Form and Substance in Islamic Finance: from the Perspective of Islamic law of Contract
Keywords:Form and substance, hiyal, legal stratagems, tawarruq, bay al-inah, sukuk, asset-based, asset-backed
This paper aims to analyze the issues of form and substance from the perspective of the Islamic law of contract, particularly in light of the alleged mimicking of conventional financial products and services by the Islamic financial industry. We attempt to analyze the approaches of jurists and fuqaha[i] from different schools of Islamic law in this regard, with emphasis to the issue of hiyal: one scholarly view considers the legal form to be more important than substance, while the majority considers both to be equally important, and rule that all hiyal are not prohibited – some are allowed with certain conditions. Shifting our focus to the Islamic banking practices of organized tawarruq, and asset-based and asset-light sukuk, we conclude that they are classic examples of fulfillment of form over substance, and do not reflect the true spirit of the Shari’ah according to the majority of scholars. Therefore, it is suggested that it is the collective responsibility of all the stakeholders in the Islamic finance industry to revise these contemporary practices from Islamic law perspective and ensure the Islamicity of the prevalent transactions through the achievement of the higher objectives of Shari’ah.
[i] Plural of faqih, meaning jurists.