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Incoherence of Contract-Based Islamic Financial Jurisprudence in the Age of Financial Engineering

Incoherence of Contract-Based Islamic Financial Jurisprudence in the Age of Financial Engineering
Mahmoud A. El-Gamal
Rice University
Duke Islamic Studies Center
May 2007

Abstract: "Islamic financial jurisprudence has always had the stated aim of enhancing human welfare, and therefore prohibitions must be seen through the lens of welfare-enhancing regulation of financial practices. In today’s age of financial engineering, utilizing many of the legal and financial advances of the past two decades, it is quite easy to synthesize the contracts that classical and contemporary jurists forbade from the ones that they have permitted. This financial engineering approach was always possible to some extent, but recent advances have reduced transaction costs substantially. In premodern societies, when transaction costs of ruses to circumvent prohibitions were substantial, prohibitions could serve their intended regulatory purpose, albeit imperfectly. In today’s age of low-cost financial engineering, the regulatory substance of prohibitions, contract conditions, and other contract-based juristic rulings has been diluted to the point of rendering the contract-based jurisprudence incoherent".


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