Revisiting the Scope of Hybrid Contracts in Islamic Finance

Abstract

Islamic banking industry is apart from conventional banking but still it has rivalry with conventional banking as both serve the same set of customers. Islamic banks are way behind conventional competitors in terms of innovation and product development. The innovation of Islamic banking and finance sector is dependent on hybrid contracts. The customer needs have become complicated. It requires the Islamic banks to introduce new products. But, Islamic banks cannot evolve without indulging into hybrid contracts. The standing of early Islamic jurists and scholars have made hybrid contracts somewhat contradictory as they have differences of opinion. Their opinion is based on the four Hadiths prohibiting four types of hybrid contracts, but some scholars have applied it to all other hybrid contracts. It has caused a major setback to the progress and development of Islamic finance industry. The apprehension of induction of prohibited elements like riba, maysir, and gharar has virtually paralyzed this sector. Last few decades have observed a progress as contemporary fuqha have stepped forward to reinterpret the Shariah instructions to develop Islamic banking. This study has researched the scope and potential of hybrid contracts for product development. The work of famous scholars has been consulted to understand the contradiction. Prominent contemporary scholars were consulted to get their profound opinion. It is concluded that the hadiths addressing trade contracts can be reinterpreted through mutual Fiqhi consensus. New products developed through hybrid contracts should be free from clearly prohibited elements and it should not contradict with clear shariah instructions. The use of hilah (trick) to turn the haram into halal is a sin and hybrid contracts should not be used to gain riba. The focus of hybrid contract based products should be on profiting from trade rather than riba.