Penalty and compensation in financial commitments : a critical Shariah review

Abstract EN

Purpose: The aim of this paper is to critically review the position of Shariah and contemporary ijti- had on penalty provisions in financial commitments.

It is also to show that some relevant//^/? resolu- tions have dealt differently with similar issues despite the absence of any grounds for such differen- tiation and to show how penalty provision in contracts has been expanded to include what cannot be accommodated by Shariah principles.

All this necessitates a review of those stances, as they may have both unnecessarily burdened the Islamic finance industry and challenged some Shariah principles.

Methodology: This paper employs a qualitative research methodology that adopts textual and fiqh comparative analysis approaches.

The methodology also incorporates a macro perspective for treat- ing the subject by analyzing the issues being examined from the perspective of Maqasid al-Shariah (Shariah objectives) in consideration of existing market practices and needs.

Findings: This study primarily indicates that penalties or compensation provisions in contracts are accepted if they are intended to prevent actual harm rather than for gain, because profiting merely through stipulation is forbidden in Islamic law.

Originality: Although this paper addresses an issue that has been addressed before, it acquires sig- nificance and value by setting the basis for what constitutes a valid penalty provision in Islamic fi- nance and by showing areas of conflict and inconsistency in some of the contemporary stands on the matter, thus necessitating a review of these stances.