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​Islamic Contract Law – Form vs Substance (Examples Only)


1. Murābaḥah Financing (Cost-Plus Sale)
  • Form
    • Bank buys an asset and sells it to customer at a markup
    • Structured as a sale contract
  • Substance Issue
    • In practice:
      • Bank may never truly bear risk
      • Transaction closely resembles:
        • Loan + interest
👉 Question:
  • Is it a real sale or just a disguised loan?


2. Tawarruq (Commodity-Based Financing)
  • Form
    • Customer buys a commodity on deferred payment
    • Immediately sells it for cash
  • Substance Issue
    • No real intention to use the commodity
    • Purpose:
      • Obtain cash
👉 Looks like:
  • A series of sales
    👉 But substance:
  • Cash loan with profit (similar to interest)


3. Ijārah (Leasing Contract)
  • Form
    • Bank owns asset and leases it
    • Customer pays rent
  • Substance Issue
    • If:
      • All risks shifted to customer
      • Ownership is only “on paper”
👉 Then:
  • It may resemble:
    • Conventional financing, not true leasing


4. Ṣukūk Structures
  • Form
    • Investors own shares in assets
    • Returns based on asset performance
  • Substance Issue
    • If returns are:
      • Fixed and guaranteed
👉 Then:
  • It resembles:
    • Conventional bonds (interest-based)


5. Buy-Back Arrangement (Bayʿ al-ʿĪnah)
  • Form
    • Asset sold and then repurchased
  • Substance Issue
    • No real transfer of ownership intended
    • Purpose:
      • Generate cash with extra payment
👉 Substance:
  • Similar to:
    • Loan with interest


Final Insight
  • These examples show:
    • A contract can be:
      • Valid in form
      • But questionable in substance


One-Line Understanding
  • Form = what the contract looks like
  • Substance = what the contract actually does







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