Islamic finance has emerged as a rapidly growing industry with an increasingly global presence, resulting in an average growth by 15 to 20 per cent annually. Even though the industry has expanded in terms of volume and scope, it still represents a small share of total banking assets worldwide. Today, the industry is one of the fastest growing segments and accounts $1.66 trillion to $2.1 trillion controlled by more or less 300 Islamic financial institutions in more than 75 countries. In this regard, it is certainly not surprising that parallel to this explosive growth, market participants can no longer stay behind with hedging their risks they are subject to in the course of their operations.
Although derivatives have been in existence for centuries and have a widespread use, derivatives as such have no precedents under Shari’ah. The aim of this research is to outline the objections from a Shari’ah perspective towards the use of derivatives in their conventional forms. In addition, it examines a range of Shari’ah-compliant contracts with derivative-like features that may mirror some of the characteristics of their conventional counterparts.
In 2010, the International Swaps and Derivatives Association (ISDA) in cooperation with the International Islamic Financial Market (IIFM), published the ISDA/IIFM Tahawwut (hedging) Master Agreement. This launch is a significant milestone for the derivatives market, and marks the introduction of the first globally standardized master documentation for documenting privately negotiated Shari’ah-compliant over-the-counter (OTC) derivatives. In this regard, this research explores and analyzes how the ISDA/IIFM Tahawwut (hedging) Master Agreement has been adapted to take the concerns with respect to derivatives away, while providing a standardized master framework that strictly complies with the Shari’ah principles and concepts.