by M. Omar Baig
Islamic Finance
Principles and
Applications
of Islamic Finance
Principle #1: There must be an actual
asset/commodity or service in each
side of an exchange.
Scenario: Ahmad has $ 5000.00 he
wants to invest. He decides to use
the entire amount to buy Tesla stock
(NASDAQ: TSLA) which is currently
trading at $700.00 per stock. However,
Ahmad has a strong feeling the
stock price will spike in the coming
month. Since he does not have the
money to invest now, he buys call
options worth a hundred dollars to
lock in the price at $700.00 for 30
days. Buying the options would give
him flexibility to buy more shares at
a discounted price if the actual stock
price does go up. In case it does not
go higher as expected, Ahmad can
choose not to use the options, let
them expire and only lose a hundred
dollars.
Ruling: Impermissible
Explanation: An important component
of Islamic Finance is ensuring
each side of an exchange receives an
actual asset or service. Any exchange
in which one party does not or may
not receive an asset or service would
not be permissible. The reason for
this is that such an exchange is no
longer a “trade” and would rather
become a form of gambling.
In the aforementioned scenario,
Ahmad is paying a hundred dollars
for the option to buy shares in the
future at a predetermined price today.
Locking in a price for a potential sale
(which may not even materialize)
is not an asset nor an actual service
being performed. Thus, this would be
considered a form of gambling which
would be prohibited in Islam.
Proof: Allah says in the Qur’an, “O
you who believe! Indeed wine, gambling,
altars, and divining arrows are
filth made up by the devil. Therefore,
avoid (these things) so that you may
be successful” (5: 90).
Practical applications: Options trading
would not be permissible based
on the above principle. This would be
applicable to binary options as well
as vanilla put/call options. Likewise,
dealing in CFDs, swaps and derivatives
would not be permissible in
accordance with the principle since
there is no actual asset being traded.
The jurisprudence and permissibility/
impermissibility of cryptocurrencies
is also strongly linked with this principle
as a major discussion regarding
cryptocurrencies is discerning what
is actually being traded. The contemporary
jurists who allow the trading
of cryptocurrencies recognize it as a
legitimate asset/commodity whereas
the contemporary jurists who prohibit
it do not recognize it as such.
Principle #2: It is permissible to
exchange any product which has
potential halal usage.
Scenario: ‘Ayesha owns a clothing
store where she sells all different
types of clothing. Her inventory in
women’s clothing ranges from loose
dresses to tight and revealing clothing
(which are normally impermissible to
wear). She also sells a variety of men’s
clothing including shorts which would
definitely expose the ‘awra when
worn. She is now concerned whether
her earnings are halal.
Ruling: Permissible
Explanation: In the aforementioned
scenario, all of the products being
sold have potential halal usage. Even
tight and revealing clothing can be
worn in front of one’s spouse and in
private settings. It is not the responsibility
of the seller to ensure the
product will be used in a halal manner.
However, items which have no
purposeful halal usage and can only
be used for haram such as musical
instruments would be impermissible
to sell.
Similarly, products in which there
is a legitimate difference of opinion
regarding their permissibility would
be permissible to sell since there is
potential halal usage for those who
deem it halal. Although it is always
best to refrain from selling products
in which there is a difference of opin-
22 November – December 2021 | AL-MADINAH