Shari’ah Issues in Short Selling and its Potential Implementation in Qatar Stock Exchange

Abstract

Through surveying the literature to examine the impact of short selling on stock markets, we found that most journal articles and research papers are strongly in favor of short selling. The finance literature claims that short selling is important for a well-functioning financial market because it offers number of advantages which include efficient price discovery, better market liquidity, and enhance risk management. We showed that these claims are not accurate, and that these studies are attempting to promote the practice of short selling despite its negative impact. The practice of short selling is still a subject of debate especially among Shari’ah scholars where they are still divided on its legitimacy. The paper provided an insight into this debate by investigating various Shari’ah aspects of short selling, and we found that this financial tool does not comply with Shari’ah principles. Since Shari’ah scholars do not permit short selling, some institutions and hedge funds claim offering Shari’ah compliant short selling alternatives. In this paper, we outlined four approaches based on Ijarah, Salam, Arbun, and Wa’d structures as alternatives to conventional short selling. Based on our analysis of the mechanism of each structure, we found that all the structures involve unresolved Shari’ah issues.

Malaysia claims offering short selling that complies with Shari’ah principles, we therefore discussed the short selling as applied in Malaysia to examine its compliance with Shari’ah principles. The Shari’ah Advisory Council (SAC) of Malaysian Securities Commission resolved that Securities Borrowing and Lending (SBL) should be aligned to Ijarah principles in order for SBL to comply with Shari’ah principles. The SAC used the principle of Istihsan based on Maslahah as an exception to the general principles of Ijarah to justify the use of short selling in its Islamic Capital Market. The principle of Istihsan based on ‘UrfKhas, that is, a customary practice accepted in economic activities, was also used by the SAC as a basis for the permissibility of SBL. We showed that there is no maslahah to the market or the society from applying short selling as claimed by the SAC. Moreover, such use to the concept of Istihsan based on Maslahah to legalize what serves the benefit of some groups could dampen the credibility of Islamic finance.