19 Indiana Journal of Global Legal Studies 533 (2012)
Forward contracts allow buyers and sellers of goods to reduce risk by contracting for sale at a predetermined price and quantity prior to the actual exchange of goods and payment. While forward contracts are extensively used in the Western world without restriction, those who adhere to Islamic law are often constrained by principles intended to reduce risk, gambling, and usury. These principles can prove overly restrictive; however, Islamic law restrictions also illuminate the problems associated with the overly permissive Western system in which speculators contract in a manner tantamount to gambling-a problem associated with the recent financial crisis. This Note discusses forward contracts representing risk-hedging and pure speculation and then addresses the principles of Islamic law that affect these financial instruments. The Note next explains the forward contracts that are permissible under Islamic law and poses two questions: (1) How important are the motives of the parties involved in the contract? (2) Is there something that the requirements of Islamic law can teach those who do not subscribe to the religion? These questions are answered and conclusions are drawn concerning the permissibility of hedger-hedger forward contracts under Islamic law and whether Islamic law is overly restrictive in its treatment of these, concluding that no reasonable interpretation of Islamic law could deem a purely speculative forward contract as permissible.
Dau-Schmidt, Nicholas C.
"Forward Contracts - Prohibitions on Risk and Speculation Under Islamic Law,"
Indiana Journal of Global Legal Studies:
2, Article 8.
Available at: http://www.repository.law.indiana.edu/ijgls/vol19/iss2/8