The Concept of Combination of Contracts in Islamic Finance

Abstract

Islamic banking is currently facing many modern challenges, the most important of which is the innovation in products. New products are rapidly being introduced in modern conventional financial institutions on daily basis, while the launch of new products in Islamic banking seems to be stagnant. In order to compete with traditional banking in the current era of marketing, it is necessary to focus on introducing attractive products for Islamic banks. Combination of contracts is a method through which products can be made up of two or more contracts, such as “diminishing musharakah” consisting of partnership, lease and sale contracts. However, it is a much more complex process than it seems, in which it is very important to take care of many important principles from a Shariah point of view, otherwise the reputation of an institution will be tarnished if a wrong product is found to be illegitimate from a Shariah point of view. The concept of “combination of contracts” is the concept through which new products can be engineered in Islamic financial system. However, there are various concepts confuses the researchers to differentiate combination of contract from them. After differentiating the combination of contract from those concepts, this article explains the guidelines for the financial engineers of Islamic financial institutions regarding combination of contracts, which will help in the formulation of the new product according to the Shariah principles.