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The (mis)use of al-Hilah (legal trick) and al-Makhraj (legal exit) in Islamic finance

Edib Smolo and Abubakar Muhammad Musa

Journal of Islamic Accounting and Business Research, 2020, vol. 11, issue 10, 2169-2182

Abstract: Purpose - The purpose of this paper is to discuss the concepts ofhilah(legal stratagem or legal trick) andmakhraj(legal exit) and to examine their relevance and application in the contemporary Islamic financial services and products. Design/methodology/approach - This paper uses the qualitative research approach to provide a theoretical overview ofhilahandmakhrajliterally and technically and to examine their practical applications in Islamic financial products and services. In particular, this paper evaluates several Islamic financial contracts and examines its practices in light of the implications ofhilahormakhraj. Findings - The paper finds that there is a glaring difference in perception and application ofhilahandmakhraj, as argued by some scholars. It has been found that the principle ofhilahhas been extensively used in the Islamic finance industry as a way to circumvent theribaprohibition. For example, Islamic financial instruments such asbay’ bithaman al-ajil, bay’ al-‘inah, tawarruq, commoditymurabahah,musharakah mutanaqisahand, in some cases, the sale and lease backsukukare found to be tainted byhilah. Research limitations/implications - Because this is a theoretical paper, it should be explored in more detail, and critical analysis of Islamic financial services and products should be reviewed in line with these two principles to ascertain if the products and services are in line with Shariah requirements and devoid ofhilahpractices or not and to align the industry with themaqasid al-Shariah. Practical implications - This paper identifies a serious challenge that Islamic finance practitioners face in product development in their effort to provide more competitive services to their customers. As a result, it demonstrates the need to proactively usemakhrajin innovating Islamic financial products and proffering more sustainable and competitive solutions. Originality/value - This paper discusses a topic that attempts to dispel the suspicious perceptions of some analysts as to the genuineness of Islamic financial practices.

Keywords: Islamic finance; Tawarruq; hilah (legal stratagem); Makhraj (legal exit); Bay’ bithaman ajil (BBA); Bay’ al-‘inah (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jiabrp:jiabr-01-2020-0009

DOI: 10.1108/JIABR-01-2020-0009

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