درباره بهینگی پارتو قراردادهای آتی در طول قراردادهای اسلامی رو به جلو : مفاهیمی برای اقتصادهای در حال ظهور مسلمانان

A general equilibrium approach is used to demonstrate that: (i) futures contracting (on Islamically permissible commodities) is pareto-optimal over the Islamic forward contract of Bai’ Salam; and (ii) both forms of contracting constitute a quasi-equity claim instead of debt (dayn) as construed by the majority of Islamic jurists. These results are of import as they: (i) remove a major hurdle against futures contracting by the Islamic jurists thereby enabling the renovation of the financial intermediation system of emerging Muslim economies; and (ii) demonstrate that the arbitrage principle needs to be re-examined under non-linear asset pricing.

This paper examines how emerging Muslim countries can benefit from developing their financial markets by incorporating futures contracts. The rationale behind this stems from Demetriades et al. (2000), who propagate the view that a good financial intermediation system can contribute significantly to the growth of a nation. We investigate the pareto-optimality of a “synthetic” futures contract over Islamic forward contract known as Bai’ Salam.1 The synthetic futures contract is a package that is financially engineered by combining futures contract on Islamically permissible commodities and Islamic cost-plus sale contract (Bai’ Murabahah). We demonstrate that such a financially engineered package meets all the requirements of Islamic jurisprudence and dominates Islamic forward contract on efficiency and welfare issues. This result is contrary to the intuition that under competitive markets, arbitrage-free first-order conditions lead to pareto-neutrality of both contracts. Islam, an Abrahamic religion, endorses free markets, discourages price controls and forbids financial contracts based on riba, gharar and maysir as explicated below (Islahi, 1988): (i) Riba literally means an increase, addition, expansion, or growth, or the “premium” that must be paid by the borrower to the lender with the principal as a condition for the loan or for an extension of its maturity. However, riba has some very broad connotations, as expounded by the well-known Islamic jurist Ibn Qayyim Al-Jawziyya (1973) to imply: (a) unfairly trading in any form, manipulating the market or engaging a market participant to trade under duress (riba-al-fadl); and (b) interest-based debt contracts (riba-an-nasi’ah) ( Fazlur-Rahman, 1969 and Saeed, 1996). Ibn Qayyim rationalizes the prohibition of interest transactions in an era where the bulk of society lived in bare subsistence and were prone to exploitation by lenders. Nonetheless, the majority of contemporary Islamic scholars (termed as the Neo-Revivalists by Saeed) still rationalize its prohibition in Islam based on the social impact of bankruptcies and loan defaults emanating from excessive debt obligations. 2 and 3 (ii) Gharar in a financial contract entails deception. (iii) Maysir: Promoting gharar pre-empts maysir, which is gambling (qimar) ( Ibn Taymiya, 1951 and Ibn Taymiya, n.d.).4 Since exchanging money for more money (or monetary equivalents) at a fixed pre-determined rate is considered ribawi (interest bearing) in Islam, financial instruments such as the debt (Bai’ Murabahah) or equity (Musharakah) facilities are carefully structured so that the exchange involves goods for money (or partnership shares for money) over time.5 Furthermore, the financier should also be subject to the risk of investment, in accordance with the Prophetic tradition (hadith) that entitlement of return from an asset vests on one bearing risk of it (al-kharaj bi al-daman) (Saeed). The purpose of financing is to facilitate trade or business and not to avoid the religious injunction. The recent trend towards Islamic banking reinforces the above religious norms. However, in many Muslim countries financial intermediation is in the rudimentary stage of a banking system in need of augmentation from capital markets and especially futures markets, as their economies are predominately natural resource oriented.6 Mainstream financial economists recognize the fact that futures trading reallocates risk, reduces price volatility, offers liquidity, leads to price discovery, and enhances social welfare (Francis, 2000 and Goss, 2000). However, futures trading has been plagued by many misapprehensions by contemporary Islamic scholars. These scholars proscribe futures trading based on religious injunctions on: (i) gambling (qimar) as it is deemed to be a speculative activity; (ii) short-sales of goods/assets not owned or possessed by seller; (iii) the delay of both goods/assets and price in a transaction; and (iv) offsetting of one futures position with another as it is deemed to be the sale of one form of debt against another (Bai’ al dayn bi al dayn). Furthermore, these contemporary scholars are in favor of an Islamic forward contract called Bai’ Salam that was prevalent in the medieval period (Udovitch, 1975).7 This instrument differs from the conventional futures contract in that full cash payment must be made at the initiation of the contract and that the underlying generic asset be normally available and traded in the markets at the maturity of the contract ( Bacha, 1999 and Zaman, 1991). Despite the constraints imposed by full cash payment in Bai’ Salam at the origination of the contract, contemporary Islamic economists consider it to be a panacea for problems plaguing the contemporary Muslim countries, ranging from financing agricultural ventures to deficit financing by their governments ( Khan, 1997 and El-Gari, 1997). In a path-breaking paper, Kamali (1996) refutes the allegations against conventional futures trading since: (i) it serves an economic purpose of reducing systematic price risk and should not be deemed as gambling (qimar) prohibited in the Qur’an; (ii) the short-sales restricted in the tradition (Sunnah) of Prophet Muhammad are on unique goods/assets and not on generic (fungible) goods/assets; (iii) possession (qabd) of goods/assets prior to sale is not a prerequisite for avoiding deception (gharar) as delivery is guaranteed by the futures clearing house; and (iv) the jurists proscription of delaying both goods/assets and price in a sale and the offsetting of futures position with another have no support in the Qur’an or the authentic traditions (hadith) of Prophet Muhammad. Kamali (1996) thus concludes that futures trading is Islamically permissible (ibahah) as long as it excludes contracts on non-permissible commodities and those deriving their substance from interest (ribawi) elements such as interest rate futures.8 The primary purpose of this paper is to demonstrate that a “synthetic” futures contract is pareto-optimal over the Bai’ Salam contract, which is a forward contract on an Islamically permissible commodity with full (100 percent) margin deposit.9 Intuitively speaking, Bai’ Salam can be conceptualized as a linear combination of a conventional futures contract (with nominal margin deposit) along with a debt facility compatible in Islam (Bai’ Murabahah). Payoff from a long (short) Bai’ Salam can be replicated by buying (selling) a futures contract on an Islamically permissible commodity and investing (going short) in an Islamic debt instrument (Bai’ Murabahah). The debt instrument will be for an amount equal to the revenue gained from the futures transaction net of margin deposit and can be construed as a cash payment in exchange for future delivery of the underlying commodity. This replication results in a synthetically created futures contract by combing an Islamic forward contract and an Islamic debt instrument.10 In competitive markets, arbitrage-free first-order conditions require that both contractual packages be equally efficient. However, our unique result of pareto-efficiency of “synthetic” futures package over that of the Islamic forward contract is attributed to the fact that unconstrained optimization (of a linear sum of securities) is better than a constrained optimization (of a single equivalent security). This result is of import to mainstream economists who use the principle of arbitrage to price equivalent sets of securities (especially derivative securities) using linear valuation schemes as espoused in Varian (1987). However, this equivalence does not hold when the components comprising the financial packages themselves are non-linear. This issue needs to be re-examined as it impacts social welfare. A secondary goal of this paper is to illustrate from our intermediate results that pre-selling the underlying asset in an Islamic forward or futures contract constitutes selling equity in the production process. Although this creates an obligation for the seller to deliver the commodity in the grade and quantity negotiated and resembles a liability, it does not constitute a debt on the part of the seller as construed by Islamic jurists. This issue is important as one of the points raised by contemporary Islamic scholars against the offsetting transaction in futures contract (to close out the position) stems from the jurists’ injunction of sale of debt by debt (Bai’ al dayn bi al dayn). It is also regarded as a major impediment to the development of futures market in Muslim countries as cited by Vogel and Hayes (1998). If futures contracts do not constitute such an exchange of debt for debt, then there is no problem in trading them. Thus, our results augment those of Kamali, 1996 and Kamali, 2002. Even though the above result, identifying Islamic forwards and futures as quasi-equity instruments, is contrary to the prevailing view of the majority of contemporary Islamic scholars, it is still permissible according to the Islamic law (Shari’ah). This is because the Qur’an advises Muslims to revert to it and the practice of the Prophet (Sunnah) in case of differences with those in authority (implying religious or political authority) over them.11 Furthermore, Prophet Muhammad explicitly demarcated the authority of religious scholars to that of spiritual matters and not on issues of technical nature (implying various scientific fields that can be interpreted as including modern financial economics). 12 and 13 Our results therefore provide the impetus to the emerging Muslim countries to establish futures markets and benefit from the effects of financial depth. Currently, there are few countries that do so with contracts limited to few products. These are Indonesia (coffee and crude palm oil), Kazakhstan (wheat), Malaysia (crude palm oil, stock index and government debt) and Turkey (currency) (Bacha, 2002, Kamali, 2002 and Peck, 2000).14 In contrast, there is a limited amount of over the counter trading in many Muslim countries using Bai’ Salam. The information on this is not publicly available except for the case of Iran, where it has constituted 5–5.9 percent of all financing by Islamic banks during the period 1995–1998 (Yasseri, 2000). In the context of modern asset pricing theory, futures contracts are priced using the concept of: (a) systematic risk as in Capital Asset Pricing Model (CAPM)/Consumption Capital Asset Pricing Model (CCAPM) (Kolb, 1996 and Breeden, 1980); (b) Hedging-Pressure Explanation (Hirshleifer, 1988); or (c) General Equilibrium Theory (Francis, 2000). We prefer to use the general equilibrium approach as the CAPM or the Hedging-Pressure theories would fail to distinguish the efficiencies of the alternative financing packages considered herein under an evenly distributed demand function. Furthermore, our approach has a strong following in the academic and policy communities.15 Our model incorporates the quantity (yield) risk in conjunction with the price risk consistent with the views of Hirshleifer (1975). We evaluate the welfare of agents (hedgers) in the economy in the Salam sale contract after pricing it optimally and contrast it with a “synthetic” futures contract.16 This estimation is performed using both theoretical assertions as well as with a numerical example emulating Mehra and Prescott (1985) and Kocherlakota (1996) who have advocated its use in asset pricing. The paper is organized as follows: the modeling of Bai’ Salam, synthetic futures and their respective solutions are explicated in Sections 2, 2.1, 2.2, 3, 3.1, 3.2 and 4 and then further elaborated with a numerical example in Section 5. Finally, Section 6 provides some concluding remarks.

This study investigates the efficiency of conventional futures over that of the classical Bai’ Salam contract. Despite the subtle difference in the timing of the payment of the two contracts, we find the futures contract to be pareto-optimal. This is due to the fact that the futures contract is more flexible under agent heterogeneity in the form of level endowments (wealth) and risk aversion. This result has implications for mainstream economists as it implies that the concept of arbitrage needs to be re-examined under non-linear asset pricing. Furthermore, our result, identifying futures as a quasi-equity claim, eliminates a major hurdle against their implementation: their classification as debt (dayn) by the majority of the contemporary Islamic scholars. Our results are consistent with the framework of the Islamic law (Shari’ah) as elaborated earlier. Since the objective (maqsad) of the Islamic law (Shari’ah) (as advocated by Ibn Qayyim Al-Jawziyya) is the welfare of the people in this world as well as in the hereafter, we conclude that the welfare of the emerging Muslim economies would be reinforced by substituting modern futures on Islamically allowed commodities for Bai’ Salam. Currently four Muslim countries (Indonesia, Kazakhstan, Malaysia and Turkey) have initiated the same in a limited way ( Bacha, 2002, Kamali, 2002 and Peck, 2000). The remaining Muslim countries need to follow their trend to benefit from the effects of financial deepening. The welfare gains anticipated by modernizing the financial intermediation of emerging Muslim countries would lead to their economic expansion. Our results also have major implication for global banking industry in general and Islamic banking in particular. In the last two decades, Islamic banks have grown in size and number around the world. Even conventional commercial banks from developed countries have started to offer Islamic banking services. Islamic banking and its expansion worldwide depend on the ability of the industry to develop and offer a wide range of more creative and competitive products. The introduction of a financially engineered package consisting of conventional futures contracts on Islamically permissible commodities and an Islamic credit facility discussed in this paper will allow the industry to move in the right direction.