Journal of Academic Research for Humanities (JARH) is a double-blind peer-review, Open Free Access, online Multidisciplinary Research Journal
Skip to main navigation menu Skip to main content Skip to site footer

Sharia Ruling on Financial Risk Management in the context of Currency swap

Abstract

Currency swaps are a common financial tool, but because they might involve interest payments and exchange rate changes, there are some doubts regarding whether they adhere to Sharia law. Islamic finance is governed by Sharia law, which forbids engaging in speculative activities and charging or paying interest (riba). This has sparked a discussion among experts over whether currency swaps are permissible in Islamic finance and if they comply with Sharia law. Some academics are wary of using currency swaps in Islamic banking, but others contend that they can be set up in a way that complies with Sharia law. To establish Sharia-compliant alternatives to conventional currency swaps, new products such as Wa'ad-based currency swaps, Salam-based currency swaps, Bai al Sarf-based currency swaps, and Mudaraba-based currency swaps have been created. These goods enable Islamic financial institutions to conduct currency exchange business while upholding Sharia law's fundamental precepts. The creation of these alternative products demonstrates how Islamic banking may be modified to satisfy the demands of the contemporary financial industry while upholding Sharia law's tenets. It is anticipated that the use of Sharia-compliant currency swaps and other financial instruments will become more significant in Islamic finance as the global financial sector continues to develop.

Keywords

risk management, derivative, swap, currency swap, Sharia alternates

PDF

Author Biography

Prof. Dr. Shah Mohyuddin Hashmi

 

 


References

  1. Bank for International Settlements. (2016). Hedging foreign exchange risk. Retrieved from https://www.bis.org/publ/qtrpdf/r_qt1609g.htm
  2. Bao, D., Pan, J., & Wang, J. (2018). The impact of currency swap lines on the market perception of credit risk. Journal of Banking & Finance, 97, 35-52. doi: 10.1016/j.jbankfin.2018.09.011.
  3. "Counterparty Risk and Credit Risk for Swaps" by FINCAD: https://fincad.com/resources/resource-library/counterparty-risk-and-credit-risk-swaps
  4. Chinn, M. D., & Ito, H. (2015). The effectiveness of FX interventions: A review of the literature. Journal of Economic Literature, 53(4), 1074-1117.
  5. El-Gamal, M. A., & Inanoglu, H. (2016). Islamic finance: Law, economics, and practice (2nd ed.). Cambridge University Press.
  6. Eun, C. S., & Resnick, B. G. (2014). International financial management (7th ed.).
  7. Fabozzi, F. J., & Markowitz, H. M. (2002). The theory and practice of investment management (2nd ed.). John Wiley & Sons.
  8. Hasan, Z. (2011). Islamic currency swap as an alternative to conventional currency swap: A juristic and financial analysis. Journal of Islamic Banking and Finance,
  9. Hull, J. C. (2018). Options, futures, and other derivatives (10th ed.). Pearson.
  10. International Swaps and Derivatives Association. (2021). Currency Swaps. Retrieved from https://www.isda.org/a/zl2DE/currency-swaps-factsheet.pdf
  11. Investopedia. (2021). Currency Swap. Retrieved from https://www.investopedia.com/terms/c/currencyswap.asp
  12. Iqbal, Z., & Mirakhor, A. (2012). An introduction to Islamic finance: Theory and practice (2nd ed.). John Wiley & Sons.
  13. Madura, J. (2015). International financial management (12th ed.). Cengage Learning.
  14. Madura, J., & Fox, R. (2018). International Financial Management (13th ed.). Cengage Learning
  15. Mello, A. S., & Parsons, J. E. (2000). Introduction to financial engineering: Van Nostrand Reinhold.
  16. McGraw-Hill. "Understanding Counterparty Risk in Derivatives Trading" by Investopedia: https://www.investopedia.com/terms/c/counterpartyrisk.asp
  17. Hull, J. C. (2018). Options, futures, and other derivatives (10th ed.). Pearson.
  18. Obaidullah, M. (2010). Currency swaps in Islamic finance: A critique. International Journal of Islamic and Middle Eastern Finance and Management, 3(2), 107-120. doi: 10.1108/17538391011058525.
  19. The Balance. (2021). Currency Hedging Strategies for Companies. Retrieved from https://www.thebalance.com/currency-hedging-strategies-for-companies-392800