Dubai: Islamic derivatives are still struggling to gain traction in the Gulf, six months after the launch of a much-touted over-the-counter contract aimed at creating a standard legal framework for hedging products.
Experts said the contract, known as the Tahawwut Master Agreement, in theory provides Islamic institutions with a simpler template for risk management that has been approved by Sharia .
But the contract has been slow to catch on among Islamic institutions in the region as many are put off by the dense language of the document and still question the Sharia compliance of hedging products, which are often associated with speculation.
"Some of the provisions are difficult to understand for lay people because the document itself is very technical and difficult to navigate for those that aren't as familiar with derivatives," said Muneer Khan, partner for Islamic finance at law firm Simmons & Simmons.
The concept of tahawwut in Islam means to manage risk. But in the financial industry, hedging can either imply managing risk or can be used as a form of gambling and speculation, which is forbidden in Islam.
Shaikh Muddassir Seddiqi, an Islamic scholar and partner at Denton, Wilde Sapte, said hedging risk was especially important within the growing $1 (Dh 3.67) trillion Islamic finance industry to keep institutions competitive with their conventional counterparts.
But since the tahawwut agreement provides a template, rather than a standardised hedging product, there is concern that different products may vary in compliance based on additional documentation. And some institutions that are not as familiar with the derivatives industry are reluctant to take the risk.
"The international banks have already had their own bespoke derivatives contracts in place for some time, making it easy to adapt to the tahawwut agreement," said one Bahrain-based Islamic banker who asked to remain anonymous.
