A Proposed Mechanism in Islamic Indonesian Commodity Hedging

BAMBANG TUTUKO
Lecturer of Sharia Economic Department, Universitas Internasional Semen Indonesia
Email: bambang.tutuko@uisi.ac.id
and
RADITYA SUKMANA
Head of Islamic Economic Department, Airlangga University

ABSTRACT

Purpose - The objective of this paper is to propose regulation for hedging in the commodity market. It has been aware that to mitigate the risk, the companies should hedge the price at the spot price and delivery of the goods and payment are done in the future and certainly this is against shariah. For that to be Shariah compliance, Salam is adopted whereby the payment is done at the time when the contract is signed and deferred physical delivery. This concept has been further modified by Suwailem that the value of the transaction has to be the anchor, and this is called Value Based Salam (VBS). This paper extends from this Salam and VBS standpoint.

Design/methodology/approach – The paper relies on the qualitative approach, explain the current method of conventional hedging, and critically evaluate it from the Islamic perspective and propose shariah compliance hedging based on the existing literature study.

Findings – While original Salam tends to be in favor for the buyer side and the VBS tends to favor for the seller, this paper attempts to provide alternative method that eventually benefit the seller and the buyer. Islamic Banks may play an important intermediary role in modifying this Salam and VBS to be more favorable for both buyer and seller in term of risk management. In this paper, the Salam and VBS are modified and combined with murabahah and rahn.

Practical Implication – This paper provides benefit for the policy maker which regulates the commodity market to develop an adjusted regulation which include Islamic Banks in order to make hedging activities using Salam more favorable for both buyer and seller.

Originality/Value – This paper is a pioneer study undertaking conceptual development on the role of Islamic Banks as an intermediary institution for hedging activities in the commodity market.

Keywords Hedging, Salam, Risk, Islam, Banks, Commodity