Derivatives are few and far between in countries where the compatibility of financial transactions with Islamic law requires the development of shari'ah-compliant structures. Islamic finance is governed by the shari'ah, which bans speculation and gambling, and stipulates that income must be derived as profits from the shared generation of goods and services between counterparties rather than interest or a guaranteed return. The paper explains the fundamental legal principles underpinning Islamic finance with a view towards developing a cohesive theory of derivatives subject to shari'ahprinciples. After critically reviewing accepted contracts and the scholastic debate surrounding existing financial innovation in this area, the paper offers an axiomatic perspective on a principle-based permissibility of derivatives under Islamic law.

Financial Engineering in Islamic Finance the Way Forward: A Case for Islamic Derivatives has been envisioned as a sequel to Contracts and Deals in Islamic Finance: A User's Guide to Cash Flows, Balance Sheets, and Capital Structures. Product development in Islamic finance bas been based upon the usage of various sale and lease contracts and combinations of the same. In our current work, we explore the idea even further and look at structures based on the concept of wa'd. Islamic banks need to develop structures that behave like options and futures, and the shariah community needs to look closely at issues related to forward sales. In this book, we have explored these avenues, made recommendations, and have hopefully encouraged some dialogue in this area.

Islamic swaps are one of the largest and fastest growing Islamic derivative markets. This financial instrument is one of the most important classes of Islamic derivative instruments which are practiced in the Islamic capital market in Malaysia. This financial instrument is very useful, not only for risk management, but also for reducing the cost of finance, for smoothing seasonal cash flows, for arbitraging the yield curve, for creating synthetic instruments, for entering new markets and also for exploiting economies of scale. The usage of Islamic swaps are under Shari'ah alternative approach, based on taflawwut (Hedging) tools, which are competitively priced to provide Islamic hedging solution to customers and clients who would like to look in their future movements in profit rates, currency rates, and also rental rates. The Islamic swaps applied are based on the concept ofwa'ad (unilateral binding promise) contract, commodity murtibaJ:rah, commodity mustiwamah, tawarruq and also Muqaseah, which is allowed under Islamic law. It is also classified as compliant with applicable Shari'ah rules and principles, as long as it is free from prohibited elements in Islamic finance. This study emphasizes the impmiance of Shari' ah compliance in Islamic Derivatives transactions, especially in Islamic swaps instrument, which is provided to reduce the potential Shari'ah 'arbitrage', as well as to make it easier for Islamic bankers and investors to understand the existing Islamic financial market. Finally, the study emphasizes the importance to make it clear that Islamic swaps transaction should not be utilized for speculation purposes. Therefore, the researcher strongly recommends introducing a genuine hedging mechanism for risk management to plan better with ideal and superlative.

Despite their importance for financial sector development, derivatives are few and far between in countries where the compatibility of capital market transactions with Islamic law requires the development of shariah-compliant structures. Islamic finance is governed by the shariah, which bans speculation, but stipulates that income must be derived as profits from shared business risk rather than interest or guaranteed return. This paper explains the fundamental legal principles of Islamic finance, which includes the presentation of a valuation model that helps illustrate the shariah-compliant synthetication of conventional finance through an implicit derivative arrangement. Based on the current use of accepted risk transfer mechanisms in Islamic structured finance, the paper explore the validity of derivatives from an Islamic legal point of view and summarizes the key objections of shariah scholars that challenge the permissibility of derivatives under Islamic law. In conclusion, the paper delivers suggestions for shariah compliance of derivatives.

In general derivatives, futures, options and swaps are considered against the principles of shari'ah for various reasons, such as the absence of asset-backed deals, dealing in prohibited transaction of debt, presence of element of gharar (uncertainty), gambling, absence or non-existence of subject matter, Short-Selling, sale of subject-matter without prior acquiring of possession or constructive possession, ghabn (market price manipulation), 'ina (sale and buy-back), tawarruq (multiple buy-back sales involving no actual asset transfer), amongst others. In the recent past there have been attempts to find and explore Islamic hedging products having same functions as that of derivatives having link with real economy growth. Financial transactions either linked with economic activities or they are pure financial instruments known as 'synthetic' transactions having no contribution to the real economy. Due to Muslim investors' demand and excess saving due to oil wealth in the Gulf Cooperation Council, there is a demand for Islamic financial transactions. Therefore, derivatives in compliance with shari'ah principles were developed. Sukuk are fine and popular example of such financial products and emerged as a strong substitute to conventional derivative products. Sukuk are considered shari'ah compliant but at the same time ethical and hence fits into the requirements of financial products to overcome the adverse effects of the financial crisis. This research, hence, explores and analyses sukuk as an Islamic securitization product. In addition, this research also investigates whether or not sukuk meet the standards and criteria of conventional securitization structures in order to safeguard the interests of different parties involved in it and the public at large. Furthermore, this research examines sukuk structures whereby it identifies further shari'ah and ethical underlying principles for further product development, design under shari'ah. In responding to the research aims, this research attempted to peruse through original sources of both shari'ah and English Common law on sukuk and the application of wa'ad (undertaking) particularly in the context of sukuk and derivatives. While discussing the identified research aims in terms of determining the key legal, regulatory and shari'ah compliance issues in the development of sukuk, the focus remained on the United Kingdom (UK), which attempts to become one of the leading centers of Islamic finance. After foundational and exploratory research, this study concludes and answered the research questions that: (i) sukuk are based on shari'ah principles; (ii), derivatives are allowed under shari'ah; (iii) sukuk as Islamic derivative instruments are as efficient as that of conventional derivative products and apply the similar securitization principles; (iv) wa'ad has the same authority as that of 'aqd (contract) and can be compared with 'promise' and 'promissory estoppel' in Common law; (v) use of wa'ad in equity-based sukuk is against the shari'ah; (vi) usage of wa'ad in derivatives like Foreign Currency Forward Options, Total Return Swaps and Short-Selling is inappropriate, and (vii) UK is an attractive country for promotion and growth of sukuk. For this purpose the results of the sub-research questions were: (a) UK has sufficient legislative and regulative infrastructure to entertain shari'ah compliant products such as sukuk in the future (b) UK so far is impartial in the debate on shari'ah compliance approval process of products (c) there is confusion about whether sukuk are categorised as debt instruments or Collective Investment Schemes. This study came with an extensive research and analysed growth of sukuk and its structures in UK with legislative and regulatory developments and concludes UK is a place where development of sukuk is phenomenal for the strategic significance of London Stock Exchange in the global market. Though not many sukuk are being issued in UK but it is a place where most of the sukuk are listed.