Gharar in Forward and Futures Contracts?

Nadhirah Nordin,Engku Muhammmad Tajuddin Engku Ali,Azlin Alisa Ahmad,Normadiah Daud,Norsuhaily Abu Bakar

doi:10.5901/mjss.2015.v6n2p435

Nadhirah Nordin, Engku Muhammmad Tajuddin Engku Ali + Show 3 more

Open Access

https://doi.org/10.5901/mjss.2015.v6n2p435

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Abstract

This paper attempts to analyze the elements of gharar that exist in forward and futures contracts of crude palm oil in Malaysia. A calculation that reflects the level of confidence the presence of gharar issue in forward and futures contracts was also carried out. Forward and futures contracts are the most common types of derivative instruments. The value of this contract is derived from the values of underlying assets such as commodities, equities, and currencies. Muslim scholars differ on the permissibility of forward and futures contracts. Among the key issues raised in contracts is the issue of gharar. This study uses a thematic analysis approach to explain the data collected through secondary sources and interviews with few individuals involved in this industry. The finding of this research indicates that the issue of gharar existed in forward contracts as there is no regulatory body to monitor the contracts. Whilst, futures contracts which are traded on the exchange, the element of gharar are minimized by the role of a clearing house that acts as a regulator ensuring compliance from the contracting parties when the contract is made. DOI: 10.5901/mjss.2015.v6n2p435

Highlights

Some scholars rejected the idea of forward and futures contracts due to issues of gharar in these contracts
For the issue of bay‘ ma‘dum, the study found that the level of confidence of gharar element in forward contracts when the crude palm oil does not exist during the contract is on the scale of a skeptical
The study found that the availability of crude palm oil supply in Malaysia is abundance and is not an issue

Summary

Introduction

Some scholars rejected the idea of forward and futures contracts due to issues of gharar in these contracts (al-Saati, 2003). The gharar issue raised in forward and futures contracts was the absence of physical goods at the time the contract is made (bay ma'dum), and the deferment in payments and delay in the delivery of goods (ta'jil badalayn) This subject pivots on the situation when there is no consensus among the scholars in defining gharar and in determining the level of uncertainty that can be categorized as the prohibited bay'al-gharar. The basis of scholarly differs in opinions on the issue of gharar and its impact on the permissibility of forward and futures contracts on commodity needs to be studied based on the present situation in Malaysia. In other words, this dilemma calls for a contemporary formula (al-Suwailem, 2000; Obiyathulla, 1999). This article ends its conclusion with discussion and findings

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