Possibility of Using Total Return Swap to Manage Credit Risks in Islamic Banking - A Study

Bank, as the most important monetary institution of the country, faces a variety of risks. Comparison of the factors of credit risk, in reality, is one of the most important and costly risks of the banking system. In Islamic banking also, because of using trading and participatory contracts for providing facilities and participation of the bank itself in direct investments, there always exists a risk of complete or partial customer defaults against repayments of bank’s cash investments and provided facilities. Total Return Swap, as one of the necessities of credit derivatives, plays a significant role in managing and shifting the credit risk of conventional banking. The present article, while introducing this financial instrument, aims to study, from a jurisprudential perspective, the possibility of using this credit derivative in Islamic banking and the possibility of making it compatible with the current Islamic contracts While analyzing the hypothesis of the current research, the possibility of compatibility of the mentioned derivative with the contract of “selling debt against current payment, sale of credit against credit (mutually deferred sale) (kali bay kali), and a compromise of debt against debt” have been studied. However, because of the disapproval of majority of Islamic jurists and noncompliance with some general conditions of contracts, using this financial instrument with its current structure, will not be accepted. However, its modified structure, not only does not contain any deficiency from Islamic legal perspective, but has a noticeable advantage too, as compared to the current one.