Analysis of the factors responsible for variation between forms (suwar) and subtances (haqa`iq) of islamic financial contracts : a case study of bay` al-wafa`

Abstract

Inadequate conformity of the present mode of conducting Islamic financial contracts with the objectives of sharÊÑah that underly each of the contracts has become a critical sharÊÑah compliancy issue. The act of favoring form of contract over its substance has subjected the practice to a lot of criticisms from many Islamic jurists and economists. In effect, these criticisms are capable of having negative impact on the credibility and growth of the industry. Islamic jurists and standard-setters actually consider combination of contracts using certain mechanisms to meet a particular economic target as responsible for the failure to achieve the objectives of sharÊÑah. Hence, application of the accounting principle of ‘substance over form’ which is similar to a fiqhÊ maxim that says: ‘consideration in contracts is of the intents not the words and the forms’ was proposed as a way to resolve the issue and to also reconcile the differences between the Islamic reporting standards and the International Financial Reporting Standard (IFRS). Thus, this study, using a comparative fiqh approach explores the concept of substance over form and examines the case of bayÑ al-wafÉ’ to recognize the mechanisms that lead to divergence between forms (Îuwar) and substances (ÍaqÉ’iq) of Islamic financial contracts. From the exploration, it was discovered that condition and its legal equivalents like muwÉÏa’ah (prior agreement), Ñurf (custom), and promise are the mechanisms of the divergence in bayÑ al-wafÉ’. Afterwards, these mechanisms were examined in the context of bayÑ al-wafÉ’ using the contemporary applications of the contract (ijÉrah ÎukËk and Islamic repo (SBBA)). A thorough examination of these mechanisms and their legal implications on bayÑ al-wafÉ’ contracts revealed that custom of people is not a decisive mechanism that could change substance of a contract. In addition, independence of repurchase or sell-back promise is subject to its freedom from any legal force such as condition and muwÉÏa’ah.