Hybrid Contract in Islamic Banking and Finance: A Proposed Shariah Principles and Parameters for Product Development

Abstract

Purpose – The main purpose of this paper is to provide proper understanding the concept and application over the prohibited hybrid contracts in Shariah and how they might be applied for the purpose of product development in Islamic banking and finance.

Design/methodology/approach – The paper presents basic principles in Islamic commercial transactions from classical fiqh point of view particularly on hybrid contracts in Islamic banking and finance from the concept and application.

Findings – This study reveals that majority of Islamic banking and finance’s contracts are combination of more than one contract in their products and services. However, this concept encounters legal issues due to the hadith of the Prophet (SAW) prohibits combining several contracts in one single transaction. The paper argues that it is lawful for Islamic banking and finance to combine more than one contract to structure the Shariah compliant product as long as they follow the Shariah guidelines and parameters on hybrid contracts.

Research limitations/implications – Islamic banking and finance may benefits from the Shariah parameters and prcinciples that laid down in this paper prior structuring the contract on the products. So as the structured contract is not contravene with the hadith that prohibits the combination of contracts.

Originality/value – The analysis is valuable in drawing the attention of Islamic banking practitioners to the fact that majority of Islamic banking and finance’s products and services are hybrid contracts. The paper tries to lay down Shariah parameters on how to combine more than one contracts in one transaction so that the products of Islamic banking and finance are in accordance with Shariah.

Keywords: Hybrid Contract, Combination of Contract, Islamic Banking and Finance