Flexibility and Sharī'ah compliance of islamic financial contracts: An evaluative framework

Abstract

Although the key distinguishing feature of Islamic finance is compliance with Sharīah, there is criticism from various quarters on the Sharīah compliance of its products. However, there is no objective way to assess the Sharīah compliance of Islamic financial contracts. This article develops a structured framework for analysing Sharīah 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 Sharīah 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 Sharīah compliance of an actual mudārabah (silent partnership) contract and finds it to be defective.