monetary action and holding exchange. Well known deliberations of the administrative combination and standard setting have delivered a speech to budgetary imperatives and the lawful doubt, infringed by both Islamic law and inadequately improved uniformity of business practices. Private area drives, for example an Islamic essential business task advanced by Bahrain-based International Islamic Financial Market (IIFM) in collaboration with the International Capital Markets Association (ICMA), have bring about the selection of a update of grasping on the documentation guidelines and ace acquiescence methodologies for Islamic derivatives. Likewise, national explanations are adding on additional traction. In November 2006, Malaysia's just totally-fledged Islamic banks, Bank Islam and Bank Muamalat Malaysia, complied to execute a derivative ace acquiescence for the documentation of Islamic derivative transactions. 9

Accordingly, business sector inefficiencies and concerns about contract enforceability initiated by heterogeneous prudential standards and differing elucidations of Shariah consistence are needed to be disseminated in the close fate. As Islamic back contributes more than its fair share and associations turn to method of supporting their exposures powerfully, money related foundations in Bahrain, Kuwait and Malaysia have been intending up for additional Shariah-consistent fiscal instruments and structured back, for both, on the holding and in addition on obligation side. Budgetary advancement will donate to further improvement and more refinement of Shariah-agreeable derivative contracts.

CRITERIA OF HALAL INSTRUMENTS

All financial instruments in general must meet a number of criteria in order to be considered halal. At a primary level, all financial instruments and transactions must be free of at least the following five items: (i) riba (usury) (ii) rishwah (corruption) (iii) maysir (gambling) (iv) gharar (unnecessary risk) (v) jahl (ignorance)

RIBA
Riba can be in different forms and is prohibited in all its forms.

GHARAR
As for gharar, there appears to be no consensus on what gharar means. It means taking unnecessary risk in trade.In the context of financial transactions, gharar could be taken as looseness of the underlying contract such that both parties are uncertain about possible results.

MAYSIR
Masyir refers to the situation from a financial instrument viewpoint where the outcome is dependent on chance as in gambling.

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JAHL
Finally, jahl refers to ignorance. In the context of financial transaction, it would be objectionable if one party to the transaction gains because of the other partys unawareness. In addition to these requirements for financial instruments, the shariah has some basic provision with regards to the sale of an asset . According to the shariah for a sale to be applicable, (a) the commodity must currently exist in its physical sellable form and (b) the seller should have legal possession of the asset in its final form. These restrictions for the validity of a sale would obviously render impossible the trading of derivatives. However, the shariah gives exceptions to these general rules to enable deferred sale where needed.

ISLAMIC VIEW OF CONVENTIONAL DERIVATIVES

OPTIONS
A number of scholars, notably Ahmad Muhayyuddin Hasan (1986), Abu Sulayman (1992) and Taqi Usmani (1996) have all found options objectionable. Each of these scholars has objected for a different reason. Ahmad Myhayyuddjn Hasan objects on two foundations, firstly, that maturity ahead of three days as per khiyar-alshart (option of stipulation) is objectionable. And second, that the buyer of an option is approved much more benefits than the seller and that "this is repression and injustice". Abu Sulayman (1992) of the Fiqh Academy of Jeddah; finds options acceptable when viewed in the light of bai- al-urbun but concludes that options should be prohibited since he considers options to be detached and independent of the underlying asset and therefore unjustified for the seller to charge to premium. Mufti Taqi Usmani (also of the Fiqh Academy, Jeddah) writes in response to a question about a sale of stock with put options attached that while an option contract when viewed as a promise is satisfactory, charging a fees and trading them are not. He also says the sale of stock with a put option to resell the stock to the issuer at a future date objectionable since a precondition is placed on the original sale of stock. Mohammad Obaidullah (1997) writes, "suitability to usual options is generally left without by a majority of scholars on the ground that these involve gharar and are primarily transacted for speculative gains". Accepting that gharar does not have a consent, gharar is said to be the result of jahl, inadequate information and a lack clearness. Citing that some scholars have criticize that in modern options markets standardized contract specification and other controls have rendered invalid the gharar argument, he goes on to state that this argument is rejected since there is no

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physical delivery but mere cash settlement; implying that cash settlement induces gharar and excess speculation. He further adds that "If the gains happen are in the nature of maisir or unearned gains the possibility of equally massive losses do indicate a possibility of default by the loser and hence gharar". Hashim Kamali (1995) examines the permissibility of modern day options and its trading in the light of Islamic Commercial Law: analyzing the basic option contract, and the validity of its parameters, like, premiums, time to maturity and delivery, he summarize that "there is nothing naturally objectionable in giving way an option, exercising it over a period of time or charging a Islamic Derivatives fee for it, and that options trading like other varieties of trade is permissible and as such it is simply an extension of the basic liberty that the Quran has granted "

FUTURES
Mufti Taqi Usmani writing in the some article states that modern day futures contracts are invalid for two reasons. "Firstly, it is a well recognized principle of the Shariah that sale or purchase cannot be affected for a future contract date. Thats why, all forward and futures contarct transactions are invalid in Shariah; Also, because in most of the futures contract transactions delivery of the commodities or their ownership is not intended. In most cases the contract ends up with the settlement of difference of prices only, which is disallowed in the Shariah". Yet Fahim Khan (1995) states, "we should realize that even in the modern degenerated form of futures trading, some of the basic concepts as well as some of the conditions for such trading are exactly the same as were laid down by the Prophet (PBUH) for forward trading. For example, there are unambiguous sayings of the Prophet (PBUH) that he who makes a Salaf (forward trade) should do that for a detailed quantity, detailed weight and for a specified period of time. But while proposing an Islamic futures market based on Bai Salam, Fahim Khan's harshest criticism of modern futures contract is that it is necessarily exploitative of small farmers since it gives "incorrect" signals, "The idea of hedging through futures in the modern futures markets, though is an indirect way of reducing the farmers risk; but the futures market being totally independent and separate from the cash market is quite likely to give wrong signals to the farmer and the farmer not being a player of the futures market and having forced to compete the speculators, they may frequently end up being demoralized by the wrong signals."

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ISLAMIC DERIVATIVES

BAI SALAM:
Salam is a deal whereas two parties concur to hold out a sale/purchase of an underlying asset at a predetermined upcoming date but at a worth ambitious and fully paid for today. The seller agrees to hold the asset in the concurred number and quality to the client at the predetermined upcoming date. This is comparable to the standard futures contract. Though the large difference is that in a Salam sale the client pays the whole number in maximum at the period the contract is initiated. The contract additionally stipulates that the payment have to be in cash form. The believed behind such a 'prepayment' necessity has to do alongside the fact that the goal in a Bai Salam contract is to aid needy farmers and tiny companies alongside working capital financing. The client in a contract consequently is frequently an Islamic commercial institution. As there is maximum prepayment, a Salam sale is clearly helpful to the seller. As such the predetermined worth is normally lower than the prevailing spot price. This worth deeds is precisely disparate from that of standard futures contracts whereas the futures benefits are normally higher than the spot worth by the number of the grasping cost. The lower Salam worth contrasted to spot is the "compensation" by the seller to the client for the opportunity given to him. The Bai Salam contract is subject to countless conditions, of these the vital ones are as follows; Maximum payment by client at the period of effecting sale. The underlying asset have to be standardized, facilely quantifiable and of determinate quality. Salam contract cannot be established on an exceptionally recognized underlying asset. This way the underlying commodity cannot be established on commodity from a particular farm/field etc. Quantity, quality, maturity date and locale of transport have to be clearly enumerated in the Salam agreement. The underlying asset or commodity have to be obtainable and traded in the marketplaces across the era of contract. Keeping in mind the description of futures contracts it ought to be clear that present transactions traded futures should conform to these conditions alongside the exclusion of the early that needs maximum advance payment by the buyer. Though, given the customized nature of Bai Salam, it should extra closely resemble forwards rather than futures. Therefore a little of the setbacks of forwards; namely, double-coincidence, debated worth and counterparty chance can continue in the Salam sale. Counterparty chance though should be one reinforced, in that, as the client has fully paid it is merely the client who faces the sellers default chance and not both methods as in forwards/futures. In order to vanquish the possible for default on the portion of the seller, the Shariah permits for the client to need protection that could be in the form of a promise or mortgage.

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The contract might additionally form the basis for the ability of working capital financing by Islamic commercial institutions. As commercial institutions should not desire ownership of the underlying commodity, parallel contracts could be used. Nevertheless not all jurist are in accord concerning its permissibility, the works cites two avenues for parallel Salam. The early is a parallel Salam alongside the early seller as the supplementary is an offsetting transacting by the commercial institutions alongside a third party. In the early alternative the commercial institutions afterward going in into the early contract, gets into a parallel Salam to vend the underlying commodity afterward a period lapse for the alike maturity date to the early seller. The resale worth should be higher and believed justifiable as there has been a period lapse. The difference amid the two benefits should contain the bank's profit. The shorter the period left to maturity, the higher should be the price. Though, the necessity is that both deals ought to be autonomous of every single other. The early deal ought to not have been priced alongside the aim to do a consecutive parallel Salam. Below the subsequent alternative, the bank that had gone into an early contract enters into a contract enthusing to vend the commodity to the third party on the maturity date of that contract. As this subsequent deal is not a contract the bank does not accord advance payment. This price behavior is certainly different from that of conventional futures contracts where the futures price is typically higher than the spot price by the amount of the carrying cost. The lower Salam price compared to spot is the compensation by the seller to the buyer for the privilege given him. Despite allowing Salam sale, Salam is still an exception within the Islamic financial system which generally discourages forward sales, particularly of foodstuff. It should be clear that current exchange traded futures would conform to these conditions with the exception of the first, which requires full advance payment by the buyer. Given the customized nature of Bai Salam, it would more closely resemble forwards rather than futures. Thus, some of the problems of forwards; namely double-coincidence, negotiated price and counterparty risk can exist in the Salam sale. Counterparty risk however would be one sided. Since the buyer has paid in full, it is the buyer who faces the sellers default risk and not both ways as in forwards/futures. In order to overcome the potential for default on the part of the seller, the shariah allows for the buyer to require security which may be in the form of a guarantee or mortgage.

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ISTISNA AND JOALA CONTRACT:

Istisnaa is a contract whereby a party undertakes to produce a specific thing which is possible to be made according to certain agreed-upon specifications at a determined price and for a fixed date of delivery. This undertaking of production includes any process of manufacturing, construction, assembling or packaging. In Istisnaa, the work is not conditioned to be accomplished by the undertaking party and this work or part of it can be done by others under his control and responsibility. Istisnaa, an instrument of pre-shipment financing and it is a contract where the deal can be referred to something not in existence at the time of concluding the contract The Istisna Contract has as its underlying, a product to be manufactured. Essentially, in an Istisna, a buyer contracts with a manufacturer to manufacture a needed product to his specifications. The price for the product is agreed upon and fixed. While the agreement may be cancelled by either party before production begins, it cannot be cancelled unilaterally once the manufacturer begins production. Istisnaa provides medium term financing to meet financing requirement for manufacturing/supplying/sale of identified goods, such as industrial/construction equipment, machinery, cargo vessels, oil tankers, trawlers, dredgers, locomotives, etc., transport equipment, pipelines for water and oil distribution, gas and electricity and their transmission/ distribution lines, electric generators and transformers, telecommunication equipment, oil rigs, hospital equipment, etc. Under this mode of financing, it is possible to finance intangible assets like gas, electricity, etc. It is also possible, unlike under leasing and installment sale, to finance working capital. Istisnaa financing period is determined by the time required for procurement of necessary materials and manufacturing of the goods according to the agreed contract.

Joala contract:
The Joala Contract is essentially a Istisna but applicable for services as opposed to a manufactured product.

Baibil-wafa & Bai bil Istighlal Contracts:

A sale with the right of redemption, literally, a sale of honor. Typically, such a sale takes place when a commodity is sold on the condition that the seller be allowed to redeem the commodity upon paying its price; and the buyer agrees to honor the condition. The Bail bil-wafa is a composite of bai (sale) and rahnu (pledge). Under this contract, one party sells an asset to a buyer who pledges to sell back the asset to the original owner at a predetermined future date. The rahnu (pledge) being to sell back to the owner and not to a third party. Looks like a REPO? Except that the resale price must be the same as the original purchase price. But like a REPO, the buyer has rights to benefits from ownership of the asset. The Bai bil-Istighlal is really a combination of the Bai wafa and Ijarah.

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 Under this contract, the buyer not only promises to resell at a predetermined future price but to also lease the asset to the seller in the interim period. The Bai bil-Istighlal can therefore be a convenient means by which an IB can provide short/medium term financing. The IB first purchases the asset, leases it the customer before finally reselling it to the customer.

ISTIJRAR CONTRACT:
The Istijrar contract is a recently introduced Islamic financing instrument, introduced in Pakistan; the contract has embedded options that could be triggered if the underlying asset's price exceeds certain bounds. The contract is complex in that it constituted a combination of options, average prices and cost plus financing. The Istijrar involves two parties, buyer which could be a company seeking financing to purchase the underlying asset and a financial institution. A typical Istijrar transaction could be as follows: a company seeking short term working capital to finance the purchase of a commodity like a needed raw material approaches a bank. The bank purchases the commodity at a current price (P0), and resells it to the company for payment to be made at a mutually agreed upon date in the future for example in 3 months. The price at which settlement occurs on maturity is contingent on the underlying assets' price movement from t0 to t90 ' where t0 is the day the contract was initiated and t90 is the 90th day which would be the maturity day. Unlike a Murabaha contract where the settlement price would simply be a predetermined price; P* where P* P0 (I + r), with 'r' being the bank's required return learning, the price at which the Istijrar is settled on maturity date could either be P* or an average price (P) of the commodity between the period t0 to t90. As to which of the two prices will be used for settlement will depend on how prices have behaved and which party chooses to 'fix' the settlement price. The embedded option is the right to chooses to fix the price at which settlement will occur at any time before contract maturity. At the initiation of the contract; t0 both parties agree on the following two items (i) in the predetermined Murabaha price; P* and (ii) an upper and lower bound around the P0. (Banks purchase price at t0). P0 = the price that bank pays to purchase underlying commodity. P* = Murabah price; P* = P0 (l+ r) PL B = the Lower bound price PUB = the upper bound price. The settlement price (PS) at t90 would be; PS = P (average price); if the underlying asset price remained within the bounds. Or PS = P*; if the underlying asset exceeds the bounds and one of the parties chooses to exercise its options and use P* as the price at which to settle at maturity. For either party to exercise its option and thereby the settlement price at P*, the spot price during the term of the contract must have exceeded the bounds at any time. As to which party would exercise; of course depend on the direction of the spot price movement. For example, if the spot price at anytime breaks through the upper bound the buyer would get worried. But whether he will exercise or not would depend on his expectations of the spot price over the remaining period of the contract. If he believes that the price is likely to keep increasing thereby causing Price at which settlement will occur to be greater than P*, it will be in his interest to 'exercise' by fixing the settlement price now at P*. 16

Essentially, he would notify the bank that he is exercising his option and that the settlement would be P*. Should spot prices be falling such that it breaks the lower bound, the seller. In this case the bank would have the option to fix the settlement price at P*. Analyzing the Istijrar contract entirely from an options viewpoint is complicated since it has two different exercise styles rolled in one. Such an instrument would be highly unusual in conventional finance. Still for our purpose here, the embedded options in the Istijrar can simply be thought of as follows. The fact that buyer get to fix the buying price at P* when the price goes higher implies that he has a call option at an exercise price of P* while the bank a put option at the same exercise price. What the Istijrar contract endeavors to do is to permit the encounter to worth adjustments but to cap the benefits that accrue, as a result. By meaning, as adjustments are allowed merely inside a group, the supremacy to one party and the disadvantage to the supplementary are capped. The maximum possible gain or defeat is limited. Such a contract fulfills the demand to circumvent a fixed revisit on chance less asset that should be believed riba and additionally avoids gharar in that both parties understand up front, P* and the scope of supplementary probable prices. (By meaning amid the higher and lower bounds).

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CONCLUSION
We debated the progress of derivatives, debated the exceptional benefits to companies of employing them and the Islamic viewpoint considering their use and the assessment of the arguments in our report. It is clearly evident from the discussion that there does not materialize to be a public view. Nevertheless most scholars have assessed the standard derivatives from the frank contractual viewpoint, every single appears to have seized a disparate way and believed them from extremely disparate slants to appear at their conclusion on validity. Aside from differential way on the Shariah side, their conclusion additionally appears to have been driven by their individual understanding of derivative instruments. In countless cases the understanding appears misguided. All presently traded derivatives should not be valid. Certainly instruments that have as their underlying asset items that are haram should demand no more consideration. Yet the case of derivatives on fairness instruments, currencies and halal input commodities merits attention. Nevertheless it could seem safer for Islamic scholars to be on the side of conservatism, such a locale can have expensive aftermath for Islamic companies in the long run. In an increasingly competitive and urbane company nature repudiating them the use of a flexible and influential array of instruments might locale them at a disadvantage. Therefore in assessing the permissibility of derivatives yet one more dimension could be demanded, that is a communal welfare dimension. Aside from a slim focus on the contractual framework, Islamic scholars have to seize into thought the possible "welfare loss" after selecting on the permissibility of derivative instruments. However, it is a yet an extremely debatable case alongside so countless disparate opinions; there is a seeming demand for an extra synchronized evaluation. Unless there is a convergence amid Shariah compliance and chance association needs, Muslim companies can be critically handicapped.

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