Harmonising derivatives with Shari’ah: ethical practices and regulatory insights

Purpose This study explores the ethical challenges of integrating derivatives into Islamic finance. It aims to reconcile the principles of Shari’ah law with modern financial practices. It seeks to understand how derivatives, characterised by their complexity and speculative nature, can align with Islamic moral values, ensuring financial stability and social equity. Design/methodology/approach Adopting a doctrinal legal research methodology, the investigation delves into primary and secondary sources encompassing the Quran, Hadith, contemporary scholarly articles, and regulatory documents. The approach enables a comprehensive analysis of Islamic legal texts and principles, assessing their applicability to derivatives within a framework emphasising Shari’ah compliance and ethical integrity. Findings The research identifies pathways for the ethical integration of derivatives in Islamic finance, highlighting the potential of these financial instruments to enhance economic justice and societal welfare when aligned with Shari’ah principles. It uncovers regulatory frameworks and innovative practices that can mitigate ethical dilemmas, ensuring derivatives contribute positively to the Islamic financial system. Originality/value This paper offers original insights into reconciling financial innovation with Islamic ethical mandates by applying a doctrinal legal research methodology to studying derivatives in Islamic finance. It contributes to the academic discourse on Islamic finance and ethics, providing a nuanced framework for developing Shari’ah-compliant derivative products that uphold the principles of risk-sharing, transparency and social equity. This investigation enriches the understanding of ethical practices in Islamic finance, proposing a model for balancing modern financial mechanisms with traditional Islamic values.