This document discusses the principles of form over substance and substance over form in Islamic finance. It provides examples of how substance over form is applied in certain cases where form and substance are inconsistent, such as in Ijarah Muntahiah Bittamleek contracts and evaluating offer and acceptance. While form is important in ensuring legal and Sharia compliance, substance is also important to assess the true economic nature of a transaction. The Sharia Advisory Council has ruled that both substance and form should be consistent, but substance takes precedence over form in cases of inconsistency.

1. FORM OVER SUBSTANCE
BY
MOHD SAFWAN BIN HAMZAH

2. DEFINITION
“ An Islamic principle that emphasises on
its legal form rather than on the financial
reality(substance) of a particular transaction
”

3.  Emphasise on its legal form
 Example: legal perspective aspect, underlying contracts
used.
 important to be clarify legality of contract first before other
transaction can take place.
 However, substance is also needed in Islamic finance as it usually
related to the end result or substance of the transaction is recorded.

4.  However, in some of the cases, the application of “substance over form”
principle which is used widely in conventional are still being used in Islamic
finance.
 Substance over form- Financial reporting that records the whole economic
effects of a transaction, or a series of related transactions, instead of reporting
it merely from disjunctive contracts or legal perspective.
 The application of “substance over form” prinicple in Islamic finance
bring different opinions among jurists.

5.  This ‘substance over form’ principle as practiced by
conventional entirely is not really accepted by Islamic finance as it
can result in:
a) Misconduct activities-False information and presentation.
 Since the form (legality of the product) is less important in
substance over form principle, hence some company to do
some hilah in order to maximise the profit.
 Not accepted in Islamic finance as Islamic finance emphasize
on the importance of truthfulness and fairness in every
activities especially in terms financial products.

6. SAC’S RESOLUTION
 The SAC, in its 57th meeting dated 30 March 2006 and 71st meeting dated
26 - 27 October 2007, has resolved that in principle, “substance” and “form”
are equally important and highly taken into consideration by the Shariah. In
this regard, the Shariah emphasises that “substance” and “form” must be
consistent and shall not contradict one another. In the event of inconsistency
between “substance” and “form” due to certain factors, the Shariah places
greater importance on “substance” rather than “form”.
 Hence, the above statement conclude that the application of ‘substance
over form’ principle in Islamic finance can also be permissible in some of the
event of inconsistency.

7. EVENT OF INCONSISTENCY
 New Islamic contracts that contain collective elements derived
from different traditional contracts. Example: Ijarah Muntahiah
Bittamleek, Bai Al- Inah
 Offer and acceptance (aqd)
 ‘substance over form’ principle based financial activities in Islamic
finance depend on the fiqh maxim and the objective of the Shariah
which was:

8. IJARAH MUNTAHIAH
BITTAMLEEK
 A lease with a purchase or transfer arrangement is treated as an operating lease
followed by a sale is as the result from substance over form principle.
 If follow form over substance principle- Islamic law prohibited ijarah
muntahiah bit tamlleek as it have more than one transaction lease+ sale
 However, since the scholars viewed this concept from substance over form
perspective and also both of the objective of both of the ijarah contract and sale
contract is achieved plus there is no other element that can deemed this product to
be contradict with Shariah principle, hence on maslahah basis, this ijarah
muntahiah bitamleek is deemed permissible in Islamic finance.

9. BAY AL- INAH
 If follow form over substance principle- Bay al inah contract is deemed
as a permissible contract in Islamic finance since all of the basic condition for
a contract to be permissible is fulfill.
 However, since the scholar viewed this concept from substance over
form perspective, they noticed that the reality for this transaction is made was
not in accordance to the purpose of Islamic finance as it is a back door to
riba.

10. OFFER & ACCEPTANCE
 Aqad is one of the condition for any transaction to be permissible in Islam.
 Nowadays, there are some transaction in which the aqad is absence. Ex:
Vending machine, Financing (Bank often did not mention the aqad)
 If Form over substance-surely contract is invalid is the aqad is missing.
 Since substance over form is applied, the contract does not necessarily to
be void, as some scholar believe that as along as the person know that he is
geeting a financing from a bank, and need to pay the installment.then the
contract is valid. Same goes with transaction with the vending machine.

11.  Contracts are to be understood in relation to their intention and
substance, not by the words and phrases used.
 Imam Ahmad and Malik - the permissibility must be determined by
intention (niyya), Imam Al-Shafie sees the intention of the heart plays
no role in the ruling.

12. THE END