islamic finance & risk management

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0 | I s l a m i c F i n a n c e & R i s k M a n a g e m e n t

Islamic FinanceRisk Management

S. M. SHARIFUL AMIN

ID: 112.0549.0605/5/14 BUS698: Field Study


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Prepared for:Dr. Mahboob Rahman

MBA Program | North South University

Prepared by:S. M. SHARIFUL AMIN || ID: 112.0549.060

Spring 2014 | BUS 698 | Field Study | Section 1

MBA Program | North South University

Submission Date: 5th May 2014


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ToDr. Mahboob RahmanMBA Program North South University.

Subject: Submission of Field Study report.

Dear Sir,

I am glad to submit the field study report titled ‘Islamic Finance & Risk Management’

that you asked us to conduct at the very beginning of the semester. It is my great pleasure to

work for this paper and gain an in-depth knowledge on Islamic Finance and Risk Management.

As requirement of the course and your suggestions guidance, I have closely studied the issues

concerned.

I hope you will find the study interesting and informative. In this course I appreciate

having this project. Before doing this report I was really blank regarding Islamic Finance issues.

If you need any assistance in interpreting this report, please contact me at mail:

[email protected] or cell: 01612304256 .

Sincerely yours,

S. M. Shariful Amin.ID: 112.0549.060Spring 2014 | BUS 698 | Field Study | Section 1MBA Program | North South University.


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Executive summery

Global Islamic assets held by commercial banks stood at $1.3B in 2011, but the industry's

forecast growth of some 40% over two years will see this figure rise to $1.8B in 2013, according

to research by Ernst & Young. the Islamic banking industry in Saudi Arabia – with an estimated

$207 billion of Islamic assets – was ranked first in 2011 followed by Malaysia with total assets

of $106 billion and UAE third with total assets of $75 billion.

Islamic finance is governed by the Islamic law. Islamic Law bans interest, short selling,

speculation, put option, call option, future contract. Guide form Hadith to sale in advance,

"Whoever pays in advance the price of a thing to be delivered later should pay it for a specified

measure at specified weight for a specified period."

Three different types of Futures markets can be considered for an Islamic economy:

SALAM-based futures market for commodities for which a regular market exists; ISTISNA'-

based futures market basically for the infra-structural and developmental projects; JO'ALA-based

futures market for service based activities.

Conventional financing and risk management transfer the risk and this how babble get

fatter and get explore and global financial crisis come into sight. Whereas Islamic finance and

risk management system eradicate the risk.


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Table of Contents Introduction ..................................................................................................................................... 1

Conventional Finance & Risk Management ................................................................................... 2

Message of Islamic Finance & Risk Management: ........................................................................ 4

Possible Types of Islamic Futures Markets .................................................................................... 6

The SALAM Contract..................................................................................................................... 7

Definition .................................................................................................................................... 7

The Nature of SALAM ............................................................................................................... 7

a) SALAM as a Sale: ........................................................................................................ 7

b) SALAM as Indebtedness .............................................................................................. 9

Elements of the SALAM Contract:........................................................................................... 10

Shari'ah Conditions For The SALAM Contract: ...................................................................... 10

The ISTIS NA’ Contract ................................................................................................................ 13

Definition .................................................................................................................................. 14

Elements of The ISTISNA’ Contract ........................................................................................ 14

Features of The ISTISNA’ Contract ......................................................................................... 14

The JO'ALA Contract ................................................................................................................... 16

Definition .................................................................................................................................. 17

Elements of The JO’ALA Contract .......................................................................................... 17 Features Of The JO’ALA Contract ........................................................................................... 18

Conclusion .................................................................................................................................... 19


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Islamic Finance & Risk Management P a g e | 1

Introduction

Islamic financial industry is growing rapidly. Global Islamic assets held by commercial

banks stood at $1.3B in 2011, but the industry's forecast growth of some 40% over two years will

see this figure rise to $1.8B in 2013, according to research by Ernst & Young. Yet, Islamic

instruments, particularly in the area of hedging and risk management, are not at pace with the

industry’s growth. Islamic financial institutions face a variety of types of risks associated with

Islamic modes of investment and finance.

Islamic finance is governed by the Islamic law, which bans interest, short selling and

speculation, derivative products (such as: put option, call option, future contract) and stipulates

that income must be derived as profits from shared business risk rather than guaranteed return.

Islamic law derives from

a) the Shariahah (or Shari’ah), which comprises the Qur’an and the sayings and actions

of the prophet Mohammed recorded in a collection of books known as the sahih had i

th, and

b)

the fiqh, which represents Islamic jurisprudence based on a body of laws deducted

from the Shari’ah by Islamic scholars.

In principle, futures and options under derivative may be compatible with Islamic law if they

a) are employed to address genuine hedging demand on asset performance associated

with direct ownership interest,

b) disavow mutual deferment without actual asset transfer, and


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c) eschew avertable uncertainty (gharar) as prohibited sinful activity ( har am) in a bid to

create an equitable system of distributive justice in consideration of public interest

(mas lahah).

Shari’ah-compliant derivatives would also maintain risk sharing between contract parties

by forgoing the zero-sum proposition of many conventional derivative transactions in favor of

win-win situations from changes in the value of the underlying asset.

However, the de facto application of many derivative contracts is still objectionable,

mainly because of the possibility of speculation (or deficient hedging need) and the absence of

entrepreneurial investment violate of the tenets of distributive justice and equal risk sharing

subject to religious restrictions on the sale and purchase of debt contracts as well as profit taking

without real economic activity and asset transfer.

This repost concentrated for possibility of Islamic finance. In Bangladesh derivative

market is not allowed in advance stage only forward market and spot market is allowed. Under

forward contract Bangladesh Bank allow only foreign currency USD commodity forward market

is completely absent is Bangladesh.

Conventional Finance & Risk Management:

From late 1900s derivatives have become increasingly important in finance. Futures and

options are actively traded on many exchanges throughout the world. Many different types of

forward contracts, swaps, options, and other derivatives are entered into by financial institutions,

fund managers, and corporate treasurers in the over-the counter market. Derivatives are added to

bond issues, used in executive compensation plans, embedded in capital investment


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Message of Islamic Finance & Risk Management:

In the Arabic language, the term hedging is known as tahawwut which origins from the

word hata . The linguistic meaning of the word hiyatah includes precaution, protection, attention

and/or patronage. The technical meaning of the word tahawwut in the field of finance is: the

adoption of processes and arrangements and the selection of contractual formats that guarantee

the reduction of risks to a minimum while maintaining good possibilities for return on

investment

Islamic finance is not only for Muslims. It is for entire humanity: “We have send you

solely for the mercy of all worlds” (21:107). This imposes a serious challenge to Muslim

economists, namely to successfully deliver the message of Allah ( s.w.t ) to humanity, and

positively contribute to world economic stability and prosperity.

Formulation of contract involving debt in the Quran, the verses 282-283 of the second

chapter al-Baqarah, it had been stated “O you who believe! When you contract a debt for a stated

term, put it down in writing. Have a scribe write it down justly between you. No scribe should

refuse to write; let him write as Allah has taught him, let the debtor dictate and let him fear

Allah, his Lord and not diminish what he owes. If the debtor is feebleminded, weak, or unable

himself to dictate, let his guardian dictate justly. Call in two men as witnesses. If two men are not

there, then call a man and two women out of those you approve as witnesses, so that if one of the

two women errs, the other can remind her. The witnesses should not refuse when they are called

on for evidence. Do not disdain to write the debt down, be it large or small, along with the time it

falls due. This way is more equitable in the sight of Allah, more reliable as evidence and more

likely to prevent doubts arising between you. But if the merchandise is there and you hand it


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over, there is no blame on you if you do not write it down. Have witnesses present whenever you

make a commercial contract; and let no harm be done to either scribe or witness, for if you did

cause them harm, it would be a crime on your part. Be mindful of Allah and He will teach you.

Allah has full knowledge of everything. If you are on a journey and cannot find a scribe,

something should be handed over as security”.

Hedging and risk management is Quran, in the 12 th chapter of the Quran, verses 47-49,

Prophet Yusuf answered: “You shall sow for seven consecutive years as usual. Store all that you

reap, left in the ear, apart from the little you eat. After that will come seven years of hardship

which will consume all but a little of what you stored up for them. After that will come a year in

which the people will have abundant water and will press (products from grapes, olives etc.)”.

From the verses we can see how Prophet Yusuf suggested to the Egyptians to cultivate their

plantation for the fertile seven years and to stoke a majority part of their produce as a preparation

for a more critical time, which was the draught season in the following seven years. As a result,

Egypt was able to survive when the dry season hit for seven years and the risk of famine was

reduced since a big portion of food was stored during the first seven prosperous years. This is

clear evidence that strategic steps were taken in order to prevent and reduce expected risks, since

a risk that is not well-managed can bring harm to certain parties. Although the above verses are

mostly directed to the benefits of saving for the future, but it is also linked to the idea of the

future being uncertain. Risks are also part of the uncertain future.

Allah commend in the second chapter, verse 195: “Spend in the cause of Allah; do not

contribute to your destruction with your own hands, but do good, for Allah loves those who do

good”. This commend can be apply in hedging practice because the hedging method also


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requires a person or a corporate entity to pay a particular cost for purchasing financial

instruments that can be used in hedging investments or commerce from unforeseen risks.

A Bedouin Arab who asked the Prophet Muhammad on which is better; to leave his

camel untied and ask for the protection of Allah for his camel, or to tie it. The Prophet told him

to tie his camel first and then have tawakkal (trust and dependence: not to leave things entirely to

Allah without making any effort) to Allah. Islam teaches us to always be ready in facing any

unexpectedness. Without prior preparation (hedging practice), we may have to face even worse

risks.

The Prophet (peace be upon him) came to Medina and the people used to pay in advance

the price of dates to be delivered within two or three years. He said (to them), "Whoever pays in

advance the price of a thing to be delivered later should pay it for a specified measure at

specified weight for a specified period."

Possible Types of Islamic Futures Markets

Based on the three Islamic concepts of contract relating to future delivery, three different

types of Futures markets can be considered for an Islamic economy:

a) Salam-based Futures Market for commodities for which a regular market exists.

b) Istisna'-based Futures Market basically for the infra-structural and developmental

projects.

c) Jo'ala-based Futures Market for service based activities.


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The SALAM Contract

Definition

Literally, the word Salam is synonymous to the word salaf (lending) and to make Salam

is to give or lend something to somebody'. A Salam transaction is so called because the principal,

(i.e. price) is to be paid when the concerned parties sit together to conclude the contract.

Therefore, the Salam principal is salaf since it has to be paid in advance.

The Nature of SALAM

Salam is an exchange contract that results in future obligation of the receiver of the

finance and in this sense has both selling as well as borrowing implications.

a) SALAM as a Sale:

The general consensus among fuqaha' is that at the stage of signing the contract, Salam

is a sale as the author of al Majmu of the Shaft 'e school says: "Salam, therefore is a sale and

its contract is based on the same requirements and conditions of a ale contract ".

Ibn Qudamah of the Hanbali school also says: "It is a sort of sale on which the rules of a

sale contract apply".

As for the Hanafi fuqaha', they indicate that "its elements are the same as those of bay'

(sale), i.e., "offer " and "acceptance" and a Salam contract may be concluded by using the word

bay' according to the most accepted view.

The Maliki fuqaha' divided sale contracts, from the view point of the time lag between

payment of price and delivery of the commodity into four types. The fourth type, according the

Maliki fuqaha' is "when delivery of the commodity alone is postponed and that is Salam" .They


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have also reported that some classical fuqaha' showed their dislike for using the word Salam to

refer to this contract, as this contract is in fact no more than a type of sale. Ibn Hazm has a

different view point regarding this issue. He says: "Salam is not a sale". He then explains the

difference between Salam and sale.

However, in spite of the fact that the majority of the fuqaha' consider Salam as type of

sale, yet they disagree on the idea that a Salam contract can be effected by mentioning the world

bay'.

There are two different viewpoints in this respect:

The Hanafi, Hanbali; Maliki and some Shafi'e fuqaha' believe that Salam

takes place by mentioning the word Salam and the word bay'. Ibn Qudamah in al-

Mughni says. " It is a sale contract which takes its contractual form by use of terms that

are appropriate for a sale contract and by mentioning the word Salam". He also says: " It

is rightful as well to .effect a Salam contract by using the word bay' and by any other

word that suits a bay' contract ". Ibn Abidin also says: " It has the same elements of bay'

and it can be concluded by using the word bay". The author of al Majmu adds " It can be

concluded by using the words salaf or Salam while there are two opinions regarding the

use of the word bay"

The view point of some Shafi 'e fuqaha' and Ibn Hazm as indicated 'by

the author of Mughni al Muhtaj is that "mentioning contract as per the most accepted

view". Ibn Hazm does not consider it a sale at all, and therefore he does not share the

view that it can be concluded with the word bay'.


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b) SALAM as Indebtedness

It is well known that when a Salam contract is effected, the commodity in question

becomes a debt burden on the seller as all fuqaha' agree. Ibn Qudamah says in al Mughni "...

that is, because the commodity sold remains as a debt and if the price is to be deferred also, the

contract will lead to exchange of debt against debt which is prohibited as per the unanimous

belief of the fuqahan " Ibn Abidin says: "Salam is allowed in what can be precisely described,

because being an in kind debt, it cannot be known except by description". The author of al

Majmu also confirms that “The first condition regarding commodity sold in Salam is that it

(temporarily) remains as a lrability on the seller ”.

There is, therefore, no dispute that Salam is meant to involve a debt component. It is

worth mentioning here that in spite of their unanimous belief that Salam is a lending and

borrowing transaction, yet , fuqaha' were in sharp disagreement regarding the applicability of

some conditions of debt to Salam particularly with regard to transfer of debt and to guarantees as

we shall see below:

Transferring a Salam i s debt (whether by the debtor or the creditor) is

prohibited according to both the Shafi 'e and the Hanbali schools. The author of al

Majmu says: "Transferring a Salam i s debt is not allowed because such a debt is not

confirmed. The Salam contract is vulnerable to termination if thecommodity ceased to

exist. Debt transfer is allowed only when compensatory arrangements (in case of

default) could be resorted to, whereas such arrangements are not permissible in the case

of Salam" Ibn Qudam also says: "Transferring a Salam's debt is not allowed because

such transfer is allowed only for a confirmed debt. Being vulnerable to annulment, a


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Salam's contract does not result in a confirmed debt "

Regarding guarantees in Salam, whether mortgage or collateral, Ibn

Qudamah summarizes in al Mughni wa al Sharhal Kabir the opposing viewpoints of

fuqaha' which comprise prohibition, dislike and permissibility. The latter is widely

accepted among fuqaha'.

Elements of the SALAM Contract:

There are three elements of this contract:

1) The commodity sold/purchased

2) The purchaser or the one who is paying the price now.

3) The seller or the one who agrees to deliver a specific commodity at a determinedfuture date.

Shari 'ah Conditions For The SALAM Contract:

A Salam (Forward) contract in Islamic framework is subject to following main Shari'ah

conditions:

1) Price must be paid by the buyer in advance and in lump sum.

2)

Using debt owed to the purchaser by the seller as price of the Salam

commodity is prohibited first because it will violate the principle that price must be

received by the seller in advance and secondly, and more importantly, it implies

exchanging debt for debt which is prohibited. The practice of paying the Salam

commodity by debt may lead to exploitation of Farmer and will defeat the purpose of

helping the Farmer to finance his production.

3) Depositing the received price with the purchaser is permissible if the seller

receives it at the time of signing the contract and then deposits it with the purchaser.


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4) Price should be determined and fixed in advance at the time of signing the

contract though it may or may not be the price currently prevailing in the , market.

5) The Salam commodities according to all Fuqaha' is anything that can be

sold and which can be specifically described.

6) The Salam commodity can be goods as well as services of an real asset.

7) The characteristics to be mentioned in describing the commodity sold

should include those which could apparently affect its price without including other

unnecessary details in order not to make Salam contract impracticable.

8)

Salam contract is not permitted when commodity sold is money or another

currency.

9)

Commodity sold should be of known quantity.

10) Commodity sold should be a thing that can possibly be delivered.

11) The two objects exchanged should not be such that their exchange will

lead to "Riba". For example exchange of currencies cannot be made in the form of a

Salam contract because it will violate the principle of exchanging hand to hand (and hand

to hand means no Sabin).

12) The contract should be binding and with no option especially contractual

option.

13) Purchaser cannot resell or transfer the ownership of the Salam commodity

before it is delivered to him. He cannot dispose of the commodity through any such

action that leads to the ownership transfer like Ba'i Murabaha, tawliyah and wadi'ah,

hawalah etc. (This is the opinion of majority of the schools of thought including Hanafi,

Shafi'i and Hanbali. Malik school, however, permit resale or transfer of ownership


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before delivery is made provided the Salam commodity is not a food item). There is,

however, permission to sell a parallel Salam on the basis of a Salam already purchased.

14) There is, however, no objection issuing a parallel Saloom contract against

the Salam commodity to be received in future. The two parallel contracts, however, will

be independent with independent obligations.

15) If the seller does not deliver or tries to evade the delivery of the

commodity of Salam tract in time while the commodity is available in the market, then

this will be treated as refusing or evading to pay a debt. A legal sanction through court

can be obtained against him. (It is, however, not permissible to include any clause in the

contract to impose a fine for delay.)

16)

If the seller is unable to deliver the commodity, the following can be done:

a. The seller agrees with the buyer to postpone the delivery till the next crop

(output) comes.

b. If buyer does not agree, the seller will return him the advance paid to him

(without any increase).

c. The contract can be canceled by mutual agreement.

Three points require serious attention in the concept of Salam trade from the point of

view of Futures and their markets.

Firstly, delivery of the goods is mandatory and compulsory. There is no

way to get around it. This is completely opposite to the practice in the contemporary

Futures trade. Though the delivery is legally binding but there is a mechanism to absolve

the traders of the obligation to make or take delivery. This will not be possible in Islamic


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framework.

Secondly, reselling of a Salam commodity before it is received is not

permitted in Islam, whereas contemporary Futures market have not only made it

permissible but have separated the Futures market from commodity markets in order to

focus only on selling and reselling commodities without receiving them.

Thirdly, Salam contract strictly require advance payment of the price of

the goods. The contemporary Futures market, on the contrary do not require any payment

to the farmer. They require only a small deposit, usually percent of the price, with the

Futures exchange as a security. This deposit is not paid to farmer.

The ISTISNA’ Contract

The istisna’ contract lets one buy a described manufactured item that the seller does not

own at the time of contracting, whether the item is made by the seller or another manufacturer.

The istisna’ contract is a unique feature of the Hanafi school, for the other three schools (Maliki,

Shafi’i, and Hanbali) consider it a salam sale and apply to it the salam rules. Because a salam

sale is a sale of a described item the not in the seller’s custody, the three schools besides the

Hanafi attach to the istisna’ contract a condition of paying the entire price at the contracting

time. The Hanafi school says that the istisna’ contract has its own ruling, and is not considered as

a salam sale would be. On the basis of the Hanafi opinion, contemporary scholars have ruled that

the istisna’ contract is valid; that the payment of the full price at the contracting time is not

obligatory; and that the price can be paid in installments. Furthermore, istisna’ is a committing

contract based on fulfillment of the purchase specifications by the manufacturer.


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Definition

The word Istisna’ means requesting someone to construct, build or manufacture an asset.

Istisna’ is an agreement to sell to a customer a non-existent asset that is to be manufactured or

built according to the agreed specifications and delivered on a specified future date at a

predetermined selling price.

Elements o f The ISTISNA’ Contract

The essential elements of the Istisna’ contract are:

i) Legal capacity of contracting parties;

ii)

Offer and acceptance; andiii) Subject matter of the contract must be lawful which includes the

works and asset specification.

Featur es o f The ISTISNA’ Contract

The features of an Istisna' contract are as below:

1) Istisna' contract is a sale contract. It is neither treated as a hire contract

treated as a promise to deliver. It is treated as a sale contract.

2) The subject matter of the contract is the commodity ordered by the buyer

to be manufactured and not the work or services of artisan or manufacturer and that is

what distinguishes it from the hire-contract.

3) The subject matter of the contract is deemed to be non existent at the time

of contracting and the purpose of the contract is to manufacture it and bring it into

existence and that is the only justification of the permission of such a contract as an

exception to the general.

4) The realm of this contract is goods that are subject to manufacturing; it

does not include natural goods like fruits, cereals and the like as these are in the realm of


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Salam contracts if there is a need to sell them before they come into existence.

5) The article to be manufactured constituting the subject-matter of sale

should be duly described in a clear manner that would not leave any doubt or uncertainty

about it. The same care is required in determining and fixing the price.

6) The price need not be paid in advance in Istisna' contracts contrary to the

case of Salam contracts. The price, however, has to be precisely and definitely known in

advance. The price may be totally or partially advanced, totally or partially deferred or

paid in installments.

The following distinguishing features, particularly in comparison to Salam contract, need

to be noted in case of Istisna' contract:

Firstly, these contracts cannot be done in such commodities that are normally available in

the market or are not required to be customized. In other words these contracts cannot be done

where there is no uncertainty about the demand and some demand is always expected to exist.

These contracts are allowed only for such products which are not primary goods and which will

be produced only when there is a specific definite demand already established.

The examples include, buildings, bridges, factories, etc. This may include even such

mundane items as tailored clothing. Only the buyers, therefore, will initiate a Futures contract in

this case unlike the conventional Futures which can be initiated by either buyers or sellers.

Secondly, unlike Salam Sale the payment of price in this case can be deferred until the

delivery of the product. The price, however, can be paid in installments as may be mutually

agreed. Thus in this context it is in line with the contemporary Futures market where the prices


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are not paid in advance for Futures delivery. Despite this feature, this is still not a concept that be

acceptable to or could be accommodated by the contemporary Futures market.

Thirdly, this contract is basically a production contract unlike Salam contract which is

basically a trading contract. Thus a seller agreeing to provide a product in future under this

contract will have to be a producer or will establish a contract-with a producer before entering

into such a contract.

Under Salam contract, this is not necessary. Since the Salam goods are generally

available in the market, the seller does not have to be a producer. He can purchase from the

market to supply the promised goods.

The JO'ALA Contract

Scholars of Islamic jurisprudence are divided on whether the Jo’ala contract is

permissible in Islamic Shari‘ah. According to the majority of the Malikite, Shafiite, Hambalite

and Shiite scholars, Jo’ala is a permissible contract to be adapted in transactions. On the other

hand, the majority of the Hanafi and Dhahirri scholars take an opposite view that the Jo’ala

contract is not compatible with Islamic Shari‘ah. Hanafi scholars argue that this contract is illicit

because it has elements of gambling (Qimar) and risk (Mukhatara) on one hand, while it also

deals with an unknown person on the other hand. The Hanafi scholars consider the Jo’ala

contract as null and void (Batil) if the agent ( Maj’uul ) is not determined. However, the Dhahiri

scholars do not consider the Jo’ala as a contract but as a promise which is preferable to be kept.

The concept of Jo'ala is similar to that of Istisna'. Whereas in Istisna' the seller provides a

physical commodity, in Jo'ala the seller provides a service rather than a physical commodity. All


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other aspects of Jo'ala are same as of Istisna'. In Jo'ala deal, a seller will offer a definite service to

be provided whereas the buyers will pay a definite price for this service. In many instances,it

may be difficult to distinguish whether it is an Istisna' deal or a Jo'ala deal.

For example, consider asking a tailor to make a particular dress where the client pays the

tailor an advance only to cover the purchase of raw material, remaining payment (for the service

of the tailor) to be made after the good is delivered. This activity can be done under either of the

two concepts, though conventionally, this activity is regarded as a Jo'ala activity.

Definition

The Jo’ala is a contract composed of three basics, the Ja’eel (principal), the Maj'uul

(agent) and the Ju'ul (remuneration or compensation) in which a Ja’eel (p rincipal) hires a

Maj'uul (agent) to perform a given task for a given Ju'ul (a compensation in monetary terms or

otherwise as it is specified in the contract) under the following conditions:

a.

If the Maj'uul completes successfully the task agreed upon, the

Ja’eel pays him the agreed Ju'ul (compensation or remuneration).

b. If not, the Maj'uul gets nothing.

Elements o f The JO’ALA Contract

These contracts concentrate on three elements:

Uncertainty about some aspects of the market (prices, demand or output)

is constraining the production or exchange of goods/services.

The uncertainty is dealt with in a way so as to minimize its effect on that

aspect of the market that is constraining the exchange/production of the goods/services


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concerned. When it is the uncertainty of prices, the prices and the factors effecting it are

the main focus for the Futures contract. When the uncertainty is about demand,

determining and defining the exact nature and form of demand is the focus of the

contract. When uncertainty is about the supply or output, then it is the output/supply

which is the main focus of the contract. The objective in all these being to avoid the

possibility of dispute because of the uncertainty about certain elements of the contract.

Advance payment of price when the output is normally available in the

market and hence certain to be delivered. When there is uncertainty of the output to be

delivered because the output is not available in the market, the payment of price can be

deferred until the delivery of the output.

Features Of The JO’ALA Contract

The main features of this contract may be summarized as follows:

1) The agent may accomplish the task alone or in partnership with others in

the framework of this contract. He also may delegate the task to a tierce person to do it

for him. The principal pays the agent his remuneration. The agent in his turn will pay as

mutually agreed to his partners or the agent he delegated. The agent can also sign a fresh

Jo’ala contract (a parallel Jo’ala contract to the first one) with a new agent to perform the

task for a given Ju’ul . Here the remuneration of the second agent will be naturally less

than that of the first agent; otherwise he will not sign a new Jo’ala contract. The first

agent will then get a margin from this new Jo’ala contract. The first agent in this case

plays the role of the principal ( Ja’eel ) while the second agent serves as the Maj’uul

(agent).


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2) In the Jo’ala contract sometimes an agent may be specified or sometimes

not. In case the agent is not specified at the first hand, the Ja’eel (the principal) will pay

the compensation as he announces to the person who does the job. However, this kind of

situation may not work in the contemporary setup but Fuqaha envision a possibility of

such a case.

3) The Ja’eel (principal) may contract more than one Maj’uul (agent) to

perform the task .The remuneration will then be shared by the agents as agreed.

4) In the Jo’ala contract the nature and amount of remuneration should be

specified in clear terms so that there will be no ambiguity in this respect . It also requires

the nature of the task to be well specified.

5)

In practice, the remuneration may in general be agreed upon to be part of

the capital lost or a fraction of the output. In case of disagreement, the agent will be paid

a wage like a paid employee. In the case of mining for instance, the Maj’uul may be paid

a fraction of the production of the mineral extracted as a remuneration. In the case of debt

recovery, the agent or firm specialized in debt recovery may get a percentage of the debt

recovered as Ju’ul .

Conclusion

In 2008 the world economy faced its most dangerous crisis since the Great Depression of

the 1930s which begun through housing babble. This recession had begun in the United States in

December 2007, which made this already the third longest recession in the U.S. since World War

II.

If world economy follow conventional financing and risk management than this type of


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crisis will be emerge after a certain period of time. Conventional financing and risk management

transfer the risk and this how babble get fatter and get explore. Whereas Islamic finance and risk

management system eradicate the risk.


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Reference

Al-Suwailem, Sami/ Hedging in Islamic Finance, 2006

Hammad, Nazeeh , Salam Contract, Islamic Research and Training Institute, Islamic Development Bank, Jeddah, 1994.

John C. Hull. — 8th ed /Options, futures, and other derivatives

M. Fahim Khan / Islamic Futures And Their Markets With Special Reference To Their Role In Developing Rural Financial Market Research Paper No.32

Muhammad Anas Zarqa / ISTISNA‘ FINANCING OF INFRASTRUCTURE PROJECTS

Nor Fahimah Mohd Razif, Shamsiah Mohamad and Noor Naemah Abdul Rahman / Permissibility of Hedging in Islamic Finance

Umar, Muhammad Abdul Halim , Shari'ah, Economic and Accounting Framework of Bay alSalam in the Context of its Contemporary Application (translated by M. Mehdi), Islamic

Research & Training Institute, Islamic Development Bank, Jeddah, 1992.

Zarqa, Sh. Mostapha Ahmad , Istisna' Contract, Islamic Research & Training Institute, Islamic Development Bank, Jeddah, 1994.

islamic finance & risk management

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