Overview of Futures Contracts
A futures contract is an agreement or contract between a buyer and a seller that allows them to agree to buy or sell an asset or commodity on a predetermined date and price. The market price of the goods or assets may be higher or lower on the promised date compared to the time of the contract. Despite price changes, the contract or agreement must still be fulfilled.
Shariah Perspective
The majority of scholars believe that futures contracts have issues and potential violations of Shariah principles. There are several factors that can be highlighted as problematic from a Shariah perspective:
- Trading goods or assets that do not yet exist, which may involve elements of gharar (uncertainty).
- The occurrence of trading debts, which is a form of riba (usury) prohibited in Islam.
- Futures contracts can also be done with leverage, which can involve riba if the broker imposes additional charges on the loan provided.
- These contracts are usually settled in cash only, meaning that the underlying asset or commodity being traded in the contract is not desired or the main purpose of the contract between the two parties. It is only used as a determinant of price fluctuations. Both rising and falling prices result in one party losing and the other party gaining, which resembles gambling.
Therefore, it is clear that futures contracts offered on stock or crypto platforms have three elements that are strongly discouraged in Islam, namely involvement in riba, gharar, and maysir (gambling).
In contrast, in Malaysia, the Shariah Advisory Council (SAC) of the Securities Commission Malaysia has approved Shariah-compliant futures contracts such as futures contracts on crude palm oil (FCPO) and stock index futures contracts (as long as the underlying assets are Shariah-compliant). The SAC has discussed the potential Shariah issues that may arise in futures contracts:
- Maysir (gambling): The SAC believes that the requirement for investors to place a deposit as margin payment before starting trading does not contain any elements of gambling. This is because the fluctuation in the value of commodities, such as crude palm oil, is influenced by demand in the futures market and not solely dependent on luck. Thus, it is not considered gambling.
- Gharar (uncertainty): In FCPO contracts, the quantity, type, price, and delivery date to the investor are specified, eliminating elements of uncertainty.
- Speculation: The SAC believes that speculation is a normal occurrence in all forms of business and is not unique to futures contracts.
Although the SAC holds this view, it is not free from criticism from academic scholars. The criticism arises when this issue is viewed from the perspective of the maqasid al-Shariah (objectives of Islamic law) and not solely based on the contracts themselves. They(1) argue that futures contracts are a contract that is merely permissive (hajiyyah) and should not be considered a necessary matter (daruriyyah) because without FCPO, no harm would befall society. One of the issues they state in FCPO is that it deviates from the true purpose of contracts in Islam, which is ownership. In reality, the actual physical delivery of FCPO is minimal, contradicting the true purpose of a contract intended to receive the asset or commodity.
Conclusion
Although the above discussion is a general discussion regarding futures contracts, futures contracts in cryptocurrencies also do not escape the mentioned prohibited elements. There may be riba involved if there are fees on debt, and there may also be maysir (gambling) if the contract is settled in cash only and the underlying asset merely serves as a means to determine the price. Therefore, we advise investors out there to be cautious with futures contracts.
(1) Nadhirah Nordin, ,. M. (2017). Commodity Futures: A Maqasid Al-Shariah Based Analysis. Retrieved from https://hrmars.com/papers_submitted/3265/Commodity_Futures_A_Maqasid_Al-Shariah_Based_Analysis.pdf