Affiliations: Economics, International Studies
Award: Woodrow Wilson
The Wa’d-Based Total Return Swap: Questions of Shariah Compliancy and Implications on Future Islamic Derivatives Markets
The Wa’d-based Total Return Swap (TRS) is a financial derivative devised by bankers to circumnavigate restrictions imposed by Shariah law. This paper seeks to analyze the multiple stances scholars and bankers have provided to support or negate the legitimacy of TRS. Although proponents argue that the TRS would allow Muslim investors to access new financial markets and diversify their risk, critics vehemently contend that the TRS circumvents the spirit of Islamic law by only explicitly following the letter of the law; that is, the TRS follows Islamic law only in form, but not in substance. By dissecting the arguments on both sides, I argue that not only must the TRS comply with the letter of the law, it must also pay consideration to the ethical implications and the primary motivations of the usage of such products. This paper will then pivot to a broader discussion of what makes Islamic finance “Islamic,” and whether this form of finance will ever be consistent with the usage of derivatives.
Mentor: Dr. Ryan Calder, Department of Sociology