Form and substance in Islamic finance: analysis of deferred payment sales

Abstract

Deferred payment contracts involving use of al-bai’ bithaman ajil, al-murabahah and bai’ al-inah have been extensively used in design of Malaysian in Islamic financial products. It is widely argued that Islamic banking is the replication of conventional system by imitating the conventional banking products excepting that they are presented in syariah compliance mechanism. The deferred payment sales are one of the example. The issues of form and substance in Islamic banking products and instruments has been frequently debated. Therefore, this paper endeavour to analyse the nature and content of Islamic financial products with particular reference to the debt-based transactions of Al-Bai’ Bithaman Ajil, Al-Murabahah and bai’ al-inah as practiced in the Malaysian Islamic banking. By analysing legal documents, reports, fiqh and Islamic jurisprudence’s views, this paper suggests that the debt-based transactions have been proven to be a reliable and efficient way of conducting commercial transactions which are in conformity with the syariah. Nevertheless, the practice of these modes of transactions ought to be enhanced and perfected to avoid intentional or unintentional deception in its implementation.