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Shariah-Compliant Short-Selling: Mechanism 1

Short Sale via Wa'ad.
General description: Short seller sells security to exchange. Exchange promises to repurchase security. Exchange faces short-term long buyer who buys security from exchange and promises to resell to exchange at a later date.

Like a conventional (covered) short, the security which is shorted is identified by the short-seller (identified as "supplier" below). The long, ("user" below) is long a conventional security with one catch--he must sell (at market price) at some point in the future. The fact that this his purchase has a condition means he must be compensated for it, much as in the conventional framework.

Is this two transactions in one? Can we actually sell with a condition that we can repurchase the same back again? Wouldn't there be shariah-specific objections to this? Or is it a viable approach? The Shariah scholars at the SC and BNM believe so (see link). Note the necessity of the intermediary to make this work. (This would be VERY good in western finance--to track the shorts). What do you think?

SC's Islamic Capital Markets Quarterly Nov 2008, pp 2-4


  1. A wa'ad, or unilateral promise without consideration (i.e., not a contract in either Islamic Law or Common Law) is used in many other contexts as long as not to hide rib'a.

    Wa'ad is used in financing murabaha, in ijara wa iqtina and increasingly on its own.

    Sale with promise to buy back at a higher fixed price is a ribawi transaction and definitely not allowed.

    In the context of the short sale, however, the promise to buy back is at the prevailing market price and cannot be considered riba as a conseuquence.

  2. Hi,
    - if the promise is to purchase a good/service at a future date at prevailing market price would subject transaction to market risk? - how about if the transaction is carried out similar to the existing commodity murabaha?
    - How can the promise be valid at the time of sale that exactly the same security will be bought back with a promise, isn't it buy back or bai al innah?
    - If one party goes back on its promise, the same can still ask the other to fulfill its promise, since the two promises are independent?

  3. The two promises are definitely independent (and there is a clearing house intermediary whose purpose is to ensure enforcement). The issue of gharar is never eliminated from a contract but in the view of the SC, it is lessened because the shares which are meant to be repurchase have been explicitly identified.

    About the issue of uncertainty in paying the future market price, this will also be true of salaam, where you sell items which you do not own (or istisna'a, items which do not exist). If you are a farmer who has a date crop on the trees, you cannot sell it, but you can enter into a salaam for ripe dates. You may or may not be able to find the supply from your own dates (perhaps your crop fails that year) and you will have to do so at the prevailing market price.

    The gharar in this same contract is no different.

    Please feel free to disagree.

  4. Is the sale/purchase price determined on the current date???, if not, is it possible to fix future price in waad???
    future contracts allowed in Sharia are for very specific purposes i.e. Salam for agriculture produce or oil extraction, Istisna'a for construction/manufacture, and (forward) Ijarah limited for forward contracts!!! and so is little out of context!

  5. I quote from Ayub, Understanding Islamic Finance, p 115:
    The Islamic Fiqh Academy of the OIC has made the promise in commercial dealings binding with the following conditions:
    1. The promise should be unilateral or one-sided.
    2. The promisor must have caused the promisee to incur some liabilities or expenses.
    3. If the promise is to purchase something, the actual sale must take place at the appointed time by the exchange of offer and acceptance. Mere promise itself should not be taken as the actual sale.
    4. If the promisor backs out of his promise, the court may force him either to purchase the commodity or pay actual damages to the seller. The actual damages will include actual monetary loss suffered by him, but will not include the opportunity cost.

    This is very similar to English Equity concept of Promissory Estopppel, in which a cost must be incurred for the promise to be enforceable (so if your employer says you will get a raise in one year and you go out and spend it beforehand, he is bound by law).

    I can promise to buy at the prevailing market rate. I can promise to sell at the prevailing market rate. I can promise to buy at a fixed cost (set today) and I can promise to sell at a fixed cost. All of these are valid promises (and we will visit several of these in structures in the future).

    This is not the same as a future/forward, since it is unilateral, binding only on one party. If a promise could be paid for (and 99.9% of all scholars would disapprove of paying for a promise--it is not a contract and there is no consideration given), then this would be more like an option rather than a forward.

    It is binding so long as the promisee incurs a cost. This is easy, since once you promise me something I can always hedge it, claim it is a hedge, etc, and my depenence on this hedge would mean I could incur a cost having to rehedge.

    Again, it is similar to an option but it cannot have a price.

  6. One of the best short resources I've seen on Gharar/Maysir/Qimar is courtesy Khalil Jarar:


    Good refresher. Cursorily it seems the Malaysian structure is meant to avoid Gharar associated with non-delivery.

  7. Please refer to the following for a discussion of the fiqh issues related to this structure

    Fiqh Issues in Short Selling as Implemented in the Islamic Capital Market in Malaysia by Asyraf Wajdi Dusuki And Abdelazeem Abozaid
    JKAU: Islamic Econ., Vol. 21 No. 2 (2008), pp65-82