Capital

No economy can survive until its members set aside a part of their current production to meet their future needs. In capitalist economies those who provide this service are rewarded by a fixed guaranteed return on their capital. But the Islamic Shari’ah has tied the concept of reward on capital with the responsibility to bear the risk of loss. There­fore nobody can claim a fixed pre-determined return on the capital provided to an enterprise. [1] Instead, one can invest one’s capital as a sole proprietor, acting as a financier and an entrepreneur at the same time. In case he needs the help of others, he may enter into shirkah (i.e. partnership) on the basis of capital, labour or skill. He has still another course open, if he cannot actively undertake a business enter­prise: he may enter into a contract of mudarabah. In mudarabah one person provides capital, the other labour and both of them share the profit in an agreed proportion. But the loss is borne only by the one who provides the capital while the worker does not get any reward for his labour.        

The present day joint stock companies are similar to mudarabah inasmuch as the professional employees manage the business with the capital of shareholders, who are detached from day-to-day affairs of the enterprise. This is not to suggest that the concepts of a joint stock company and mudarabah are identical. There are certain juridical differences, but their discussion is being omitted from here.

[1] This is technically known as riba, which has been prohibited in the Quran (2:275). Further discussion on riba has been made in Chapter 8.

Source: Economic Teachings of Prophet Muhammad (peace be upon him): A Select Anthology of Hadith Literature on Economics, Muhammad Akram Khan. Republished with permission.