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Many of my monthly columns for the magazine "Islamic Finance News" are inspired by questions from readers. Usually to ask whether some kind of financial transaction is religiously permissible for Muslims.

My May 2024 column was another example. You can read it below.

Some thoughts on stock index futures

The following question arrived without warning a couple of months ago, since my website makes it easy for complete strangers to email me.

“Could you please give some insight into futures — specifically stock index futures? I understand there is no interest involved in the margin as it's a "good faith" deposit and not an actual loan, however there is some interest embedded into the actual cost of the contract as sort of a carry cost which is calculated using LIBOR.

Would this make trading this future contract haram as the price of the contract has interest embedded into the carry cost? Or would it only be riba if there is an actual direct loan taking place?”

I responded with the same point I make regularly here.

Each of us is individually accountable to God on the Day of Judgment, so we have to decide religious questions for ourselves. However, I am always willing to share my thoughts, in particular to help others think about the process by which they tackle religious questions.

Firstly, are you willing to own a stock index future?

Like all derivatives, it derives its value from something underlying, here a stock index such as the S&P 500. The S&P 500 contains some companies (such as casino companies) that I personally won’t buy for moral and religious reasons. My own view is that the companies I object to are a sufficiently small part of the S&P 500 index that I am willing to ignore them; obviously others may differ.

Does the futures contract contain so much uncertainty (“gharar” in Arabic) that it is religiously prohibited?

My view is that Islamic finance scholars are too keen to dismiss contracts as having excessive gharar. While the price will fluctuate, just as the S&P 500 index fluctuates, the contracts used in futures trading, with the margin arrangements and the use of a central counterparty, are all designed to ensure reliable enforceability, so I don’t see an excessive gharar problem.

Carry cost

With regard to the question about “carry cost”, all financial transactions that involve cash flows taking place in the future involve some kind of recognition of the time value of money, either explicitly by periodical interest payments, or by adjusting the future price to be different from the spot price.

Islamic finance is no exception. That is exactly how murabahah contracts are priced. I explained this in my 11 January 2017 Islamic Finance News article “Murabahah and the time value of money in Islamic Finance.”

Accordingly, I don’t consider the way futures contracts are priced makes them religious prohibited.

I then received a supplemental question.

"Does the fact that stock index futures contracts are cash settled introduce riba (prohibited interest payments or receipts)?"

My view was that cash settlement does not mean anyone is paying or receiving interest.

My more serious concern was whether the variability of returns, and the cash settlement, might result in the contract being seen as a gambling contract (maysir in Arabic). That is not outlandish – spread betting on shares in the UK is legally treated as gambling under UK law.

My view was that a cash settled forward contract or futures contract that is based on a real underlying (such as the S&P 500 index) is fulfilling a real economic need for some people, while providing a speculation tool for others, so was not gambling.

Mohammed Amin is an Islamic finance consultant and former tax partner at PwC in the UK.