Until 2007, Malaysia was the largest producer and exporter of palm oil and palm oil products in the world. It still accounts today for 39% of world palm oil production and 44% of world export. Malaysia’s contribution to the palm oil industry is not only in terms of production; its price for crude palm oil futures is referred to as the global price benchmark. In this context, on November 26, 1997, the Shariah Advisory Council of Securities Commission Malaysia (SAC) resolved that the crude palm oil futures contract is in accordance with Shari'ah principles. Being the only country in the world that validates crude palm oil futures trading as Shari'ah compliant, Malaysia prides itself as being a pioneer at the forefront of Islamic capital market development.
Nonetheless, the SAC resolution is a contentious one as it conflicts with the resolutions of the major internationally represented organisations of Shari'ah scholars, namely, the Islamic Fiqh Academy of the Muslim World League (IFA-MWL), the Islamic Fiqh Academy of the Organisation of Islamic Cooperation (IFA-OIC), and the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). While these organisations of Shari'ah scholars have ruled that futures transactions transgress the principles and fundamentals of the Shari'ah, the SAC argues that it is permissible on the basis that it is free from any elements of gharar and gambling (maysir), and that, even if there is gharar, the Malaysian trading regulations have successfully addressed the Shari'ah violations that prompted the prohibitive resolutions of the other fatwa-issuing bodies.
Although the resolutions on commodity futures contracts diverge, they all address the same core issues. This research has discovered that the SAC, IFAMWL, IFA-OIC and AAOIFI deliberated on two main issues: gharar and maysir. These issues are important as they form the basis for the SAC’s acceptance and IFA-MWL’s, IFA-OIC’s and AAOIFI’s rejection of the commodity futures contract. Elements of gharar discussed were with regard to non-exchange or deferment of both counter-values at the time of sale; sale of nonexistent or non-possessed crude palm oil; and sale of an outstanding debt/obligation for a corresponding outstanding debt/obligation. Due to the depth of the gharar analysis undertaken in this paper, the issue of maysir has been deferred to a later research paper.
The focus of this research is the SAC resolution as it reasoned that gharar has been overcome by the measures contained within the crude palm oil futures contract legal framework. An examination has thus been undertaken of the legal framework for crude palm oil futures contracts in Malaysia: the Capital Markets and Services Act 2007, the Capital Markets and Services Regulations 2007, the Rules of Bursa Malaysia Derivatives Berhad, and the Rules of Bursa Malaysia Derivatives Clearing Berhad. The selection of the relevant provisions from this legal framework has been made with regard to their relevance to the abovementioned gharar issues, as identified and discussed in the resolutions of the SAC, IFA-MWL, IFA-OIC and AAOIFI. Besides studying the local legal regime, other regimes of the United Kingdom, the United States of America and some other European countries are also examined. Although this research focuses on the Malaysian crude palm oil futures contract and its legal regime, reference to these external jurisdictions does not impair the research findings. This is because commodity futures contract trading is generally similar globally and because the commodity futures markets in these jurisdictions are more mature and their commodity futures contracts case laws are more extensively reported.
The above research method is adopted as the research aims to ascertain the adequacy of the SAC resolution in term of its correspondence with the actual trading of crude palm oil futures contracts as well as the adequacy of the crude palm oil futures legal framework in eliminating Shari'ah violations in the trading procedure as resolved by the SAC. To achieve this aim, questions critical to the discussion on the issue of adequacy are posed, namely, whether excessive gharar exists in the crude palm oil futures contract, and if it does, whether the trading regulatory framework has disabled the identified features that create excessive gharar.
This research finds that although crude palm oil futures contracts are very heavily regulated, issues of gharar are still found to contaminate the trading of crude palm oil futures contracts. A number of provisions in the crude palm oil futures legal framework are found to be ambiguous, thus injecting elements of uncertainty into the trading process. The cases studied reveal disputes arising from determination of the emergency settlement price by the Exchange as well as default in the delivery of the underlying commodity due to the unavailability of the underlying commodity in the delivery month. Finally, notwithstanding the view of the SAC that gharar in crude palm oil futures contract has been overcome by the crude palm oil futures legal framework, the findings of this research indicate otherwise. Due to the inadequacy of its resolution, the SAC is recommended to revisit and review its resolution on the crude palm oil futures contract.
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