Chapter 10: Fundamentals of Islamic Economic System by Dr. Muhammad Sharif Chaudhry



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Fundamentals of Islamic Economic System

By Dr. Muhammad Sharif Chaudhry



  1. Enterprise and Entrepreneur

  2. Forms of Organisation

  3. Mudarabah

  4. Musharika or Shirkah

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I- Enterprise and Entrepreneur

Enterprise, after land, labour and capital, is the fourth factor of production. Enterprise plays a leading role in production. The supplier of this factor is called entrepreneur or organiser. Enterprise is also called organisation. The whole job of organisation, planning and managing of business is called enterprise.

In the simple economic life of earlier times, all the factors of production i.e. land, labour, capital and enterprise were normally controlled by one person. He owned his own land or workshop, supplied his own capital, worked with his own tools, planned the operations himself and faced the consequences of the venture himself. In other words, one himself was the landlord, the labourer, the capitalist and the entrepreneur all combined in one. But due to emergence of large scale production as a result of industrial revolution, specialisation of functions started as all the functions connected with land, labour, capital and enterprise could not be discharged by one person. Factors of production today like land, labour and capital are separately owned and thus lie scattered. Some one is required to bring them together and put them to work of production. This is done by a person who is called entrepreneur.

The entrepreneur is a specialist in the work of organisation. He may not own any land, he may not have any capital, he will not be expected to be like a common labourer, but he possesses organising ability and management skill. He gets land on rent, borrows capital, hires labour and uses each in best possible manner so as to get best possible results. Thus the main function performed by the entrepreneur is to organise and co-ordinate the other factors of production after securing them and putting them together. He remunerates all the other factors of production : pays rent on land, interest on capital and wages to labour, and after making these payments he is left with the residue which may be profit or loss. A successful entrepreneur is a good judge of men and possesses qualities of leadership. He is very intelligent, worldly wise, tactful, hardworking, sharp, quick witted and patient. Thus to make a good entrepreneur, a rare combination of the qualities of head and heart is required.

In the modern industrial world, organisation or enterprise plays a very significant role and it has become the most important factor of production. It is the entrepreneur who employs other factors of production, remunerates them and gets maximum production with minimum cost. He is thus like a captain of a ship who steers the ship of industry to safe waters in the harbour of economic prosperity.

Islam has attached much importance to organisation and enterprise. Al-Qur’an, the revealed book of Islam, in its chapter 12 in the story of Joseph relates how Prophet Joseph persuades the king of Egypt to appoint him incharge of storehouses. The relevant verse reads : “He said : set me over the storehouses of the land. Lo! I am a skilled custodian.” (12:55). The Arabic version of this verse is more clear. In that version two words ‘Aleem’ and ‘Hafeez’ have been used which mean knowledgeable and trustworthy or custodian. Both these qualities are essential requirement for a entrepreneur or organiser. Thus on the basis of these two qualities, the great Prophet requests the king to put him over the organisation of storehouses of kingdom. That post in old egypt resembled today’s minister of finance.

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II- Forms of Organisation

In the modern world, enterprise finds its manifestations in the form of different business organisations. Sole proprietorship, firm or partnership, Joint-stock company, public sector corporation, etc. are examples of business organisation. In Islam, mainly business organisations like sole proprietorships, Mudarabah, Shirkah and Agency, etc. have existed. But Islam does not oust any modern business organisation from its fold provided it is not involved in usury or in gambling or in other un-Islamic business practices. We shall discuss in the subsequent sections Islamic business organisations like Mudarabah and Shirkah.

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III- Mudarabah

Meaning of Mudarabah: Mudarabah is form of business organisation in which one person gives capital to another person for business and both of them share profits in mutually agreed proportions. The former, the supplier of capital, is called the ‘Mudarib’ and the latter, the user of capital or entrepreneur, is called ‘Darib’. Thus ‘Mudarabah’ is a contractual relationship executed between two parties, one supplying the capital and the other supplying the labour and skill, for business the profits of which are shared by both in accordance with agreed terms. In case the business sustains loss, the entire loss is borne by the Mudarib who assumes full responsibility and makes no claim on the Darib, although the latter also suffers because he does not receive any share in profit or any reward for his services.

The ‘Mudarabah’ is an Iraqi term which is derived from the Arabic word ‘Darb’. The ‘Darb’ means to walk or travel in the land. It is so called because in mediavel times the ‘Darib’ had to travel in distant lands for commercial ventures to make profits. “In the language of law Mudarabah signifies a contract of partnership of which the one partner (namely, the proprietor) is entitled to profit on account of his stock, he being denominated ‘Rabbi Mal’, proprietor of the stock (which is termed Rasmal); and the other partner is entitled to a profit on account of his labour, who is denominated the Darib (or manager) in so much as he derives a benefit from his own labour and endeavour.” Some jurists call ‘Mudarabah’ a partnership contract because both the Mudarib and Darib participate in sharing profits, but some others call it an agency contract between the principal (Mudarib) and the agent (Darib) because the entire loss is borne by the principal.

The Medinites called this form of business as ‘Muqaradah’ which is derived from the Arabic word ‘Qard’. ‘Qard’ means loan which signifies surrender of right over capital by the owner to the user. The Muqaradah is also called Qirad.

It is said that Mudarabah was in vogue at the time of advent of Islam and the Arabs widely practiced it. The Holy Prophet himself is reported to have worked as Darib for Khadijah during his youth. His companions are also reported to have been practicing this form of business partnership. But had the Mudarabah business been so common, there would have been its detailed mention in Hadith literature. However, there is no reference to it in any Qur’anic verse and there is hardly any instruction about it in any tradition of the Prophet of Islam.

It appears that concept of Mudarabah was developed by the Muslim jurists later on. They have taken pains to build up sizeable amount of literature regarding the concept of Mudarabah. They have laid down detailed rules and regulations about the terms and nature of its contract, about the duties and rights of the Darib as well as the Mudarib, duration of the contract, etc. Some of the basic rules laid down by the jurists are:

Rules & Conditions : 1. Two or more persons, of their own free will, should enter into contract whereby one party provides a specified amount of capital to the other who employs this capital in business to make profit.

2.       Share of each party in the profit should be clearly defined in definite ratio or percentage. However, the loss of business should be the responsibility of the Mudarib.

3.       The capital should be in terms of gold or silver coins or standard money in circulation and not in commodities.

4.       The Mudarib should hand over the capital to the Darib before the Darib starts business.

5.       The Darib is absolutely free to trade or do business with the capital as he deems fit. Any condition limiting his freedom may render the contract invalid.

6.       The duration of Mudarabah is neither predetermined nor limited but either party can terminate it by giving a notice of his intention to do so.

The Mudarabah is not restricted to trade or business only but it can be extended to industry also.

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IV- Musharikah or Shirkah

Shirkah means conjunction of two or more estates. In law, however, Shirkah stands for partnership of two or more persons in business or in property. Doing business in partnership has been upheld by Islam as legal and valid. This form of business organisation has existed among all communities from time immemorial. During the time of the Prophet and his companions, partnership was popular among the Muslims not only in business but also in agriculture and gardening. The Prophet of Islam, in fact, helped in establishing partnership between the Muhajrin and Ansar in Madinah in field of agriculture and gardening.

Kinds of Partnership : Shirkah is of two kinds : Shirkah Milk and Shirkah Akid. Shirkah Milk or partnership by the right of property applies where two or more persons are owners of one thing. It is optional where two persons make a joint purchase of one particular property. It is compulsory where properties of two or more persons become united without their willful act, for example inheritance.

Shirkah Abid or partnership by contract comes into existence when two or more persons, by their free consent, enter into contract to do some business with a view to share its profits and losses. It is effected by proposal and acceptance. It is of four kinds which are briefly described as follows:

1.       Shirkat-ul-Mufavadha : In this form of partnership, the capital contribution of the partners and their shares in profits and losses are equal.

2.       Shirkat-ul-Anan : In this form of partnership, the partners neither contribute equally in capital nor do they share the profits and losses equally. This form of partnership was very common among the men with women or children or between masters and their servants.

3.       Shirkat-ul-Sanai : In this form of partnership, artisans, technicians and other manual labourers participate.

4.       Shirkat-ul-Wujooh : This is a form of partnership which is started by the person who have neither capital nor skill but they start the business on credit as partners and share the profits among themselves.

Conditions of Partnership : Jurists have laid down the following conditions which should be fulfilled in order to made a valid contract of partnership :

1.       All the partners should enter into contract with their own free consent to do a business in partnership, and the date from which partnership would come into force would be clearly mentioned in the contract.

2.       Partnership contract, according to some jurists is legal only if it is in legal tender money.

3.       Jurists like Imam Sarikhsi prescribe that partnership contract should be executed in writing. According to him, Quranic condition laid down in verse 282 of its chapter 2 for a contract of debt is also applicable to contract of partnership because like contract of debt this contract is also made for a definite period.

4.       The amount of capital contributed by each partner should be clearly stated in the deed of partnership.

5.       The share in the profit or loss to be obtained by each partner should also be clearly stated in the deed so as to avoid any dispute which may arise.

Similarities between Islamic concept of partnership and the provisions of British Partnership Act of 1890 are so real that one is tempted to say that the British draftsman of the partnership Act had been influenced by Hedaya, a renowned work of Islamic Fiqh, which had been translated by Charles Hamilton in English in the year 1870.

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