Theory-Practice Dialectic in Islamic Finance: The Case of Product Development

Understanding the current structure and problems of Islamic finance (IF) requires an examination of how the contract types have evolved since first Islamic banks were founded in the mid-1970s. IF scholars have often turned to Islamic legal texts for alternatives to the interest-based system, suggesting working with contracts based in classical fiqh, including particularly the mudaraba, musharaka, and the murabaha. These contractual forms have often been modified with new clauses inserted in them to produce ‘new’ ones. This endeavor signifies broader changes in socio-economic life in the Muslim World on the one hand, and in the theoretical outlook and mindset of IF scholars, on the other. This paper attempts to examine these changes in the case of oft-used contracts in IF by focusing on its both practical and theoretical dimensions. For the first dimension, it explores the question of how modern contractual forms have emerged out of their classical forms and adapted to modern circumstan