CREATING A TWO-WAY MARKET VIA SHORT SELLING AND ITS POTENTIAL USE IN THE ISLAMIC PARADIGM

Short selling is the selling of a security that the seller does not own. Inconventional finance, the ability to short is considered an important elementof an efficient and complete market. For most Muslim scholars, however,short selling is deemed undesirable when read in conjunction with theHadÊth lÉ tabiÑ mÉ laysa Ñindaka, which carries a verbatim meaning of sellnot what is not with you. There are, however, alternative interpretations ofthis Hadith that may justify the use of covered short selling as one of thelegitimate instruments in the Islamic paradigm. Covered short selling,which entails borrowing a security for the purpose of shorting it, may beused efficiently to lower asset prices, as theorized by Miller (1977). Thispaper discusses about the short selling mechanism and argues that shortselling may be beneficial to consumers in an Islamic market as it creates atwo-way market mechanism and can be used to stabilize asset prices.