Business contracts must satisfy Islamic norms

Business contracts must- Abdulazeem AbozaidAbdulazeem Abozaid

One of the challenges facing Islamic Banking and Finance industry is the methodology used for product development.

While Sharia enjoins that its rules must be observed in contracts, some of these rules are not genuinely observed in product development.

Sharia dictates that in any structure, the underlying contract must fulfil all requirements.

Independence needed

One such requirement is eligibility to initiate agreements and possessors of the necessary legal capacity.

Others relate to the contract itself being independent and unconditional on the occurrence of something else. The subject matter of the contract should also be in line with the Sharia, most important of which is that the contract should be permissible and intended for permissible use.

Having fulfilled all the structural requirements, the contract must also harmonise itself to meet, or at least not to be in conflict with, the objectives of Sharia.

This is because an apparently valid contract may be misused to reach an evil end, or its implementation may result in causing serious harms and negative impacts.

Form and substance

Therefore, it is indispensable to distinguish in Sharia validation of contracts between two elements, the form of the contract and the substance of the contract.

The first relates to the structure of the contract, and the second relates to the essence, spirit and implications of the contract. Both are equally important and essential in product development; however, this equation has not been fully observed in many of the developed products.

In fact, the current methodology of product development in Islamic finance in general is commonly criticised for not looking beyond the product, into formal and structural conditions.

Although maintaining a proper form is a Sharia requirement, it is also a Sharia requirement to maintain a proper substance.

Islamic Jurisprudence

A careful review of the literature of Islamic law reveals that in contracts, the form is meant to protect the substance. In many Fiqh (Jurisprudence) applications, it is noticeable that the schools of Islamic law have somehow compromised some aspects of the contract’s form but never compromised the contract’s essence or spirit.

The implication is that jurists aim to protect the essence of contracts and agreements.

Some modern practices of Islamic financing product development have implied the opposite; taking care of the form and neglecting the substance of the contracts.

Contract negligence

No doubt that contracts, rules and conditions are meant to enable the contract to serve its purpose in fulfilling the contractors’ needs in a just, positive and productive manner.

This explains why contractors in Sharia are not allowed to make personal stipulations that may annul the contract rules.

Naturally, a contractor, when given an absolute right in making stipulations, tends to tilt the scale to his favour, probably at the expense of the other contractor.

However, there are cases, especially in Uqud Al Ezan (Contracts of Subjection) in which only one party formulates the contract, neutralising some rules by adjusting some clauses or incorporating new ones.

Abdulazeem Abozaid is Associate Professor of Islamic Finance Programme at Qatar Foundation, Qatar. The above is the fourth of several parts of the Paper that he presented at the 11th Conference of Western Economic Association International hosted by Victoria University and Massey University at Te Papa Museum, Wellington from January 8 to 11, 2015.


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