‘Hedging permissible in Islamic finance’

By Habhajan Singh
Hedging is permissible in Islamic finance and the industry should not look at banning derivatives, says a Shariah scholar.
Dr Mohammed Daud Bakar said that Islamic finance cannot depart from risk management for both pre and post transactions.
"We can have Islamic hedges, but we cannot allow Islamic speculators. Hedges are permissible," he said at the 5th International Islamic Finance Forum Asia 2009 in Kuala Lumpur last week.
Mohd Daud, who runs Amanie Business Solution Sdn Bhd and chairs the Shariah Advisory Council (SAC) of Bank Negara Malaysia (BNM), was one of the panelists at the two-day conference organised by Informa Finance.
He said that hedging is important as institutions need to hedge against the real risk faced in day-to-day transactions.
"We cannot ban Islamic derivatives. They are required. Some speakers tend to give extreme examples of CDS — (as) one of the reasons that brought down some large financial institutions in the US (in arguing against allowing hedging in Islamic finance).
"But CDS is a remote example. It is not reflective of derivatives on the whole," he told the conference.
Credit default swaps, or CDS, became a buzzword in the financial market following the spectacular collapse of a number of big names in the US during the financial crisis.
Hedging risk is one of the typical concerns at a bank, including Islamic financial institutions. They go hand in hand with the management of risks concerning liquidity and also that of asset and liabilities management.
Treasury risks include risks arising from the management of the financial resources of financial institutions in terms of cash management, equity management, shortterm liquidity management as well as asset and liabilities management. In an earlier paper at another event, Mohd Daud touched on the Shariah perspective of the economics of hedging.
He noted that the principles of capital protection, risk management and risk hedging are essentially acceptable to the general principles of Islamic law as long as they are free from (a) taking and paying interest, (b) uncertainty in pricing, subject matter and other relevant aspects in a contract (gharar); and, (c) any element/clause/practice which contradicts the very purpose of an underlying contract (e.g. capital guarantee in investment contract).
Although these economic objectives may be acceptable under Shariah law, the mechanism to achieve the desired objective must be equally compliant, he added. Mohd Daud was one of the panelists examining the risk return potential of derivatives and hedge funds in the Islamic finance market. The session was moderated by head for product development of Bursa Malaysia Bhd's Islamic capital market Norfadelizan Abdul Rahman.
Other panelists were Singapore-based AFG Capital Management managing director Kevin Ho and Thomson Reuters global head of Islamic finance Rushdi Siddiqui.
In another panel session entitled "Positioning Islamic finance to tap into new non-Islamic markets" moderated by The Malaysian Reserve's associate editor Habhajan Singh, the panelists were Rushdi, Kuwaitbased Rasameel Structured Finance vice chairman and CEO Issam Al-Tawari and Citi head for regional Islamic structuring at fixed income, currencies and commodities Ahmad Shariman Mohd Shariff.
The conference was officiated by Accounting and Auditing Organisation for Islamic Financial Institution's (AAOIFI) secretary general Dr Mohamad Nedal Achaar.
Among top local Islamic bankers attending the two-days conference were Kuwait Finance House Malaysia acting CEO Ab Jabbar Ab Rahman, Unicorn International Islamic Bank Malaysia Bhd (Unicorn Malaysia) CEO Khalid Mahmood Bhaimia and CIMB Islamic Bank Bhd CEO Badlisyah Abdul Ghani.