Issues in Islamic Derivatives and Proposals for Reforms in the OTC Market in Indonesia

Abstract

This paper aims to propose reforms to develop the Islamic derivatives transactions in Indonesia’s over-the-counter (OTC) market. It is argued that the use of derivatives instruments is considered non-sharia compliant by the National Sharia Board (NSB) of the Indonesian Council of Ulama. However, other Ulamas had adopted a different approach in discussing the issues of derivatives contracts. Standard doctrinal and comparative approaches are employed in this discursive qualitative analysis using an extensive review of the literature from primary and secondary sources to collect the data on Islamic derivatives in the OTC market. This research concludes with two proposals for Islamic derivatives in the OTC market in Indonesia; first, the use of musawamah (sale without revealing the cost) in the swap, al-khiyar (the right to make choice) in option, ju’alah (commission) in future contracts, and wa’ad (a promise) in option can further boost the investors in the OTC market. Second, the Islamic scholars should be softening towards the decision of using derivatives instruments in Indonesia. Such as in the case of the forward agreements, which should be exempted from non-sharia compliance, provided they are used solely for reducing risk due to necessity in al-tahawuth lil hajah al-massah (sharia-compliant genuine hedging needs).