Journal of Islamic Banking and Finance

A Critical Evaluation of the Regulatory Framework for the Application of Islamic Financial Derivatives in the Kingdom of Saudi Arabia
Ali Alshamrani

Abstract
The first financial derivatives emerged in Chicago in the early 1970s in response to increasing interest rates, exchange rates and volatile prices. In the three decades before the credit crunch of 2008 and global financial crisis, financial derivatives contracts grew rapidly to constitute a major component of the U.S. financial system. However, despite their demonstrable importance for financial sector development, derivatives are few and far between in countries where capital market transactions are governed by Shariah law such as Saudi Arabia. The aim of this article is to give a comprehensive and critical review of Islamic derivatives as an alternative to conventional derivatives in Saudi Arabia, and examine whether the current uses of accepted risk transfer mechanisms in Islamic structured finance are compatible with the principles of Islamic law. The article is divided into a number of sections. The first section gives background material on financial derivatives contracts and their legality from an Islamic point of view. The next section offers a critical and comparative analysis of the principles and practices of financial derivatives. The third section gives a critical analysis of how Islamic financial derivatives work in Saudi Arabia.

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