Sharīʿah appraisal on the issue of imposing burden of proof to the entrepreneur in trust based contracts

Abstract

Purpose The purpose of this paper is to examine the Shariah view on the legitimacy of requiring the entrepreneur to prove that he/she has complied with all business requirements in case the actual profit was below the expected profit in trust-based contracts such as mudarabah and musharakah. Design/methodology/approach This paper is part of the research which applies qualitative research approaches, including among others, content analysis, interviews, observations and descriptive analysis using fiqh muqaran (comparative analysis of jurists’ arguments) in few phases. Findings The study found that shifting the burden of proof to the fiduciary is the weightier view and necessary to ensure that both sides are protected. The considerations of protecting people’s wealth (ḥifẓ amwāl al-nās) and mitigating widespread greed (ṭamaʿ) are among the reasons for allowing elements such as ʿurf, tuhmah and dalālat al-ḥāl to be treated as bayyinah in trust-based contracts when the fiduciary is obliged to defend himself from litigation. Research limitations/implications The study is meant to strengthen the practices of Islamic banks world wide. Practical implications Few protections can be applied for capital provider. Social implications This study is meant to give solution in dealing with moral hazard of both parties, and to provide solution to the regulator for policy drafting and to increase confidence to the industry. Originality/value The finding is important in assisting the regulators in drafting the policy to protect both parties without neglecting the essence of trust-based contracts.

Moral Hazard Behaviors and Mitigation Strategies: A Systematic Review

“…Looking through the government's perspective, Paper P15 (Kapounek 2017) highlighted the impact of the institutional environment on bank lending activities. The results supported the finding in Paper P46 (Wu & Wu 2016) and Paper P47 (Naim et al 2016) which suggested that information sharing could help to lower the corruption level in lending activity. In the legal study Paper P33 ) also found that moral hazard could be cushioned during the judicial review if the legislator has information on policy cost.…”

“…Paper P46 (Wu & Wu 2016) also stated that the credit development rating model supported the idea stated in Paper P3 ) that can mitigate the adverse selection and hazard problem in the loan market. In the business field Paper P47 (Naim et al 2016) pointed out the issue of Sharia legitimacy in partnership contracts, where the finding indicated that it is permissible for the capital provider to oblige the entrepreneur to provide his misconduct information that may incur loss. This permissibility will be a solution to mitigate the moral hazard involving both parties.…”

“…Supervisory and regulatory measures , supervisory distribution , and risk diversion (Eufinger et al 2016) were among the methods proposed to minimise risk from unethical behaviour. In addition, this behaviour had also been analyzed in investment and financial risk management (Wu & Wu 2016), banking sector and fiscal risk management by financial institutions (Irwin 2016), politics, governance and economic stability , involving contracting agencies in agreements (Naim et al 2016), as well as ethics and financial scandals in the industry (Steen et al 2016). In addition, agriculture is not exempt from facing moral hazard behaviour since most agriculture projects involve subsidy programs (Razack et al 2009).…”