Assalamu Alaykum,
I have been reading and researching the prohibition (by the majority of 'ulama) of futures contract. I am aware of the main arguments: selling before posession, qimar, and the prohibtion of bay’ al-kali’ bi-kali’.
For physically-settled futures, the absence of the issue of Riba al-Fadhl in the settlement is easy to understand, as the settlement is either physical delivery or the exchange of one debt for another, the latter of which being prohibited but not riba necessarily.
However, why is Riba al-Fadhl not considered a primary issue for futures contracts where physical-delivery is not even possible (i.e. for cash settled futures)?
According to the Shariyah Review Bureau (SRB), “[Riba al-Fadhl is] unequal payments in homogenous currencies.”
The SRB mentions the above in the context of commodity swaps, where one fixed payment cash flow is exchanged for a floating one, the concept is presented plainly. There is also the concept of Riba An-Nasiyah in commodity swaps.
Ostensibly, with a cash-settled futures contract, the Buyer of a contract is outlaying an amount X (market price of contract at the time of entry) , and if he lets the contract go to “Delivery” (i.e. mature), he will receive the difference between X and the prevailing market price Y for the underlying commodity. See the following London Metal Exchange article for more information.
If the Buyer sells a strip of futures contracts along the forward curve (e.g. for months April, May, June, July) and lets each and every one of them mature, he will in effect replicate a commodity swap with the key differences being:
- The cash flow exchange is not direct, but rather through the offsetting of contracts by the clearinghouse.
- The contract is not explicit exchange of one cash flow for another, but rather designed to mimic the pre-delivery cash-settlement of a physically delivered contract. The countervalues are ostensibly still cash payment and delivery of the underlying commodity.
However, I am not sure how the above differences would address the issue of Riba al-Fadhl or otherwise. The payoff of a commodity swap for the producer is the sum of the difference between fixed and floating payments for the length of the contract. The payoff calculation for a futures strip going to maturity would be similar.
Any clarification on the points above would be highly appreciated. If the riba type in question is actually an-Nasiyah, please forgive my ignorance.