Should Islamic financial transactions reflect the legal form or the economic substance? My honest opinion both are importance. However, for Islamic financial transactions the legal form determine the Shariah compliant of the transactions. Economic substance may seem similar to conventional but the legal form is markedly different. The previous example on Islamic investment in Islamic banks indicates just that.
Another classic example is in the case of Islamic financing. Islamic financing instruments normally revolved around the concept of buying and selling such as bai muajal, bai bithaman ajil or bai at-tawarruq. Economic substance of Islamic financing is very similar to conventional loan. The profit on loan is interest but in the case of Islamic financing it is purely profit. However, Islamic financing involved buying and selling of asset at transparent mark-up. There are contracts of purchasing and selling of assets involved. The relationship is buyer and trader as compared to conventional loan borrower and lender. Conventional loan is simply money lending with interest.
This leads to a question whether Islamic financing is like a conventional loan. From the economic substance it may appear to be similar as the flow of funds has almost the same impacts but from the legal form it is obviously not. This leads to my argument that Substance Over Form as an accounting principle cannot be adopted for Islamic financial transactions. The concept that should be used is Form Over Substance. I have discussed 2 examples already, should we discuss more....?
Another classic example is in the case of Islamic financing. Islamic financing instruments normally revolved around the concept of buying and selling such as bai muajal, bai bithaman ajil or bai at-tawarruq. Economic substance of Islamic financing is very similar to conventional loan. The profit on loan is interest but in the case of Islamic financing it is purely profit. However, Islamic financing involved buying and selling of asset at transparent mark-up. There are contracts of purchasing and selling of assets involved. The relationship is buyer and trader as compared to conventional loan borrower and lender. Conventional loan is simply money lending with interest.
This leads to a question whether Islamic financing is like a conventional loan. From the economic substance it may appear to be similar as the flow of funds has almost the same impacts but from the legal form it is obviously not. This leads to my argument that Substance Over Form as an accounting principle cannot be adopted for Islamic financial transactions. The concept that should be used is Form Over Substance. I have discussed 2 examples already, should we discuss more....?
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