Islam and Capitalism

It is equally essential to understand fully the difference that exists between the Islamic view of the distribution of wealth and the Capitalist point of view. This distinction being rather subtle and complicated, we will have to discuss it in greater detail.

By comparing and contrasting the brief outlines of the Islamic and the Capitalist systems of the distribution of wealth, we arrive at the following differences between the two:-

1. The entrepreneur, as a regular factor, has been excluded from the list of the factors of production, and only three factors have been recognized, instead of four. But this does not imply that the very existence of the entrepreneur has been denied. What it does mean is just that the entrepreneur is not an independent factor, but is included in any one of the three factors.
2. It is not "interest" but "profit" that has been considered as the "reward" for Capital.
3. The factors of production have been defined in a different manner. Capitalism defines' 'Capital'' as "the produced means of production." Hence, Capital is supposed to include machinery etc. as well, beside money and foodstuff. But the definition of "Capital" that we have presented while discussing the Islamic view of the distribution of wealth, includes only those things which cannot be utilized without their being wholly consumed, or, in other words, which cannot be let or leased - for example, money. Machinery is to be excluded from "Capital", according to this definition.
4. In the same way, “land'' has been defined in a more general way. That is to say, all those things have been brought under this head, which do not have to be wholly consumed in order to be used. Hence, machinery too falls under this category.
5. The definition of Labor too has been generalized so as to include mental labor and planning.

Let us now go into the details of this discussion. Under the Capitalist system, the most important characteristic of the entrepreneur (which entitles him to "profit") is supposed to be that he bears the risk of profit and loss in his business. That is to say, from the Capitalist point of view, “profit'' is a kind of reward for his courage to enter into a commercial venture where he alone will have to bear the burden of a possible loss, while the other three factors of production will remain immune from loss, for Capital would get the stipulated interest, Land the stipulated rent and Labor the stipulated wages.

On the other hand, the Islamic point of view insists that the ability to take the risk of a loss should, in reality, inherent with Capital itself, and that no other factor should be made to bear the burden of this risk. Consequently, the Capitalist, in so far as he takes the risk, is an entrepreneur too, and the man who is an entrepreneur is a Capitalist as well.

Now, there are three ways in which Capital can be invested in a business venture:-

1. Private business: The man who invests Capital may himself run the business without the help of any partners or shareholders. In this case the return which he gets may be called "profit" from the legal or popular point of view; but, in economic terms, this "reward" would be made up of (1) "profit", in as much as Capital has been invested, and (2) "wages", as earnings of management.
2. Partnership: The second form of investment is that several persons may jointly invest capital, jointly manage the business and jointly bear the risk of profit and loss. In the terminology of the Fiqh, such a venture is called "Shirkat-ul-Aqd" or Partnership in contract.

According to the terminology of economics, in this case too all the partners will be entitled to “profit” in so far as they have invested capital and also entitled to "wages" in so far as they have taken part in the management of the business. Islam has sanctioned this form of business organization too. This form was quite common before the time of the Holy Prophet until he permitted people to retain it, and since then there has been a consensus of opinion on its permissibility.

3. Co-operation of Capital and Organization (Mudarabah): The third form of investment is that one person may invest Capital while another may manage the business, and each may have a share in the profit. In the terminology of Fiqh, it is called "Mudarabah". According to the terminology of economics, in this case, the person who invests his capital ("Rabb-ul-Mal") will get his share in the form of "profit", while the person who has actually managed the business will get it in the form of "wages". But if the person who has been managing the business ("Mudarib") eventually suffers a loss in the business, his labor will go wasted just as the capital of the investor would go wasted.

This form of business organization too is permissible in Islam. The Holy Prophet himself has made such an agreement with Hazrat Khadijah before their marriage. Since then there has been a complete consensus of opinion on this too among the jurists of Islam.

Money Lending Business

The fourth form of investing Capital, which has ever since been practiced in non-Islamic societies is the money-lending business. That is to say, one person lends out capital in the form of a debt, and a second person puts in his labor; if there is a loss it has to be borne by labor, but, profit or loss, interest does accrue to Capital in any case. Islam has interdicted this form of investment.

“O, believers, fear Allah, and give up what is still due to you from the interest (usury), if you are true believers. (2:278)

The Holy Quran also says:

“If you do not do so, then take notice of war from Allah and His Messenger. But, if you repent, you can have your principal. Neither should you commit injustice nor should you be subjected to it.” (2:279)

In these two verses, the phrases ''what is still due to you from the interest" and "you shall have the principal" makes it quite explicit that Allah does not condone the least quantity of interest, that "giving up the interest" implies that the creditor should get back only the principal. Thus, one can clearly see that Islam considers every rate of interest (except zero%) to be totally inadmissible. In the pre-Islamic period, certain Arab tribes used to carry on their trade with the help of money borrowed on the basis of interest from other tribes. Islam puts an end to such transactions altogether. Ibn Juraij says:

"In the pre-Islamic period, the tribe of Banu Amr bin Auf used to take interest from the tribe of Banu-al-Mughira, and the Banu-al-Mughira used to pay this interest. When Islam came, the later owed a considerable amount of money to the former". And further on: ‘’The Banu-al-Mughira used to pay interest to the Banu Thaqif"

Let it be understood that the position of every Arab tribe was like that of a joint company, carrying on trade with the joint Capital of its individual members. So, when a tribe would borrow collectively from another tribe, it would usually be for the purposes of trade. The Holy Quran prohibited even this practice.

Thus, under the Islamic system of economy, if a man wants to lend his money to a businessman for being invested in business, he will have first to decide clearly whether he wishes to lend this money in order to have a share in the profit, or simply to help the businessman with his money. If he means to earn the right to a share in the profit by lending his money, he will have to adopt the mode of "partnership" or that of “Co-operation'' (Mudarabah). That is to say, he too will have to bear the responsibility of profit or loss - if there is eventually a profit in the enterprise, he shall have a share in the profit; but if there is a loss, he shall have to share the loss too.

On the other hand, if he is lending this money to another person by way of help, then he must necessarily regard this help as no more than help, and must forgo all demand for a "profit”. He will be entitled to get back only as much money as he has lent out. Islam considers it not only unjust but also meaningless that he should fix a rate of "interest" and thus place all the burden of a possible loss on the debtor.

This discussion makes it clear that Islam places the responsibility of ''taking the risk of loss'' on Capital. The man who invests capital in a risk-bearing business enterprise shall have to take this risk.

Source: Dr. Muhammad Imran Ashraf Usmani, Meezan Bank’s Guide to Islamic Banking.