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

What is it about?

The paper finds that the principle of hilah has been extensively used in the Islamic finance industry as a way to circumvent the riba prohibition. For example, Islamic financial instruments such as bay’ bithaman al-ajil, bay’ al-‘inah, tawarruq, commodity murabahah, musharakah mutanaqisah and in some cases the sale and lease back sukuk are found to be tainted by hilah. To come up with important solutions to the current Islamic finance travails, the forward-thinking is simply to apply the makhraj doctrine and cautiously avoid hilah during the process to prevent reputational risk for the industry. While it is evident from Shari’ah books that most controversies are cantered on hilah because of its repugnant nature right from the historical perspective, some scholars do consent to the use of hilah but the outcome or end objective is subject to the fundamental five ahkam (rules) of Shari’ah. All seem to agree, however, that the application of makhraj on daily difficulties and challenges that a Muslim may face is accepted unanimously.

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