On the pareto-optimality of futures contracts over Islamic forward contracts: implications for the emerging Muslim economies

A general equilibrium approach is used to demonstrate that: (i) futures contracting (on Islamically permissible commodities) is pareto-optimal over the Islamic forward contract of Bai' Salam; and (ii) both forms of contracting constitute a quasi-equity claim instead of debt (dayn) as construed by the majority of Islamic jurists. These results are of import as they: (i) remove a major hurdle against futures contracting by the Islamic jurists thereby enabling the renovation of the financial intermediation system of emerging Muslim economies; and (ii) demonstrate that the arbitrage principle needs to be re-examined under non-linear asset pricing.