Document Type : Science - Research (Islamic Capital Market)

Authors

• Kamran Salmani Qaraie ¹
• Abdolsadeh Neisy ²
• Alireza Zamanpour ³
• Mohammad Tohidi ⁴

¹ PhD Student, Financial Engineering, Department of Financial Management, Faculty of Management and Economics, Science and Research Branch, Islamic Azad University, Tehran, Iran

² Professor, Department of Mathematics, Faculty of Statistics, Mathematics and Computer Science, Allameh Tabatabaei University, Tehran, Iran

³ Associate Professor, Department of Financial Management, Faculty of Management and Economics, Science and Research Branch, Islamic Azad University, Tehran, Iran

⁴ Associate Professor, Financial Management, Department of Financial Management, Faculty of Islamic Studies and Management, Imam Sadeq University, Tehran,

Abstract

1. Introduction and Objective
In recent years, global capital markets have faced increasing pressure to diversify their range of investment instruments and to provide mechanisms that can better address the risk–return preferences of investors. Stock exchanges in advanced financial centers such as Frankfurt, Stuttgart, London, Paris, Bucharest, Warsaw, and Zurich have progressively introduced new categories of structured products. Among these, the uncapped capital protection certificate (UCPC) has gained prominence as a hybrid financial instrument that combines the security of capital protection with partial exposure to the performance of an underlying asset.
     These certificates are generally issued by a third-party institution, such as a reputable financial company or banking entity, with the dual purpose of providing investors with a protected form of investment and enabling issuers to secure financing. Functionally, they are structured similar to derivative contracts, since their payoffs are directly linked to an underlying asset, typically equities, stock indices, baskets of shares, or other financial benchmarks. The fundamental feature of UCPCs is that, at maturity, the investor is entitled to the repayment of the principal, either fully or partially, depending on the contract’s structure, while also benefiting from potential gains if the underlying asset appreciates.
      The attraction of these instruments lies in their ability to meet the needs of risk-averse investors who seek to avoid principal loss but are simultaneously dissatisfied with the relatively low yields of fixed deposits. They create an innovative middle ground between high-risk speculative investments and safe but low-yield bank deposits.
     Despite the wide application of UCPCs in conventional markets, their introduction into markets governed by Islamic finance principles has remained unexplored. Specifically, in the Iranian capital market, all financial instruments must comply with the jurisprudential requirements of Imamiyya fiqh. This raises a central research question: Can uncapped capital protection certificates be structured in accordance with Islamic jurisprudence, and if so, under which contractual frameworks can they be introduced?
     The primary objective of this research is therefore twofold:

To evaluate the jurisprudential feasibility of UCPCs within the Iranian capital market.
To determine which Islamic contracts—namely Muḍāraba (profit-sharing partnership), Wakāla (agency), and Mushāraka (partnership)—can most appropriately serve as the legal foundation for structuring these instruments.

     By answering these questions, the study contributes both to the theoretical literature on Islamic financial engineering and to the practical development of Shariah-compliant capital market instruments.
2. Methods and Materials
The research adopts a jurisprudential-analytical methodology combined with applied research techniques to bridge the gap between financial innovation and Islamic law.
     The guiding framework is the multi-stage ijtihād method, an approach specifically designed to manage the challenges of introducing new financial instruments in Islamic contexts. Unlike traditional jurisprudential reasoning, which often provides fragmented or delayed responses to new financial issues, multi-stage ijtihād incorporates economic experts and financial engineers into the reasoning process, ensuring that both economic functionality and jurisprudential legitimacy are considered simultaneously.
Step 1: Jurisprudential Analysis of Candidate Contracts
The first stage consisted of a systematic review of Islamic legal sources, juristic opinions, and existing applications of the three proposed contracts.

Muḍāraba (profit-sharing partnership): Characterized by an arrangement in which one party provides the capital (rabb al-māl) and the other manages the business (muḍārib). Profits are shared according to pre-agreed ratios, while losses are borne by the capital provider unless negligence is proven.
Wakāla (agency contract): In this arrangement, the investor appoints the issuer as an agent (wakīl) to invest funds on their behalf, usually in exchange for an agency fee. The structure is highly flexible, allowing adaptation to various financial products.
Mushāraka (partnership contract): Both issuer and investors contribute capital to a joint venture and share in profits and losses based on pre-agreed proportions.

 
     For each of these contracts, the researcher analyzed compatibility with the structure of UCPCs, focusing on three key elements: principal protection, profit allocation, and risk distribution.
Step 2: Focus Group with Experts
     Following the jurisprudential analysis, the findings were presented to a focus group (group kawnūnī) composed of eight experts in Islamic economic jurisprudence. These experts were drawn from institutions including the Securities and Exchange Organization of Iran, the Tehran Stock Exchange, and the Energy Exchange, and several also held academic positions in Islamic finance and law.
     The group was convened in the Islamic Finance Department of the Securities and Exchange Organization. Discussions were structured around the proposed contractual frameworks, and participants were asked to evaluate each model’s legitimacy and feasibility.
Step 3: Empirical Assessment via Questionnaire
To quantify expert consensus, a structured questionnaire was designed using a five-point Likert scale, ranging from “strongly disagree” (1) to “strongly agree” (5). The objective was to capture the degree of support for structuring UCPCs under each of the three contractual models.
Step 4: Statistical Analysis
The collected data were analyzed using the one-sample t-test, where the mean scores of each contract were compared against the neutral midpoint (3). Results with statistical significance at the 5% level indicated that expert agreement was not due to chance but reflected genuine consensus.
     This mixed-method approach—combining jurisprudential reasoning, expert deliberation, and quantitative validation—ensures robustness in both theoretical and practical dimensions of the study.
3. Research Findings
The results can be summarized in three main areas: jurisprudential compatibility, expert consensus, and preferred contractual framework.
3-1. Jurisprudential Compatibility
The jurisprudential analysis confirmed that UCPCs can be validly structured under all three examined contracts:

Under Muḍāraba: Investors provide capital, and the issuer manages the investment. Profit-sharing ratios can be set to reflect the nature of UCPC payoffs, while principal protection can be introduced via external binding agreements (ʿaqd khārij lāzim) or third-party guarantees.
Under Wakāla: The issuer acts as an investment agent, charging a fixed or performance-based fee, while investors bear the investment results. Principal protection can be embedded through stipulations or by employing mechanisms such as non-tradable put options.
Under Mushāraka: Both parties pool their resources, and profits or losses are distributed according to their shares. Here too, protective conditions can be added to ensure that investors’ principal is safeguarded.

3-2. Expert Consensus
The focus group discussions confirmed the feasibility of all three models. However, experts expressed varying levels of support:

Wakāla (Agency contract): Received the strongest endorsement, with 88% agreement. Experts emphasized its operational simplicity, adaptability, and precedent in Islamic finance.
Muḍāraba and Mushāraka: Both received 80% agreement, reflecting substantial but slightly lower consensus compared to Wakāla.

3-3. Statistical Validation
The t-test results showed that the mean scores for all three contracts were significantly higher than the neutral midpoint (3), confirming that expert agreement was statistically meaningful. Thus, jurisprudential feasibility is not only theoretically valid but also supported by empirical expert consensus.
3-4. Mechanisms for Principal Protection
Experts further approved several mechanisms for safeguarding investors’ principal:

External binding contracts that obligate the issuer to compensate losses.
Non-tradable put options attached to the certificate, allowing investors to sell back at the original value if the underlying asset declines.
Third-party guarantees (rukn-ḍāmin), whereby an external institution assumes responsibility for principal repayment.

 
These mechanisms were considered both jurisprudentially valid and practically implementable within the Iranian financial system.
4. Discussion and Conclusion
The research highlights several critical contributions to both Islamic finance scholarship and market practice.
4-1. Theoretical Contribution
This study demonstrates that UCPCs—structured products widely used in conventional markets—can be adapted to the jurisprudential framework of Imamiyya fiqh. The adoption of the multi-stage ijtihād methodology illustrates an effective mechanism for reconciling financial innovation with Islamic law. It addresses the traditional challenge of slow or conflicting juristic responses by embedding expert dialogue into the process, ensuring coherence and timeliness.
4-2. Practical Implications
The findings suggest that introducing UCPCs into the Iranian capital market is not only jurisprudentially possible but also strategically beneficial. Specifically, UCPCs can:

Expand financing options for issuers, particularly listed companies and financial institutions.
Attract risk-averse investors who require capital protection but desire returns above bank deposits.
Enhance market liquidity and depth, as issuers reinvest collected funds into equities and related instruments.
Strengthen Shariah legitimacy of the market by showcasing an ability to innovate within Islamic principles.

4-3. Preferred Contractual Framework
While all three contracts are feasible, Wakāla emerges as the most practical option, given its operational simplicity, transparency, and high level of expert approval. Muḍāraba and Mushāraka remain valid alternatives, offering flexibility for different contexts.
4-4. Conclusion
In summary, the study concludes that uncapped capital protection certificates can be introduced into the Iranian capital market under the contracts of Muḍāraba, Wakāla, and Mushāraka, with Wakāla being the most favorable structure. The feasibility is supported by both jurisprudential reasoning and expert consensus, validated statistically. Mechanisms such as external binding agreements, embedded put options, and third-party guarantees provide robust solutions for principal protection.
     The successful adaptation of UCPCs would represent a meaningful step toward the diversification of Iran’s financial system, balancing investor protection with market innovation. Moreover, the methodological framework of multi-stage ijtihād serves as a model for evaluating future financial innovations within Islamic markets.

Main Subjects

• Science - Research (Islamic Capital Market)