Shariah Appraisal of Short Selling and Margin Trading

Islamic finance industry has witnessed a remarkable growth in the last thirty years. This growth has been restricted to the banking sector while Islamic capital market is still at its nascent stage. Several countries have attempted to bridge this gap by introducing several Islamic alternative products to their respective capital markets. However, investors have not been receptive to these alternatives due to the lingering controversies surrounding their permissibility.This study attempts to study margin trading and short selling from a shariah perspective. Both contracts were characterized from shariah perspective as qard. A step by step assessment of both margin trading and short selling was conducted to ascertain their compliance with shariah. The study concluded that the conventional margin trading and short selling facilities are not shariah compliant.Several financial institutions at different stages have tried to offer an Islamic compliant margin trading and short selling. Malaysia has been at the forefront of this drive. Other countries such as Qatar, U.S.A Saudi Arabia and the United Arab Emirate have also seen the introduction and incorporation of either Islamic margin trading or short selling.Margin trading offered by three financial institutions was assessed in this study. The study showed that all three products had an underlying shariah concerns. The study also scrutinized the short selling offered by two institutions which employed the Islamic concepts of wa’d and salam. The study showed that both two structures were not fully shariah compliant.