Islamic Swap Instruments: An Evaluative Study from Maqasid Al-Shariah Perspective

Abstract

This research aims to analyse and explore the Shar??ah issues regarding the issuance of Islamic swaps, namely Islamic Profit Rate Swap (“IPRS”) and Islamic Cross Currency Swap (“ICCS”), in the financial system. The rationale for such issuance and juristic views on their functions or purposes are analysed in this study. The analysis covers the underlying theories that have mooted the justification for the derivatives as well as Shar??ah arguments and the related resolutions pertaining to the swap mechanism and its reflection into specific legal documentation templates. The result of this analysis will then be assessed within the framework of Maq??id al-Shar??ah in order to harmonise the approaches and identify the way forward. This interdisciplinary study covering finance, law, and Shar??ah applies qualitative methods or specifically uses doctrinal methods and content analysis. For this approach, a wide range of documents has been collated and analysed to capsulise the essence of the subject matter. The data also includes standard documentation templates for Islamic swaps, namely the Tahawwut Master Agreement and the Islamic Derivative Master Agreement, widely used in fieldwork. As such, the study inclines to the analytical approach involving fundamental and applied research; the general and specific facts and information will be analysed to establish a critical evaluation and outcome. The findings indicate three perspectives: (i) Economics of Swap Instruments – IPRS and ICCS (which are mirrored from the conventional interest rate swap and cross currency swap) are deemed as Forward Commitments and not Contingent Claims that contributed to the 2008 financial crisis. These swap instruments have existed due to the economic and financial market conditions, in which the main factor is price fluctuation due to the interest rate component of the underlying asset. Under the current circumstances, the instruments seem essential to the contracting parties; (ii) Shar??ah Concern on Swap Instruments - Shar??ah compliance status is determined by two aspects i.e. purposes and structures (the latter to be reflected in legal documentation). For the determination of the former aspect, there is a lack of clarity in prohibiting speculation, which indeed has accompanied hedging and is hardly avoided. Hence, this study has suggested the key factors i.e. the fiqh maxim al-ghurm bi al-ghurm, the ?illah of gambling, real economic activities and intention, as considerations to measure the state. The second aspect is that the presence of gharar, maysir or qim?r and rib? elements is the primary Shar??ah concern on swap. Applying tawarruq as a core principle for Islamic swaps has raised a fundamental issue, where the Shar??ah arguments have echoed the issue of h?lah. As a result, necessary precautions must be taken; (iii) Maq??id al-Shar??ah Framework for Islamic Swaps – pursuant to items (i) and (ii), for which several factors have been considered for evaluating the ma?lahah of Islamic swaps, namely: needs and economics of Islamic swaps, risk and consequential impact, current context and market conditions, controlled concept as a way-out solution and juristic maxims, as well as the specific maq??id amw?l such as protection, stability, circulation, transparency, productivity and justice.