TOWARDS A GENUINE ISLAMIC PROFIT RATE SWAP: A MURĀBAḤAH-WAKĀLAH HYBRID MODEL FOR SHARĪ'AH-COMPLIANT HEDGING.

Purpose -- This paper aims to develop a substantively Sharī'ah-compliant alternative to the existing ISDA/IIFM Islamic Profit Rate Swap (IPRS) framework, which relies on corresponding promises (wa'd) and repetitive commodity murābaḥah (tawarruq) transactions. It seeks to preserve the hedging functionality while strengthening the asset linkage, minimising reliance on debated contractual devices, and promoting closer alignment with the objectives (maqāṣid) of Islamic finance. Design/Methodology/Approach -- The study adopts a conceptual, doctrinal and comparative Sharī'ah-based methodology. It undertakes a structured analysis of the ISDA/IIFM IPRS in light of relevant AAOIFI Sharī'ah Standards and maqāṣid-oriented principles, identifying areas of juristic and structural tension. Building on this assessment, the paper evaluates a hybrid structure that integrates murābaḥah and wakālah contracts that are executed at inception. Findings -- The proposed model replicates swap cashflows through executed murābaḥah and wakālah contracts rather than back-to-back undertakings, eliminates organised tawarruq, anchors transactions in real assets, and replaces mark-to-market liquidated damages in case of early termination with takhāruj-based settlement, ensuring stronger Sharī'ah alignment and operational efficiency. Originality/Value -- This study advances Islamic derivatives by introducing a murābaḥah-wakālah model that enhances Sharī'ah authenticity and links hedging activities to real economic assets. Research Limitations -- The accounting classification and measurement of the proposed murābaḥah-wakālah structure, including its eligibility for hedge accounting and balance sheet treatment under IFRS, as well as the legal enforceability of its close-out takhāruj mechanisms across jurisdictions, require further detailed examination prior to practical implementation. Practical Implications -- The proposed framework provides Islamic banks, regulators, and Sharī'ah boards with a practical blueprint for developing hedging tools that enhance governance and link finance to real economic activity. [ABSTRACT FROM AUTHOR]

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