Gharar in futures contracts from Islamic perspective: A case study of USA & Malaysia

Abstract

This paper investigates whether the financial futures contracts are acceptable from Shariah perspective by examining one of the futures prohibition elements that make them unaccepted as Islamic instruments, which is Gharar (volatility of prices) in both developed countries (USA) and in emerging countries (Malaysia). This paper studied if the introduction of futures resulted in increasing the volatility of the market; and if there is a real difference between the stock index and futures’ volatility in both countries, as a sign of Gharar existence. Also, the study compared between the volatility of futures and Shariah indices to examine if their volatility differs or they are the same as Shariah indices were introduced to meet the increasing demand for Islamic investment and to fulfil Shariah rules and regulations. Four volatility measures were used (open to open prices, close to close prices, Parkinson extreme value estimator and Garman Klass Volatility (GKV)). The reported results in both countries indicated that the introduction of futures indices had a meaningful and significant impact on the volatility of stock markets to be higher for the selected period. Also, the daily volatility for both stock and futures markets is significantly different during the study period and the futures volatility was higher. In addition, the daily volatility for both Shariah and futures markets is not significantly different during the study period. Reported results support the opponents of futures, who stated that futures make the markets unstable and destabilize, by increasing risks in the markets through increase prices’ volatility. Thus, futures indices involve excessive risks (Gharar), which void the contracts, encourage speculation activities, and ending with other prohibited element gambling. Also, it supports that the Shariah indices are not different from Futures, only the name changed by an Islamic one.