Arbon Sale

The Arboon Sale

A Shariah Compliant Alternative to Selling Short with Borrowed Securities

SHARIAH CAPITAL 2008 Shaykh Yusuf Talal DeLorenzo, Chief Shariah Officer

The Arboon Sale

A Shariah Compliant Alternative to Selling Short with Borrowed Securities

Introduction

Until the present stage of its development, modern Islamic Finance has been without the ability to profit from falling markets or even to protect stock market investments from downward trends. It is widely acknowledged in Shariah finance circles that the conventional methods for hedging, and the short sale in particular, are simply unacceptable owing to their use of elements that are contrary to Shariah principles and precepts. However, for the past several years scholars and experts have indicated a growing consensus that it may be possible, at least in theory, to use classical transactional models like salam and arboon to provide investment managers with effective tools for hedging and managing risk, including the ability to profit when the price of shares declines. This White Paper outlines the development of the Arboon Sale by Shariah Capital as a practical solution for the Al Safi Trust, providing investment managers with an effective way to benefit from stock market investments regardless of market trends. Most importantly, the Arboon Sale solution is completely Shariah compliant and has been certified as such by means of a fatwa signed by senior and experienced Shariah scholars, each of whom is a member of the Shariah Board of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the standard setting board for the modern Islamic financial industry.

Difficulties with Conventional Short Sales

Since conventional short sales require the sale of borrowed shares, such sales are clearly contrary to Shariah rules. There is complete unanimity of agreement among Shariah scholars on this point. In order to sell something, according to the Shariah, one must first...