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Business Partnership: Ottoman Case

The fourth Islamic institution to be considered here in the context of poverty alleviation is the business partnerships. Partnerships alleviated poverty in history by attacking the problem from both ends; by both accumulating and redistributing the capital. Partnerships enhance capital accumulation by efficiently combining different factors of production, basically capital, labour and entrepreneurship, possessed by different individuals. It goes without saying that an efficient combination of the factors of production leads to capital accumulation or growth. A brief look into the structure of Islamic business partnerships should illustrate the point.

The most dramatic combination of the factors occurred under the mudaraba and wujuh partnerhips. In both, the entire capital was provided by principals to agents who merely provided their labour/entrepreneurship and did not possess any capital of their own. Moreover, under the phrase i’mal fihi bi raika an agent was granted the freedom to combine the resources of a multitude of principals thus effectively accumulating capital. Archival documents have revealed that some Ottoman agents could accumulate the capital of 15 or 20 principals for long-distance commercial ventures.


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But Islamic partnership law also allowed under the same phrase the redistribution of the thus accumulated capital among various agents. Thus an agent who travelled, say from Bursa to Iran, with the accumulated capital of some 20 principals could entrust this capital further to a multitude of agents. This complex sate of affairs could be called a multiple and two-layer mudaraba. The term multiple refers to the multitude of principals and gents involved, whereas the two-layer refers to the two phases: accumulation of funds from the principals by the agent (mudarib number one) and the redistribution of this accumulated capital further to another group of agents.

Combining the capital of a multitude of investors and then entrusting this total to an entrepreneur or entrepreneurs was a great achievement. An entrepreneur who did not possess-any capital of his own could thus become a well-to-do person at a relatively short time and escape poverty. There is no doubt that Islamic business partnerships have rescued a great number of enterprising agents from poverty throughout the history.

Alleviation of poverty was also facilitated by the introduction of the concept of limited liability. The mudaraba provided limited liability to both the principal and the agent; the former was liable up to the amount he invested while the agent was not held responsible for losses that were beyond his control. In sharp contrast to the Florentine partnership, compagnia, and Chinese partnership forms practiced in the Far East which led to the ruin even enslavement of the principal for the debts incurred by his partner, the mudaraba provided an effective safety net and encouraged individuals to enter into partnerships.

Recent research has revealed that the Islamic partnerships were practiced throughout the world of Islam from Spain to the Pacific. In view of the contrast made above, we should also not be surprised by the fact that they were borrowed and enthusiastically applied by the Europeans as well. So much so that the European commenda, which was an identical copy of the Islamic mudaraba, dominated European commerce throughout the Medieval era. Moreover, bulk of the modern instruments of finance applied in the West can be traced back to the Islamic mudaraba. The role of mudaraba in the alleviation of poverty has also been confirmed by European historians who have found definitive evidence in their own archives.

It has been hypothesised that the widespread application of the same partnership law in the vast Islamic world as well as Europe must have provided an enormous impetus to intercontinental trade. This vastly increased trade, on the other hand, surely must have alleviated poverty not only in the Islamic world but in Europe as well.

 

Source: Poverty Alleviation in Pakistan: Present Scenario and Future Strategy, Mohibul Haq Sahibzada. Republished with permission.