Binding Contracts – Formation of Islamic Financial Law

A question seldom asked when investigating the intricacies of Islamic Law is how Islamic law came to be. Sure we all can look to the legal compendiums and the minutiae mentioned therein; review the marginalia and the facets of edge issues and dimensions of a particular position. But what is seldom seen is an analysis of how certain rulings were reached; what substantive principles were drawn upon to formulate those rulings that are taken as canon in the books of Islamic law, especially those of the standardized schools.

Let’s take for instance the stance of most schools concerning contracts: are they binding or not? A cursory look at the annals of Islamic law would show a plethora of categorizations, divisions, topical treatments, and stress on the form of contract under review. Without going into medieval positions on who said what, suffice it to say there are three opinions on the binding nature of contracts: they are, they aren’t, and it depends. When looking back to the primary texts on the topic, we find the verse 4:1 stating “Oh you who believe: Fulfill your contracts…” the imperative used here would apparently mean that any contract entered into should be binding.

Even though the nature of this text in unequivocal, if we were to apply the singular and apparent meaning of this verse, we would at times harm one or both of the parties to the contract. Because of this a holistic approach was taken, recognizing how a contract may be applied at times and the harm that may result there from, and giving precedence in those instances to the general and all-encompassing verses and hadith that forbid harm and reciprocating harm. In this case the contract was designated as non-binding, due to precautions of harming one or more parties to the contract.

Now after all of this, this is really not the point at all. What I’d like to highlight here is not that some contracts were viewed as binding and some not, but that in looking at this principle, i.e. deciding as to whether a contract is binding or not, we have not so far needed to mention the tomes of information on form based contracts that are most often, if not always, used as a basis for deciding what “is” Islamic Finance.

In short, we need a more substantive analysis of contract for Islamic Finance to flourish.