Publication:
The innovation of Islamic hedging tools for Indonesia Islamic finance institutions
Abstract
Hedging instruments assist various parties in mitigating currency risk exposure in Indonesia since Rupiah is deemed as a volatile currency compared to others. Only three types of Islamic hedging instruments are allowed in the recently released fatwa 96/DSN-MUI/IV/2015 by the National Sharia Board of Indonesian Ulema Council (DSN MUI). However, the Islamic hedging market is still at the initial stage where only simple hedging is implemented while hedging through the commodity market is still inapplicable. The study investigates whether Islamic banks and their customers that require risk management instruments is covered under the new legislation on Islamic hedging. It is difficult to diversify financial and market risk, as there are limited development and regulation on Sharia-compliant hedging instruments in Indonesia. This study aims to find out the reason for the sluggish development of Islamic hedging in Indonesia and suggest solutions that apply to the Indonesian regulatory framework to enhance the depth of the Islamic financial market, and further suggests amendments to regulation in the case of excessive restriction or inadequate coverage. This study finds that the current simple hedging faces problems such as default and counterparty risk. Meanwhile, interbank hedging from Islamic to conventional bank is limited because the conventional one perceived wa'ad as a basis of transaction is not binding. This paper also finds that hedging through commodity market has never been used due to its higher cost and complexity. Based on the findings, we propose some solutions as follows; First, to have a solid coordination among responsible institutions to harmonize wa'ad perception among related parties. Second, to maximize hedging through the commodity market by releasing its practical regulation while limiting its practice aimed for critical transactions. Third, to consider hamish jiddiyah as basis of Islamic option hedging, and last, to innovate Islamic hedging through ICCS, IPRS and Islamic option.
Keywords
Islamic derivative , Islamic hedging , Tahawwut , Wa’ad , Hamish jiddiyyah , ICCS , IPRS , Islamic option , Project paper (MSc)
Citation
Ashfahany, A. E. (2020). The innovation of Islamic hedging tools for Indonesia Islamic finance institutions (Master dissertation). INCEIF, Kuala Lumpur. Retrieved from https://ikr.inceif.org/handle/INCEIF/3975
Publisher
INCEIF
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