Finance and Growth: The Role of Islamic Contracts

Although, Islamic law has been in existence for more than fourteen hundred years, but its implementation have been subjected to the willingness of the rulers in the passage of history and civilization. Although, the study on financial contracts has been extensively reviewed, the role of Islamic contracts is not highlighted, except those in the historical institutional and contract theory literatures. The study that link finance and growth takes many dimensions. One of the dimensions is law and finance view. In the beginning, the studies that link the former only look at the finance variables and economic variables. Further development analyses the relationship at the system level, i.e. discussion whether bank-based vs. market-based matters on growth. Islamic finance comes up with its distinctive contracts and products of profit-loss sharing. It may give different character and notion in the financial system in particular and in the economic system in general. This paper is aimed at discussing Islamic laws which are relevant to finance. Most importantly the aspect of contracts as foundation for the distinctive Islamic financial products, i.e. the one resembling profit-loss sharing nature containing cooperative spirit, will be analysed to establish a strong connection with financial stability as pre-requisite to achieve the economic growth.