The study aims at discussing the approach toward Shari'ah non-compliance transactions in Islamic financial institutions (IFIs). The Hanafi's approach in dealing with invalid contracts is employed. The study reveals that defects in contracts requires either re-execution or rectification. Based on the Hanafi's approach, not every defect in contracts calls for re-execution and purification. Some defects need only rectification. Once the necessary amendments have been made, the contract is valid and the legal effect is then operative. Moreover, not all Shariah non-compliant transactions is to be purified by way of channeling it to charity. There are also possible instances whereby the proceeds generated need to be returned to the original owner. The study provides a new approach to IFIs in dealing with Shari'ah non-compliant transactions and gives clear insight on how the defects in contracts are to be treated. The finding of the study is valuable for regulators in formulating the appropriate methodology on how to treat Shari'ah non-compliant transactions in IFIs.