Clearinghouses as Modern Tools to Ensure Compatibility of Derivatives with Islamic Financial Principles

Erkam Hasim Bulut

 

Abstract: According to the commonly held view among Islamic law scholars, derivative contracts do not comply with certain Islamic law principles. These principles have their roots in Islamic law resources and carry binding significance when assessing the compatibility of modern financial instruments with Islamic law. However, the modern understanding of law and the legal techniques and tools employed in contemporary financial systems significantly differ from the circumstances in which these principles were originally formulated. Moreover, many of these modern legal tools such as clearinghouses, which are the topic of this article, have the potential to eliminate the causes (illa) that were valid at the time Islamic law principles were established. Presently, one of the most vital modern legal devices is the utilisation of clearinghouses in derivatives clearing. In this article, I argue that the functions of clearinghouses may eradicate the underlying reasons for certain prohibitions imposed by Islamic law concerning derivatives. While putting forward this argument, I also evaluate the uncertainty surrounding Islamic financial principles and delve into the perplexity experienced by Islamic law scholars regarding interest-rate swap contracts and modern financial tools.