[ms] Innovation in Applying the Principle of Wa‘dan in Instrument of Islamic Hedging

Abstract

At present, Islamic financial institutions in Malaysia have utilized the concept of wa‘d in Islamic hedging product as in the contract of FX forward. Despite the potential for use wa‘d to be developed in order to fulfill the requirements of hedging, but the use of wa‘d raises issue of injustice because it binds only one side, namely the customer, not to the bank. Due to weakness of wa‘d, then the use of Wa‘dan which binds both parties seem to have the space and potential to meet the shortfal. But, the use of Wa‘dan may cause to appear the issue of legal judgement in Islam because it is seen as similar to the concept of muwa‘adah. As an example, AAOIFI does not allow the exchange foreign money through muwa‘adah contract, because it resembles the contract of sale. When muwa‘adah resembles contract, the interest will happen because the submission of currency has not happened in muwa‘adah as outlined in the principle of al-sarf. If Wa‘dan is also considered equal to muwa‘adah, then its application in forward foreign currency contract can also raise the issue of interest. Based on this issue, the objective of the study is to evaluate the principle of wa‘d that is practiced in one of the hedging instrument, namely the Islamic contract of FX forward. Other than that, this study aims to study Wa‘dan as an alternative of wa‘d in the products of hedging, especially in terms of analyzing differences between Wa‘dan and muwa‘adah together with applicable prospects of Wa‘dan as a basis to produce Islamic hedging mechanism. This research is based on a qualitative study with applying the method of semi structure interview in order to collect data in the field level. The result shows that the concept of Wa‘dan is different to the concept of muwa‘adah in a few aspects. In fact, the concept of Wa‘dan is potential to be developed competitively and innovatively in structuring the Islamic products for hedging FX forward.

keywords: Islamic finance; wa‘d; muwa‘adah; interest; hedging

DOI: http://dx.doi.org/10.17576/islamiyyat-2014-3601-02