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ISLAMIC PROSPECTIVE OF BUSINESS

INTERNATIONAL ISLAMIC UNIVERSITY ISLAMABAD

PROJECT REPORT
Submitted to:
Sir.Naveed Khan
Submitted by:
Anwar Hussain
Abuzar Ahsan
Saad Iqbal
Nadeem Muzaffar
Batch:
BBA (Hons)

16-A

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TABLE OF CONTENTS
16-A ....................................................................................................................................1
TABLE OF CONTENTS.....................................................................................................2
ISLAMIC ECONOMIC SYSTEM VS CAPITALISM AND SOCIALISM.......................3
INTRODUCTION:..........................................................................................................3
ISLAMIC ECONOMIC SYSTEM..................................................................................3
Introduction:.................................................................................................................3
History:........................................................................................................................3
Property in Islam:.........................................................................................................4
CAPITALISM:................................................................................................................5
History:........................................................................................................................5
What is Capitalism? ....................................................................................................6
Features of Capitalism: ...............................................................................................6
Comparison with Islam: ..................................................................................................7
SOCIALISM..................................................................................................................12
What is Socialism? ....................................................................................................12
History:......................................................................................................................13
Distinctive Features of Socialism: ............................................................................14
CONCLUSION:.............................................................................................................17
COMPANY AND LIMITED LIABILITY FROM SHARIAH PROSPECTIVE.............18
Company in Islam:.........................................................................................................18
The Principle of Limited Liability:................................................................................19
Waqf:..........................................................................................................................22
Inheritance under debt:..............................................................................................25
Conclusion:....................................................................................................................27

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ISLAMIC ECONOMIC SYSTEM VS CAPITALISM AND


SOCIALISM

INTRODUCTION:
The most dominant economic systems in the modern world at present are
capitalism and socialism. The capitalism is the dominant economic philosophy
in the western world mainly comprising Western Europe and Northern America
under the leadership of United States. The socialism has been dominant
economic ideology in USSR, Peoples Republic of China and some countries of
Eastern Europe. Although socialism, with downfall and dissolution of its former
leader Soviet Union, has received a great setback, yet it still holds a lot of
relevance as an economic philosophy.

However, before comparing Islamic economic system with capitalism and


socialism, we would briefly introduce these systems and then we shall make
comparison.

ISLAMIC ECONOMIC SYSTEM


Introduction:

Islamic economics in accordance with Islamic law. Islamic economics can refer
to the application of Islamic law to economic activity either where Islamic rule is
in force or where it is not; i.e. it can refer to the creation of an Islamic economic
system, or to simply following Islamic law in regards to spending, saving,
investing, giving, etc.

History:

Traditional Islamic concepts having to do with economics included

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• Zakat - the "taxing of certain goods, such as harvest, with an eye to


allocating these taxes to expenditures that are also explicitly defined, such
as aid to the needy."
• Gharar - "the interdiction of chance ... that is, of the presence of any
element of uncertainty, in a contract (which excludes not only insurance but
also the lending of money without participation in the risks)"
• Riba - "referred to as usury"

These concepts, like others in Islamic law, came from the "prescriptions,
anecdotes, examples, and words of the Prophet, all gathered together and
systematized by commentators according to an inductive, casuistic method."
Sometimes other sources such as al-urf, (the custom), al-aql (reason) or al-ijma
(consensus of the jurists) were employed.

Property in Islam:
The Qur'an states that God is the sole owner of all matter in the heavens
and the earth. Allah said:
“So walk in the paths of the earth and eat of His sustenance which He
provides.”[Al-Mulk: 15]
“It is He who created for you all that exists on earth.” [Al-Baqarah: 29]

Man, however, is God's vice-regent on earth and holds God's possessions in


trust (amanat). Islamic jurists have divided properties into three categories:

• Public property
• State property
• Private property

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Early reforms under Islam:

Some argue early Islamic theory and practice formed a "coherent"


economic system with "a blueprint for a new order in society, in which all
participants would be treated more fairly". Michael Bonner, for example, has
written that an "economy of poverty" prevailed in Islam until 13th and 14th
century. Under this system God's guidance made sure the flow of money and
goods was "purified" by being channeled from those who had much of it to those
who had little by encouraging zakat (charity) and discouraging Riba
(usury/interest) on loans. Bonner maintains the prophet also helped poor traders by
allowing only tents, not permanent buildings in the market of Medina, and not
charging fees and rents there

CAPITALISM:
History:

The origins of capitalism and free markets can be traced back to the Islamic
Golden Age and Muslim Agricultural Revolution, where the first market economy
and earliest forms of merchant capitalism took root between the 8th–12th
centuries, which some refer to as "Islamic capitalism". A vigorous monetary
economy was created by Muslims on the basis of the expanding levels of
circulation of a stable high-value currency (the dinar) and the integration of
monetary areas that were previously independent. Innovative new business
techniques and forms of business organisation were introduced by economists,
merchants and traders during this time. Such innovations included the earliest
trading companies, big businesses, contracts, bills of exchange, long-distance
international trade, the first forms of partnership (mufawada) such as limited
partnerships (mudaraba), and the earliest forms of credit, debt, profit, loss, capital
(al-mal), capital accumulation (nama al-mal), circulating capital, capital

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expenditure, revenue, cheques, promissory notes, trusts (see Waqf), startup


companies,[ savings accounts, transactional accounts, pawning, loaning, exchange
rates, bankers, money changers, ledgers, deposits, assignments, the double-entry
bookkeeping system, and lawsuits. Organizational enterprises similar to
corporations independent from the state also existed in the medieval Islamic world

What is Capitalism?
Capitalism, as defined by the Collins Dictionary, “is an economic system
based on the private ownership of the means of production, distribution and
exchange”. Broadly speaking, capitalism is the name given to the economic
system in which the principal means of production, distribution and exchange
are in private (individual or corporate) hands. The profit motive constitutes the
prime stimulus to productive exertion and the ‘price mechanism’ determines
what things shall be made in what quantities and what conditions.

It is a type of economy in which capital is privately owned and may be freely


used by the owners as they wish in attempting to make profits from their
economic enterprises. Thus in this system of economy production and trade are
organized on individualistic basis. Private individuals or private firms and
corporations with the help of previously accumulated capital, but more often
utilizing money borrowed on interest, earn profits and build up business or
industrial empires for themselves by employing the mass of human labour for
wages

Features of Capitalism:
Chief features of capitalism include : existence of unrestricted private
ownership of means of production, exchange and distribution; economic
freedom; profit motive as incentive for productive activity; free market and
competition; existence of monopolies; banking and institution of interest; wide

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disparities in distribution of wealth; economic exploitation of the weak by the


strong, etc.

Comparison with Islam:


Capitalism and Islam are compared in respect of their basic economic
concepts as under:

1. Right to ownership: The existence of right of private ownership of property is


the hallmark of capitalism. It gives unrestricted and unencumbered full rights of
ownership to the individual. The individual may acquire, own or alienate his
property in whatever manner he likes. The system believes in the private
ownership of the means of production, distribution and exchange which are
managed and controlled by individuals or groups of individuals for private
profit. The unrestricted right to own property and earn profits leads to
concentration of wealth in few hands. This necessarily disturbs the balance of
distribution of wealth and income in society. The economic disparities and the
ever-increasing gulf between the rich and the poor sow the seeds of discord and
destruction in the capitalist society.

Islamic concept of ownership is unique one. Ownership, in reality,


belongs to God while some rights only vest in man so that he may fulfill the
purpose of God, that is the purpose of community by acting as a trustee for those
in need. In other words, what Allah has created for benefit of and service to man
belongs collectively to the whole humanity. Legal ownership by the individual
is recognized in Islam but it is subject to the moral obligation that in all wealth
all sections of society have the right to share.

Thus private or individual ownership in Islam is not unlimited or


unrestricted. All the means of production are not placed under private ownership
as public ownership of certain things of common utility exists side by side with
it in an Islamic state. Islamic state has also the right to nationalize certain things
which are under private ownership for the benefit of the community. In this way

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the limited right of private ownership with law of inheritance which distributes
the estate of the deceased among fairly large number of heirs averts
concentration of wealth in few hands and thus prevents class-conflict.

2. Economic Freedom: Unrestricted economic freedom and non-interference of


the state in such freedom is another feature of capitalist economy. Every
individual is at liberty to initiate, organize and establish any enterprise, business,
trade, profession, etc. He has full freedom to earn as much income as he can and
spend his wealth in whatever manner he likes. This unrestricted economic
freedom generally leads to earning of wealth through foul means such as
gambling and prostitution. It also encourages business malpractices such as
smuggling, black marketing, profiteering, hoarding, speculation, forward
transactions, fraud, exploitation, adulteration, etc. Thus a mad-race for earning
wealth becomes order of the day and high social and moral values such as
fraternity, brotherhood, mutual help, love, truthfulness give place to selfishness,
callousness, hatred, falsehood and mistrust. Capitalism, in fact, has come to
signify a religion of money or dollar dictatorship.

Islam also allows economic freedom to an individual who is at liberty to


earn wealth, own it and spend his wealth at his discretion. But the freedom given
by Islam in economic sphere is not unlimited. Islam makes distinction between
halal (permitted being lawful) and haram (forbidden being unlawful) in every
economic activity embracing vast fields of production, exchange and
consumption. Certain means of earning wealth such as interest, bribery,
embezzlement, gambling, games of chance, speculation, monopoly, usurpation
of wealth of orphans and other weaker persons, prostitution, singing and
dancing, sale of wine and narcotics, short weighing and short measuring, trade
in haram things, immoral and exploitive methods, etc. are prohibited to a
Muslim. Similarly consumption of wealth on luxurious living, haram things and

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extravagant spending is also forbidden. A Muslim is required to pay Zakat and


spend whatever he can for the cause of the poor and the destitute.

“O you who believe! Spend of the good things which you have earned, and of
that which We bring forth from the earth for you.” [Al-Baqarah: 267]

All these regulations promote moral values in Islamic society and


eliminate mad-race for wealth and material gains.

3. Monopoly: Competition, which is another feature of capitalism, leads to the


destruction of minor enterprises and firms. This encourages merger of smaller
business organizations into major ones and thus monopolies or cartels are
established. Monopolies kill free competition, cause inflation in prices and
ultimately result into unemployment. Thus labour and consumer are both
exploited in such a situation. Morever, trade-cycles, unplanned production, over-
competition, increasing accumulation of capital upsets the balance between
production and consumption which sometimes leads to economic depressions.

Islam forbids unhealthy competition and bans all the ways which lead to
it. Islam also disallows establishment of monopolies.

“And give them from the property of Allah, which He gave to you.”[An-Nur: 33]

The Prophet of Islam is reported to have said: Whoever monopolies is a


sinner. Especially monopolies over food-stuffs or articles of daily use are
forbidden by Islam. Commodities and services which are of the common interest
of the community are never allowed to be monopolized. Those essential things
which are required by everyone are generally maintained under joint ownership
of the community. Thus interests of the consumers and labour are protected and
balance between production and consumption is never allowed to be disturbed.

4. Institutions of Interest: The Institution of banking and interest is the life-blood


of capitalistic form of economy. For business, trade and industry especially for

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big projects and economic ventures, huge funds are required which no
individual or firm can arrange. This leads to establishment of banks who borrow
capital from depositors and investors on lower rate of interest and lend it to
business enterprises on higher rate of interest. Thus the institution of interest has
become part and parcel of capitalism.

Islam considers interest as the most exploitive institution for humanity and has
abolished it root and branch in its every form and manifestation. According to
Al-Quran taking of interest tantamount to war against God and His
Apostle, while according to Prophet Muhammad (PBUH) interest is worse
than adultery. Islam builds its economy on interest free basis and promotes
profit and partnership as incentive for saving and investment.

“Whoever gives a good loan to Allah; and Allah will multiply it to him many
folds”

5. Exploitation: Unrestricted right of economic freedom and uncontrolled right


of private ownership has practically resulted into exploitation. Economic
exploitation of the weak by the strong is an order of the day in a capitalist
society. Labour is exploited by the capitalist, farm worker is exploited by the
landlord, poor is exploited by the rich, servant is exploited by the master, people
are exploited by the rulers and above all national treasury is exploited and looted
by the persons in power. Wealth is the religion of every person (but a few
honorable exceptions) and earning of it through fair or foul means is his creed.
Consequently, everyone exploits the other economically with a view to gather as
much fortune as possible.

Islamic economic system, on the other hand, ensures elimination of


exploitation of one man by the other. Many effective measures have been taken
by Islam to do so. Riba or usury is one of the worst instruments of human
exploitation and this has been abolished in all forms by Islam. Other means of

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exploitation such as bribery, gambling, speculative transactions, embezzlement,


and prostitution have also been prohibited. Interests of the weaker classes of the
society like women, orphans, slaves, labourers, tenants, consumers, etc. have
been protected against their exploiters through legislation by Islam. Islam has
given these weaker sections of society many rights which were hitherto
unknown in the history of humankind.

6. Distribution of Wealth: Capitalism does not believe in fair and just


distribution of wealth. Since it believers in full economic freedom and private
ownership of means of production, wide economic disparities exist in
capitalistic economy. Concentration of wealth in few hands takes place while
huge majority of the populace is deprived of the very basic necessities of life.
The privileged few live in luxury while poverty, ignorance, disease and
unemployment are the lot of the multitude. This disturbed balance of
distribution of economic resources and unbridgeable gulf between the haves and
have-nots ultimately leads to class struggle and ultimate overthrow of the very
system.

Islam on the one hand guarantees provision of basic human needs such as
food, clothing and shelter to everyone and, on the other hand, ensures fair and
equitable distribution of wealth and economic resources among all. It does not
tolerate existence of wide disparities among the rich and the poor and tries to
eliminate concentration of wealth in few hands. For bridging the gulf between
the rich and the poor and for ensuring equitable distribution of wealth, Islam has
taken many steps such as Zakat and Sadaqat, laws of inheritance and bequest,
voluntary charities and compulsory contributions in the form of taxes and duties.
To prevent concentration of wealth in few hands Islamic economic code has
taken measures like abolition of interest, prohibition of earning of wealth
through haram means, prohibition of hoarding of wealth, etc.

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SOCIALISM

What is Socialism?
According to the Collins Dictionary, “Socialism is an economic theory or
system in which the means of production, distribution and exchange are owned
by the community collectively through the state. It is a transitional stage in the
development of a society from capitalism to communism, and is characterized
by the distribution of income according to work rather than need”. Advanced
Learner’s Dictionary explains socialism as “a political and economic theory
advocating that a country’s land, transport, natural resources and chief industries
should be owned and controlled by the whole community or by the state and that
wealth should be equally distributed.”

Encyclopedia Britannica writes: “Socialism is essentially a doctrine and a


movement aiming at the collective organization of the community in the
interests of the mass of the people by means of the common ownership and
collective control of the means of production and exchange.” Encyclopedia
Americana, in its article on socialism, states: “Socialism is a doctrine that
espouses public ownership or control of the major means of production. It aims
to achieve a more equitable and efficient distribution of social goods and greater
economic planning than exist under capitalism. Although the central concerns of
socialism appear to be economic, its ramifications extend to the moral, social
and political realms.”

Political scientists and scholars do not agree on a uniform definition of


socialism. It has been aptly remarked that there are as many types of socialism
as there are socialists. Socialism is therefore compared to a hat which has lost its
shape because everybody wears it.

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History:
Socialism has drawn its strength from the desire of conscientious men is all
ages from Plato to Ruskin for a more equitable and fair distribution of the
income and wealth. However, the word ‘socialism’ came into general use
around 1830. But it was Karl Marx who founded it on scientific lines. Marx is
known as father of socialism. He developed the principle of scientific socialism
which came to be known later on as communism. Along with his friend
Frederick Engel’s, he wrote and issued the famous communist Manifesto in
1848 calling upon the labour of the world ‘to unite as they were nothing to lose
but their chains’. He wrote his famous book Das Capital in 1867 which is
considered to be the Bible of socialism. Philosophy of Marx is mainly based
upon the following two principles:

1. Dialectic materialism or materialistic interpretation of history is the most


important feature of Marxism. Marx seeks to explain every event in history on
economic grounds. All wars, riots and political movements, according to him,
have their origin in economic factors. He views history as a class struggle i.e.
struggle between the oppressor and the oppressed. Present struggle between the
capitalist class and the workers or proletariat class would result into victory of
proletariat who would establish their dictatorship, and thus with the liquidation
of capitalist class, a classless society shall come into being and state would
wither away.

2. Theory of surplus value is another feature of Marxian teachings. According


to Marx, the capitalist gets for his commodity more than he has spent on labour
and other costs. The excess of market value over the costs is surplus value. This
surplus value, which according to him, is created by labour, is usurped by the
capitalist as profit.

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Distinctive Features of Socialism:


Distinctive features of socialism, briefly speaking, include : Public or
state ownership of all means of production, distribution and exchange and
abolition of private property; economic equality and provision of basic
necessities of life for every citizen; materialism and emphasis on economic
factors; totalitarian state and dictatorship of proletariat; suppression of civil
liberties, etc.

Comparison with Islam:

Socialism and Islam are compared in respect of their basic economic


perceptions as under:

1. Ownership: State ownership of all property and means of production, as


stated earlier, is the most distinctive feature of socialist economy. Private
ownership of property and of all the means of production, distribution and
exchange is totally abolished. Land, factories, transport, communications,
mines, etc are all placed under state control. This leads to management of these
means of production by the bureaucracy. Bureaucratic running of economic
machinery results into inefficiency, low production and collapse since the
bureaucrats lack initiative, follow rigid rules and are not trained to run business.

Islam does not abolish private ownership of property and does not place
all the means of production, distribution and exchange in the hands of the state.
Although Islam upholds public ownership of some means of production which
are the common utility to the people, but it concedes the rights of private
ownership of majority of the means of production and distribution. Unlike
socialism, Islam gives economic freedom to an individual who can earn wealth,
own it and enjoy it within certain limits provided he does not infringe teachings
of Islam in the process of earning, owning and consuming it.

2. Materialism: Socialism, especially scientific socialism or communism rests on


a purely materialistic basis. Dialectic materialism or materialistic interpretation

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of history is the most vital element of Marxism. Marx has sought to explain
every event in history on economic grounds. According to him, origin of every
activity of man lies in economic factors. Marx does not believe in religion
which, in his view, is a bourgeois invention to keep the proletariat under their
perpetual control. Engel’s said: Matter is the only real thing in the world. The
communists believe that human reason is just a manifestation of matter and soul
has no independent existence of its own but is a product of matter. They hold
that all the different stages of human progress are determined by the interplay of
conflicting economic forces alone, thus leaving no place for God’s will. So
communism is a purely materialistic ideology which ridicules religion, concept
of God and all forms of spiritualism dubbing them as unscientific.

Islam is the perfect and final religion revealed by Lord of the universe for
the guidance of mankind. Its foremost aim is to ensure ‘falah’ or well-being of
humanity in this world and in the Hereafter. It does not give importance to
matter only at the cost of spirit as does a secular ideology like socialism. Islam
believes in the material as well as moral and spiritual welfare of its followers at
micro and macro level. Followers of Islam believe in one God, in all the
Prophets and Holy Scriptures, in the Hereafter, in the moral code and in the
universal brotherhood of mankind. In an Islamic state there exist no antagonistic
classes conflicting with each other; neither all the events in history are
determined by interplay of economic forces. Although, in the sight of Islam,
welfare of society does not lie in economic prosperity only as moral and
spiritual advancement is equally important, yet it does not discourage pursuit of
material prosperity through fair means.

3. Regimentation and Totalitarianism: Communism sets up a totalitarian state in


which bourgeois class is liquidated and strong dictatorship of the proletariat
class is established. Fundamental rights and civil liberties are crushed and man
is rendered merely to the status of an economic animal. In the name of bread he

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is deprived of freedom of conscience, freedom to think, freedom to speak and


freedom to act. In order to achieve economic objectives and in order to work the
huge productive machine efficiently, the state becomes all powerful and
establishes complete regimentation. Thus the state under communism does not
wither away, as predicted by Marx; rather it turns out to be a worst type of
totalitarian state.

Islam, on the contrary, believes in democratic form of government as the


Quran, its revealed book, enjoins upon Prophet Muhammad (PBUH) to conduct
public affairs in consultation with his followers. Islam gives all the fundamental
rights and civil liberties to the people living in the Islamic state. All the citizens
have freedom of person, freedom of religion and conscience, freedom of
expression, right to own and alienate property, right to protection of honour,
right to criticize the government, right to equality before the law, right to
education, right to medical care and above all right to basic human needs such as
food, clothing and shelter. Islamic state does not establish dictatorship of any
class; neither it is a totalitarian state. The state under Islam does not wither
away; rather it becomes indispensable as it discharges all the functions of a
traditional state and modern welfare state.

4. Economic Equality: Economic equality is another claim of communism


although it has never been realized so far. In theory at least it is claimed that the
rights of the individuals in the economic sphere are governed by the principles
of equality. Every individual is provided with the necessaries of life according to
his needs.

Islam, unlike communism, recognizes that there is no equality among


human beings as regards the economic means and possession of worldly wealth.
The Quran considers these inequalities and disparities in the distribution of
wealth as part of Divine economic order and, therefore, does not try to eliminate
them by unnatural and artificial means. The existence of economic disparities, in

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fact, is a test by which Allah tries the human beings how they behave in good
and bad circumstances. However, Islam does not permit the differences in
possession of wealth to assume such proportions that concentration of wealth
takes place in few hands that live in luxury while vast majority of people lead a
life of abject poverty, misery and deprivation. Islam does not tolerate the
existence of unbridgeable gulf between the rich and the poor, but unlike
socialism it does not believe in equal distribution of wealth. Actually Islam
believes in fair, just and equitable distribution of wealth and in social justice.

CONCLUSION:

Islam as a religion and ideology needs to be revisited by both Muslims and non-
Muslims alike. It is a religion that should be looked at as a continuation of
previous religions and inheritor of them as well. As an ideology, Islam should be
viewed as one that provides economic, political, and social systems that do not
belong to the ideologies of materialism (both capitalism and socialism). After the
fall and collapse of socialism, the people of the world resorted to capitalism as
their only alternative. The collapse of capitalism is eminent. It is the responsibility
and the duty of the people of the world to examine Islam with serious and sincere
scrutiny, in order to consider it as the only viable alternative to capitalism.

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COMPANY AND LIMITED LIABILITY FROM SHARIAH


PROSPECTIVE

Company in Islam:

Islam has laid down rules for ownership and designated various rules for
when individuals come together and distribute profits amongst themselves. This is
different to employment (Ijara) where one is compensated for the use of their skill
or labour in the form of wages or a salary. Islamic jurists have defined the word
'company' ("Shirkah" in Arabic) to mean "join together or intermix" and have
interpreted it as a legal concept "as a contract between partners in capital and
profits". A Shirkah is further elaborated to mean

"participation of two or more persons in a certain business with


defined amounts of capital according to a contract for jointly carrying out a
business and for sharing profits and losses".

This concept was recognised from the dawn of Islam. A Company


(Sharikah) is essentially a contract where people come together and instead of
paying themselves a salary they distribute the profits amongst themselves. In
origin a company is a contractual matter and Islam has laid out detailed rules for
contracts. Under the rules of Islamic Law (Sharia), companies are divided into
following main classes:

1. The Company of Equals (Al-'Inan) this is where both partners put their money
into a business and work with it. Both partners would have the right to buy and
sell and take the company forward, hence all partners are all equal in their deposal.

2. The Company of Bodies (Al-Abdan) this is where two or more people come
together with their skills such as a consultant, doctor or craftsmen. Although they
use their money, the skill they have is what constitutes the basis of the company.

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3. The Company of Body and Capital (Mudharaba) this is where one funds the
capital of the business and the other partner works with it. The partner who
provides the capital element is a silent partner and takes no part in the running of
the business. The other partner buys and sells on behalf of the company.

4. The Company of Reputation (Wujooh) this is a company similar to


madharabah but the capital is provided by a silent partner who has respect and
standing and based upon this the company trades. The partner could be a rich
merchant, which would mean debts will always be paid by this company as they
are backed by a wealthy individual.

5. Company of Negotiation (Mufawadha) this is any combination of the above.

The Principle of Limited Liability:

Introduction:
The concept of 'limited liability' has now become an inseparable ingredient of
the large scale enterprises of trade and industry throughout the modern world,
including the Muslim countries. The present discussion aims to explain this
concept and evaluate it from the Shari‘ah point of view in order to know whether
or not this principle is acceptable in a pure Islamic economy. The limited liability
in the modern economic and legal terminology is a condition under which a
partner or a shareholder of a business secures himself from bearing a loss greater
than the amount he has invested in a company or partner-ship with limited
liability. If the business incurs a loss, the maximum a shareholder can suffer, is
that he may lose his entire original investment. But the loss cannot extend to his
personal assets, and if the assets of the company are not sufficient to discharge all

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its liabilities, the creditors cannot claim the remaining part of their receivables
from the personal assets of the shareholders.
Although the concept of 'limited liability' was, in some countries applied to
the partnership also, yet, it was most commonly applied to the companies and
corporate bodies. The basic purpose of the introduction of this principle was to
attract the maximum number of investors to the large-scale joint ventures and to
assure them that their personal fortunes will not be at stake if they wish to invest
their savings in such a joint enterprise. In the practice of modern trade, the concept
proved itself to be a vital force to mobilize large amounts of capital from a wide
range of investors.
No doubt, the concept of 'limited liability' is beneficial to the shareholders of a
company. But, at the same time, it may be injurious to its creditors. If the
liabilities of a limited company exceed its assets, the company becomes insolvent
and is consequently liquidated, the creditors may lose a considerable amount of
their claims, because they can only receive the liquidated value of the assets of the
company, and have no recourse to its shareholders for the rest of their claims.
Even the directors of the company who may be responsible for such an
unfortunate situation cannot be held responsible for satisfying the claims of the
creditors. It is this aspect of the concept of 'limited liability' which requires
consideration and research from the Shari‘ah viewpoint.
Limited Liability in Shariah:
Although the concept of 'limited liability' in the context of the modern commercial
practice is a new concept and finds no express mention as such in the original
sources of Islamic Fiqh, yet the Shari‘ah viewpoint about it can be sought in the
principles laid down by the Holy Qur’an, the Sunnah of the Holy Prophet and the
Islamic jurisprudence. This exercise requires some sort of ijtihad carried out by the
persons qualified for it. This ijtihad should preferably be undertaken by the
Shari‘ah scholars at a collective level, yet, as a pre-requisite, there should be some
individual efforts which may serve as a basis for the collective exercise.

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As students of Shari‘ah, the writers have been considering the issue since long.
It is the outcome of initial thinking on the subject, and the purpose of this article is
to provide a foundation for further research.
The question of 'limited liability' it can be said, is closely related to the
concept of juridical personality of the modern corporate bodies. According to this
concept, a joint-stock company in itself enjoys the status of a separate entity as
distinguished from the individual entities of its shareholders. The separate entity as
a fictive person has legal personality and may thus sue and be sued, may make
contracts, may hold property in its name, and has the legal status of a natural
person in all its transactions entered into in the capacity of a juridical person.
The basic question, it is believed, is whether the concept of a 'juridical person'
is acceptable in Shari‘ah or not. Once the concept of 'juridical person' is accepted
and it is admitted that, despite its fictive nature, a juridical person can be treated as
a natural person in respect of the legal consequences of the transactions made in its
name, we will have to accept the concept of 'limited liability' which will follow as
a logical result of the former concept. The reason is obvious. If a real person i.e. a
human being dies insolvent, his creditors have no claim except to the extent of the
assets he has left behind. If his liabilities exceed his assets, the creditors will
certainly suffer, no remedy being left for them after the death of the indebted
person.
Now, if we accept that a company, in its capacity of a juridical person, has
the rights and obligations similar to those of a natural person, the same principle
will apply to an insolvent company. A company, after becoming insolvent, is
bound to be liquidated: and the liquidation of a company corresponds to the death
of a person, because a company after its liquidation, cannot exist any more. If the
creditors of a real person can suffer, when he dies insolvent, the creditors of a
juridical person may suffer too, when its legal life comes to end by its liquidation.
Therefore, the basic question is whether or not the concept of 'juridical person' is
acceptable to Shari‘ah. Although the idea of a juridical person, as envisage by the

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modern economic and legal systems has not been dealt with in the Islamic Fiqh,
yet there are certain precedents where from the basic concept of a juridical person
may be derived by inference.

Waqf:

The first precedent is that of a Waqf. The Waqf is a legal and religious
institution wherein a person dedicates some of his properties for a religious or a
charitable purpose. The properties, after being declared as Waqf, no longer remain
in the ownership of the donor. The beneficiaries of a Waqf can benefit from the
corpus or the proceeds of the dedicated property, but they are not its owners. Its
ownership vests in Allah Almighty alone.
It seems that the Muslim jurists have treated the Waqf as a separate legal entity
and have ascribed to it some characteristics similar to those of a natural person.
This will be clear from two rulings given by the fuqaha’ (Muslim jurists) in
respect of Waqf.
Firstly, if a property is purchased with the income of a Waqf, the purchased
property cannot become a part of the Waqf automatically. Rather, the jurists say,
the property so purchased shall be treated as a property owned by the Waqf. It
clearly means that a Waqf, like a natural person, can own a property.
Secondly, the jurists have clearly mentioned that the money given to a mosque
as donation does not form part of the Waqf, but it passes to the ownership of the
mosque.
Here the mosque is accepted to be an owner of money. This principle has been
mentioned by some jurists of the Maliki School also. They have stated that a
mosque is capable of being the owner of something. This capability of the
mosque, according to them, is constructive, while the capability enjoyed by a human
being is physical.

Another renowned Maliki jurist, namely, Ahmad Al-Dardir, validates a

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bequest made in favour of a mosque, and gives the reason that a mosque can own
properties. Not only this, he extends the principle to an inn and a bridge also,
provided that they are Waqf.
It is clear from these examples that the Muslim jurists have accepted that a Waqf
can own properties. Obviously, a Waqf is not a human being, yet they have treated
it as a human being in the matter of ownership. Once its ownership it established,
it will logically follow that it can sell and purchase, may become a debtor and a
creditor and can sue and be sued, and thus all the characteristics of a 'juridical
person can be attributed to it.

Baitul-Mal:
Another example of 'juridical person' found in our classic literature of Fiqh is
that of the Baitul-mal (the exchequer of an Islamic state). Being public property,
all the citizens of an Islamic state have some beneficial right over the Baitul-mal,
yet, nobody can claim to be its owner. Still, the Baitul-mal has some rights and
obligations. Imam Al-Sarakhsi, the well-known Hanafi jurist, says in his work
"Al-Mabsut":
"The Baitul-mal has some rights and obligations which may possibly be
undetermined."
At another place the same author says: "If the head of an Islamic state needs
money to give salaries to his army, but he finds no money in the Kharaj
department of the Baitul-mal (wherefrom the salaries are generally given) he can
give salaries from the sadaqah (Zakah) department, but the amount so taken from
the sadaqah department shall be deemed to be a debt on the Kharaj department".
It follows from this that not only the Baitul-mal, but also the different
departments therein can borrow and advance loans to each other. The liability of
these loans does not lie on the head of state, but on the concerned department of
Baitul-mal. It means that each department of Baitul-mal is a separate entity and in
that capacity it can advance and borrow money, may be treated a debtor or a

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creditor, and thus can sue and be sued in the same manner as a juridical person
does. It means that the Fuqaha of Islam have accepted the concept of juridical
person in respect of Baitul-mal.

Joint Stock:
Another example very much close to the concept of 'juridical person' in a joint
stock company is found in the Fiqh of Imam Shafi‘i. According to a settled
principle of Shafi‘i School, if more than one person run their business in partner-
ship, where their assets are mixed with each other, the Zakah will be levied on
each of them individually, but it will be payable on their joint-stock as a whole, so
much so that even if one of them does not own the amount of the nisab, but the
combined value of the total assets exceeds the prescribed limit of the nisab, zakah
will be payable on the whole joint-stock including the share of the former, and
thus the person whose share is less than the nisab shall also contribute to the levy
in proportion to his ownership in the total assets, whereas he was not subject to the
levy of zakah, had it been levied on each person in his individual capacity.
The same principle, which is called the principle of 'Khultah-al-Shuyu‘' is more
forcefully applied to the levy of Zakah on the livestock. Consequently, a person
sometimes has to pay more Zakah than he was liable to in his individual capacity,
and sometimes he has to pay less than that.

That is why the Holy Prophet has said:

'The separate assets should not be joined together nor the joint assets should
be separated in order to reduce the amount of Zakah levied on them.

This principle of 'Khultah-al-Shuyu‘' which is also accepted to some extent by


the Maliki and Hanbali schools with some variance in details, has a basic concept

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of a juridical person underlying it. It is not the individual, according to this


principle, who is liable to Zakah. It is the 'joint-stock' which has been made
subject to the levy. It means that the 'joint-stock' has been treated a separate entity,
and the obligation of 'zakah has been diverted towards this entity which is very
close to the concept of a 'juridical person', though it is not exactly the same.

Inheritance under debt:

The fourth example is the property left by a deceased person whose liabilities
exceed the value of all the property left by him. For the purpose of brevity we can
refer to it as 'inheritance under debt'.
According to the jurists, this property is neither owned by the deceased,
because he is no more alive, nor is it owned by his heir, for the debts on the
deceased have a preferential right over the property as compared to the rights of
the heirs. It is not even owned by the creditors, because the settlement has not yet
taken place. They have their claims over it, but it is not their property unless it is
actually divided between them. Being property of nobody, it has its own existence
and it can be termed a legal entity. The heirs of the deceased or his nominated
executor will look after the property as managers, but they are not the owners. If
the process of the settlement of debt requires some expenses, the same will be met
by the property itself.
Looked at from this angle, this 'inheritance under debt' has its own entity which
may sell and purchase, becomes debtor and creditor, and has the characteristics
very much similar to those of a 'juridical person.' Not only this, the liability of this
'juridical person' is certainly limited to its existing assets. If the assets do not
suffice to settle all the debts, there is no remedy left with its creditors to sue
anybody, including the heirs of the deceased, for the rest of their claims.

These are some instances where the Muslim jurists have affirmed a legal entity,
similar to that of a juridical person. These examples would show that the concept

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of 'juridical person' is not totally foreign to the Islamic jurisprudence, and if the
juridical entity of a joint-stock company is accepted on the basis of these
precedents, no serious objection is likely to be raised against it.
As mentioned earlier, the question of limited liability of a company is closely
related to the concept of a 'juridical person'. If a 'juridical person' can be treated a
natural person in its rights and obligations, then, every person is liable only to the
limit of the assets he owns, and in case he dies insolvent no other person can bear
the burden of his remaining liabilities. But at the same time, it should be
emphasized, that the concept of 'limited liability' should not be allowed to work
for cheating people and escaping the natural liabilities consequent to a profitable
trade. So, the concept could be restricted, to the public companies only who issue
their shares to the general public and the number of whose shareholders is so large
that each one of them cannot be held responsible for the day-to-day affairs of the
business and for the debts exceeding the assets. On this analogy the limited
liability of a joint-stock company may be justified.
As for the private companies or the partnerships, the concept of limited liability
should not be applied to them, because, practically, each one of their shareholders
and partners can easily acquire a knowledge of the day-to-day affairs of the
business and should be held responsible for all its liabilities. There may be an
exception for the sleeping partners or the shareholders of a private company who
do not take part in the business practically and their liability may be limited as per
agreement between the partners. If the sleeping partners have a limited liability
under this agreement, it means, in terms of Islamic jurisprudence, that they have
not allowed the working partners to incur debts exceeding the value of the assets of
the business. In this case, if the debts of the business increase from the specified limit,
it will be the sole responsibility of the working partners who have exceeded the limit.
The upshot of the foregoing discussion is that the concept of limited liability can
be justified, from the Shari‘ah viewpoint, in the public joint-stock companies and
those corporate bodies only who issue their shares to general public. The concept

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may also be applied to the sleeping partners of a firm and to the shareholders of a
private company who take no active part in the business management. But the
liability of the active partners in a partnership and active shareholders of a private
company should always be unlimited.

Conclusion:

At the end, we should again recall what has been pointed out at the outset.
The issue of limited liability, being a modern issue which requires a collective
effort to find out its solution in the light of Shari‘ah, the above discussion should
not be deemed to be a final verdict on the subject. This is only the outcome of an
initial thinking which always remains subject to further study and research. The
only purpose is to persuade them to evaluate their own performance from the
Shariah point of view and to adopt a realistic approach while designing their
procedure and determining their policies.

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