Smart Contracts from the Perspective of Islamic Law of Obligations

Today, as financial and commercial transactions become digitalized, smart contracts based on blockchain technology are increasingly gaining a place in the business world. So, how should smart contracts be evaluated from the perspective of Islamic law of obligations? Are they compatible with the principles of interest-free finance? 

Smart Contracts and Blockchain Technology 

Smart contracts are self-executing, immutable, and automated contracts that run on blockchain platforms like Ethereum. They allow agreements between parties to be executed without the need for third-party approval. They are widely used in the banking, trade, healthcare, and insurance sectors. 

The advantages of smart contracts are as follows: 

• Transparency: All transactions are recorded on the blockchain. 

• Automation: Transactions occur without the need for third parties. 

• Low Cost: Legal approval processes are accelerated and costs are reduced. 

• Reduced Risk of Error and Manipulation: In coded contracts, rules that cannot be changed by the parties are defined. 

Evaluation of Smart Contracts in Islamic Law 

Islamic law of obligations considers elements such as offer, acceptance, declaration of intent, and formal requirements of the contract. The validity of smart contracts from the perspective of Islamic law can be examined in the following ways: 

Offer and Acceptance (Formation of the Contract) 
In Islamic law, for a contract to be formed, the parties must explicitly give consent (offer and acceptance). In smart contracts, the parties give consent based on pre-coded conditions, which shows compliance with this element. 

Formal Requirements of the Contract 
Some contracts must be written, notarized, or concluded in the presence of witnesses. Since smart contracts are a digital record, whether they fully comply with these requirements is debatable. 

Defects in Will (Mistake, Duress, Deception) 
In Islamic law of obligations, a defect in will renders a contract void. Smart contracts obtain the consent of the parties based on coded rules; although the likelihood of error or deception is low, it has not been entirely eliminated. 

Smart Contracts in Terms of Islamic Finance 

In Islamic law, financial transactions that do not involve interest (riba), uncertainty (gharar), or speculation (maysir) are legitimate. Smart contracts may be compatible with Islamic finance in the following aspects: 

• Use in Interest-Free Financial Transactions: Islamic banks can integrate smart contracts into interest-free murabaha, ijarah, and tawarruq transactions. 

• Sukuk and Blockchain: The execution of sukuk (Islamic bonds) transactions can be made more transparent and reliable. 

• Zakat and Charity Management: Zakat and charity funds can be managed automatically through smart contracts. 

Conclusion 

Although smart contracts contain some compatibility issues from the perspective of Islamic law, they can be made compliant with interest-free finance principles if properly structured. Islamic financial institutions can benefit from this technology by developing Sharia-compliant blockchain solutions.