Abstract
Abstract Although the key distinguishing feature of Islamic finance is compliance with Sharīʿah, there is criticism from various quarters on the Sharīʿah compliance of its products. However, there is no objective way to assess the Sharīʿah compliance of Islamic financial contracts. This article develops a structured framework for analysing Sharīʿah compliance of Islamic financial contracts by deconstructing them and developing principles of evaluation based on concepts from Islamic legal theory. Other than providing a framework to assess Sharīʿah compliance of Islamic financial contracts, this article also alludes to an important issue regarding the contracts’ flexibility. Using concepts from Islamic legal theory, the article classifies different contractual stipulations according to their legal weight, and identifies how legal perspectives on the requirements of compliance can determine the flexibility of contracts. An evaluative framework is used to assess the Sharīʿah compliance of an actual muḍārabah (silent partnership) contract and finds it to be defective.
Highlights
Islamic banking was initiated in 1975 primarily to meet the financial needs of Muslims who preferred not to deal with interest due to religious convictions
Sharīah compliance is ensured by Sharīah supervisory committees/ boards who certify conformation of all financial products and contracts with Islamic law.[2]
Delorenzo is critical of the Islamic total return swap and declares it to be unacceptable from a Sharīah point of view.[6]
Summary
Islamic banking was initiated in 1975 primarily to meet the financial needs of Muslims who preferred not to deal with interest due to religious convictions. Note that the non-legal stipulations, that is, those added in contemporary financial contracts for facilitation and administrative purposes would be considered neutral and acceptable if they do not directly violate any of the legal prohibitions This is in line with the methodological principle of permissibility (ibāḥah) which maintains that everything in economic affairs is, in principle, permitted.[31] The stipulations that are found in contemporary Islamic financial scholarship, and which do not exist in classical contract law can be classified as belonging to the minority category as, by virtue of their genealogy, they cannot. In line with the notions of obligation (al-wujūb) and prohibition (at-taḥrīm) under al-ḥukm at-taklīfī discussed above, the legal requirements are a combination of affirmative and prohibitive conditions On this basis, a general checklist entailing the relevant legal rulings from the benchmark standard is first developed for the contract investigated; in our case the muḍārabah. The number of rulings required for a contract is not an indication of its relative importance, but instead demonstrates that some contracts have more complex characteristics than others and are subject to increased legal control
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