COMBINATION OF CONTRACTS IN ISLAMIC FINANCE: A SYNTHESIS

Combination of contracts is a fusion of two or more contracts in a single arrangement by contracting parties to achieve a specific objective. It has been widely used in Islamic finance for many purposes such as product development and risk management. Nevertheless, combination of contracts encounters some problematic issues since there are three aḥādīth (Prophetic traditions) that prohibit the combination of two sales in one sale, a loan and a sale, and two transactions in one transaction. Although many studies have been undertaken, they remain inconclusive on the interpretation of the aḥādīth since scholars rendered various opinions on them. This has resulted in some perplexity among scholars and practitioners in their discussion of and employment of the concept of contract combination in Islamic financial transactions. Hence, this paper aims to revisit the issue and attempts to synthesise and consolidate all the opinions discussed by various scholars. To achieve this aim, the paper employs a qualitative research methodology, whereby it analyses secondary sources, namely classical and contemporary literature on fiqh (Islamic jurisprudence). The paper finds a strong basis for the conclusion that the interpretation of the aḥādīth can best be related to contractual stipulation—which means the execution of the first contract is dependent on the execution of the second contract, or vice versa. Contractual stipulation is not totally prohibited in combination of contracts so long as it is coherent with the legal requirements of the combined contracts and preserves the rights of the contracting parties. This paper also finds that most contracts which are combined are nominate contracts having specific requirements that must be honoured. If one contract is dependent on another, it may lead to ribā (interest) or gharar (uncertainty); hence, the contracts should be separated. The findings of this paper are especially useful for practitioners who aim to employ the concept as a product development tool or for other purposes in Islamic financial transactions.