ISLAMIC PROFIT-RATE HEDGING AND THE PROBLEM OF ECONOMIC REPLICATION FROM CONVENTIONAL SWAPS TO MUBĀDALAT AL-ARBĀḤ

Abstract

Islamic profit-rate hedges can reproduce conventional swap cash flows through promises and commodity sales, raising the question of when replication becomes formal circumvention. This article develops a doctrinal and functional comparison of scholarship, regulatory standards and public transaction documentation. It organises existing concerns into an Economic Replication Test with six conditional thresholds and two diagnostic inquiries. Each assessment separates the governing rule, required facts, available evidence and consequences of a defect. Two hypothetical implementations produce identical hedge payoffs but different contractual findings; further variations distinguish missing evidence, documentary defects and overhedging. Sensitivity analysis examines the effects of transaction costs, benchmark mismatch and funding delays. Lifecycle analysis separates completed debts, replacement valuation, close-out sales and breach remedies. The protocol shows how doctrinal requirements can be checked against transaction evidence and how contractual rights arise during performance and termination. It helps Sharīʿah boards and treasury functions identify unresolved issues without treating payoff similarity as a ruling. The conclusions depend on the legal and Sharīʿah positions adopted and the facts assumed in each case. The examples show how the protocol distinguishes the hypothetical arrangements; they do not provide empirical validation or approval of a live transaction.