Credit Risk Management in Islamic Banking through Credit Default Swaps

Risk is an inseparable part of the banking industry. Due to the specific nature of Islamic contracts, Islamic banking, in addition to the usual banking risks, also faces other risks peculiar to itself. Credit risk is among the most common risks in banking and various methods and instruments have been used to gauge and manage it. Credit Default Swap (CDS) is one of the most important types of credit derivatives which have been extensively used in conventional trade banking for the past decade, with the aim of managing the credit risks. In this article the possibility of using this credit derivative in Islamic banking has been studied with a jurisprudential approach, and it has been shown that benefitting from this credit derivative in different ways can be validated. In this study the hypothesis of possibility of conforming the credit default swap with the Guarantee [Dhaman] and Insurance [Bee may] contracts, has been studied, and in the end in accordance with the standards of Imamia jurisprudence, has been endorsed. Similarly supposing the credit default swap as a ‘newly-created contract’ (because of possessing a new legal reality), has also been considered and it has been shown that on account of adhering to the general conditions of valid transactions, its validity as a newly-created contract is also possible.