SS 20 · Trade

SS 20: Sale of Commodities in Organised Markets

What this standard is about

This standard looks at how commodities are bought and sold on organized markets, such as international commodity exchanges. It covers international sales contracts between parties in different countries, whether the goods are traded for immediate delivery or deferred delivery, and whether the contracts are plain sales or derivatives: futures, options, indexes, and swaps. It then gives the Shariah view on each of these.

The main rulings concern the derivative contracts common on organized markets. Futures contracts — agreements to buy or sell a set quantity of a commodity at a set future date and price — are not permitted, either in their formation or in their trading. Options contracts, which sell the right (without the obligation) to buy or sell at a set price within a set period, are also not permitted. The stated reason is that the subject matter of an option is not wealth that Shariah recognizes as suitable for payment.

The standard does allow a substitute for options: the buyer of ascertained goods may pay earnest money (Urbun) and keep the right to cancel the deal within a set period, with the seller keeping the earnest money if the buyer cancels. But the right itself may not be traded.

Why it exists

Organized exchanges are built around contracts that often never involve actual delivery. Traders pass contracts from hand to hand and settle only price differences. Islamic law requires real ownership, actual delivery, and the absence of excessive uncertainty. The standard sorts which exchange transactions meet these requirements and which do not.

The key rules, simply put

Futures contracts are not permitted, either to create them or to trade them.
Options contracts are not permitted, either to create them or to trade them.
The reason given is that an option's subject matter is not wealth suitable for compensation in Shariah.
For ascertained goods, a buyer may pay earnest money (Urbun) with the right to cancel within a set period; the seller keeps the earnest money on cancellation.
The right established by earnest money may not itself be traded.
Swaps and index-linked derivatives fall under the same prohibitions as other derivatives.
Genuine sales of real commodities, with actual ownership and delivery, remain permissible.

An everyday example

A grain trader on a commodity exchange agrees to buy 1,000 tonnes of wheat for delivery in three months, but plans only to sell the contract on before the delivery date and settle the price difference. Under this standard, that futures-style contract is not permitted. If instead the trader buys real wheat that is delivered to a warehouse in its name, that genuine sale is fine.

Words to know

Futures contract — an agreement to buy or sell a set quantity at a set future date and price
Options contract — a contract selling the right, without the obligation, to buy or sell at a set price
Urbun — earnest money paid with a sale, kept by the seller if the buyer cancels
Derivatives — contracts whose value depends on an underlying asset or price, such as futures, options, and swaps
Gharar (excessive uncertainty) — major unknown elements in a contract, which Islam restricts

Source

AAOIFI Shariah Standard No. 20 — https://islamicmarkets.com/publications/sale-of-commodities-in-organized-markets-scope-of-standard