The word "context" is the root of contextual, and it means "the circumstances that form the setting for an event, statement, or idea, and in terms of which it can be fully understood and assessed." Contextual theology, therefore, is theology that asserts the necessity of cultural context to fully understand a passage of Scripture. It is the idea that the words of God do not always apply equally to all people at all times, but that some passages must be interpreted according to the culture in which they were written down. This type of biblical interpretation is also called "enculturation."
It is true that some parts of the Bible must be interpreted within the context of the culture. For example, there is a passage in 1 Corinthians 11:2-16, where Paul is giving a lesson to the Corinthians about submission. It talks about the angels being in submission to God, and Christ being in submission to God, and it says that the wife should be in submission to her husband—as a matter of principle, and as a symbol of authority (v. 10). He uses a discussion about hair length and head coverings to illustrate this principle, much of which is very confusing to us today. Hair length and head coverings have little meaning in our culture. Many men have long hair, and many women short hair, and head coverings are called hats, and people wear them at will, with no particular symbol or deeper meaning in mind. Paul was speaking to a specific group of people, who lived near the Temple of Aphrodite. They were used to seeing shrine prostitutes going around with their heads shaved. A woman with her head uncovered was, to them, disgraceful, because it was the same as having a shaved head (v. 4-5). This is a good example of a passage where contextual theology can be applied to help make sense of the passage.
However, this is not to say that the deeper principle of the passage was only applicable to that culture. The principles, the meaning, and the heart of the Scripture are applied equally to all people at all times. Even passages like the one mentioned above, which contain culture-specific illustrations, are only using those illustrations to illuminate a deeper point: that submission to God is proper, and order is better than chaos, and people should show respect (whatever that looks like in their culture) for God and for one another. Likewise, though the entire Bible was written by people living in cultures very different from ours, the message and the voice is uniquely God's, and God is eternal, and His message is applicable to anyone in any time, from any culture in history.
Contextual theology should be used sparingly; it should be applied only when necessary. It is also important not to bend the Scriptures to fit a current culture. There is some danger of biblical truths being altered in order to accommodate cultures. It has been observed that in many polytheistic cultures that worship idols, the people convert to Christianity and, perhaps for lack of solid biblical teaching, wind up simply adding Jesus to their pantheon of gods, which is a terrible, deceptive mistake. Jesus is "the way, and the truth, and the life" and no person comes to the Father except through Jesus (John 14:6).
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