This paper is a continuation of an earlier research paper titled “Gharar in the Crude Palm Oil Futures Contract: A Critical Analysis of the Resolution of the Malaysian Securities Commission Shariah Advisory Council – Part I”. Similar to the aim and method adopted in the earlier research paper, this paper studies the adequacy of the resolution of the Shariah Advisory Council of Securities Commission Malaysia (SAC) that finds crude palm oil futures contract to be in accordance with Shari'ah principles. The SAC resolution is a contentious one as it conflicts with the resolutions of the internationally represented organisations of Shari'ah scholars, namely, the Islamic Fiqh Academy of the Muslim World League (IFA-MWL) and the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).
In its resolution, the SAC argues that the crude palm oil futures contract is permissible as it is free from any elements of gharar and gambling (maysir). The IFA-MWL and AAOIFI, on the other hand, rule that this transaction transgresses the principles and fundamentals of the Shari'ah. The IFA-MWL and AAOIFI contend that commodity futures contracts are tainted with elements of gambling, exploitation and unlawful devouring of the property of others. Study of these resolutions reveals that the discussion of the element of gambling in the commodity futures contract - including the crude palm oil futures contract - involves three mechanisms fundamental to the trading of crude palm oil futures contracts: the futures margin, offsetting transactions and futures speculation.
Therefore, this research analyses the operation of the futures margin system, offsetting transactions and futures speculation. The futures margin system is comprised of five important components: the initial margin, maintenance margin, variation margin, margin call, and marking to market. In this paper, initial margin, marking to market and difference payment as the result of marking to market will be studied in depth. The thrust of this analysis is premised on the notion that Shari'ah scholars are generally not against commodity futures contracts being utilised as a tool of risk management. They do, however, object when they are used as a means of gambling. As gambling is strictly prohibited, so is any form of maysir-tainted business activity.
Premised on this observation, the operation of the futures margin system, offsetting transactions and futures speculation are analysed to address the question of whether the elements which constitute maysir - betting, the element of chance, the gain of one party at the loss of the other party, as well as the engendering of hatred and enmity - are to be found in these mechanisms. In addressing this question, this research examines the legal regime governing the trading of the crude palm oil futures contract. The legal framework examined covers not only Malaysian laws but also those of the United Kingdom and the United States of America. In substantiation of such legal analysis, this research also examines the view of classical and contemporary Shari'ah jurists and scholars.
With regards to the analysis of the initial margin, this research argues that although the initial margin is said to be a security tool for an efficient futures market and to operate as a security against parties’ default when the price of the underlying is unfavourable towards them, the initial margin is also being used as a betting mechanism to wager on the future direction of the crude palm oil futures price. The reason for this contention is that each contractual party knows at the time of the initial margin payment is made he or she may lose or gain depending on the direction of the next day’s settlement price movement. It is at this moment that the two parties place a bet on the direction of the future price. Hence, the resulting gain, in the form of the differential sum received due to marking to market, is submitted to be as a result of mere chance. It is so argued because the determination of who, under the crude palm oil futures contract, will receive the differential amount from, or pay it to, the other party of the contract is beyond the control of the parties. It depends instead on the movement of the following day’s price settlement as it affects the position of each party in the contract.
This research further argued that the transfer of differential payment from one party to the other in the crude palm oil futures contract via marking-to-market or offsetting involves an element of unlawful gain by one party at the expense of another. This is so as the sum received by one of the parties is exactly equivalent to the amount lost by the other contractual party. On the issue of futures speculation, it is contended that its fiqh characterization (takyif fiqhi) is that it is a form of prohibited maysir since it involves (i) buying and selling crude palm oil futures contracts with the sole intention of gaining from the price difference and with no intention of ever possessing and exchanging the real underlying asset, and (ii) one party’s gain can only be realized at the expense of another party’s corresponding loss.
Although the SAC and proponents of the commodity futures market argue that there is a need for it due to its utility as a tool for risk-management and for price discovery, its use as a means of gambling is conspicuous. Although Islam permits tools to manage risk, the permission is rescinded when a tool is used as a means of gambling. As gambling is strictly prohibited, so is any form of maysir-tainted business activity. Finally, this paper finds that the nuances and intricacies of the futures margin system, the offsetting transaction and futures speculation have not been adequately addressed in the SAC resolution. Hence, repeating what was proposed in the earlier research paper, Part I, there is a definite need for the SAC to revisit and review its inadequate resolution on the crude palm oil futures contract.
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