In substance under the profit swap, all that is essentially happening is that a floating rate payer is paying LIBOR and a fixed rate payer is paying a fixed amount.
Therefore, if one looks closely at this transaction overall, the floating rate payer will pay interest based on LIBOR which is clearly uncertain.
The floating rate payer can make a Wa'ad under a Murabaha to pay the cost of the commodities plus a profit linked to LIBOR and this is Shari'ah compliant.
Shari'ah-compliant profit rate swaps, however, require a commodity to be bought and sold, and the 'profit' paid by the floating rate payer can be linked to LIBOR or some other floating rate and hence uncertain reference data.
The primary Murabaha contract will see a floating rate payer buy a commodity from broker 1, and immediately sell the commodity to the fixed rate payer.
Shari'ah law would traditionally argue that the floating rate payer paying a variable amount would not be Shari'ah-compliant due to the uncertainty of the amount to be paid.
What is important is that the floating rate payer agrees to pay an amount on a fixed day and with reference to a fixed reference, i.
FIXING THE FLOATING RATE What about if the floating rate payer agreed to make a series of payments of fixed amounts and then would add more if the floating equivalent was higher and would receive a refund if the floating payment due on that date was lower?
6) Strictly speaking, the contract would call for the exchange of the difference between (1 + [pi])H(n) and S(n): the fixed rate payer would pay (1 + [pi])H(n) - S(n) if (1 + [pi])H(n) - S(n) > 0, and the floating rate payer
would pay S(n) - (1 + [pi])H(n) if (1 + [pi]H(n) - S(n) < 0.