INTEGRATING SMART CONTRACTS INTO ISLAMIC FINANCE: APPLICATIONS, LEGAL CHALLENGES & REGULATORY GOVERNANCE

Abstract

The proliferation of blockchain technology has prompted growing scholarly and institutional interest in the application of smart contracts within Islamic finance. Although smart contracts offer advantages in terms of automation, transparency, and operational efficiency, their compatibility with the principles of fiqh al-muʿāmalāt remains inadequately theorised and practically unresolved. This paper adopts a doctrinal and conceptual approach to examine the opportunities and challenges associated with integrating smart contracts into the Islamic financial ecosystem. The analysis considers potential applications in Islamic banking, sukuk, takaful, and Islamic social finance, including zakat and waqf. The analysis gives particular attention to issues of contractual intention (niyyah), legal capacity, blockchain immutability, oracle dependency, and the exercise of khiyār and iḥsān within automated contractual environments. The study proposes a four-layer integrative model comprising a Shariah Compliance Layer, Smart Contract Execution Layer, Legal and Regulatory Layer, and Human Oversight (Amānah) Layer. Anchored within the Malaysian regulatory context, the model incorporates relevant initiatives introduced by Bank Negara Malaysia and the Securities Commission Malaysia to support responsible experimentation with digital financial products. The findings suggest that while smart contracts may contribute to reducing informational asymmetry and strengthening accountability, fully autonomous systems remain difficult to reconcile with several requirements of Islamic jurisprudence. A Shariah-by-design approach supported by continuous human oversight is therefore proposed as a mechanism for ensuring that smart contract applications remain aligned with the objectives of maqāṣid al-sharīʿah.