Types of Companies in Islam

(Read Company & Trade Laws Here)

(Read Rules of Selling Here)

There are 5 types of companies defined in Islamic Economic System:

1. The Company of Equals (Al-‘Inan): This is a type where all partners put their money into a business and all work with it.

Both partners would have the right to buy and sell and make progress with the company, 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 doctors or builders. They may invest some of their money but their skill is the basis for the company.

3. The Company of Body & 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 & 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 & standing and based upon this the company trades. For instance the partner could be a famous, known & rich merchant whose name ensures business for the company.

5. Company of Negotiation (Mufawadha): This could be a combination of the above types.

The differences & issues between Islamic & capitalist company structures can be summarised as:

a-      Modern day corporate doesn’t have formal “Offer & Acceptance”. One party can enter or leave a business via share trading. There are incidents when a company is completely taken over by another party by buying shares even though majority of the staff & current owners disliked it. This could not be done in Islamic Economics.

b-     The present day company is an individual & separate entity from its owners. This contradicts Islamic law whereby the partners are “the company”; if the company is taken to court, it is the partners who are liable. The current corporate takes all personal elements away  from the company. Public Limited Company is one such example. Thus in the case a company goes bankrupt the owners only lose what they put in and no more and all those who are owed debt, will receive nothing. Many people lose millions in Pakistan & abroad. Banks going bust is one good example. If a person owes money to someone, he has to pay it back.
 

Trading in Current Share Business is Not Allowed:

Reasons are simple to understand:

1- In share system the share owner does not have any control or say in the company business. Suppose you bought 25% shares in the above-mentioned Banana Company. Out of a blue, the Banana management decides that they would start importing Cocaine from Columbia since it is quite profitable; you have no means of controlling this. Islam requires a partner to have an equal control over the business so that it could be kept on track.

2- There is no offer & acceptance in present day share system. The share buyer has to accept the laid down terms; there is no Offer & Acceptance.

3- The shares are bought & sold without the consent of existing share holders. This essentially means that an unknown person becomes partner in the business who might have earned money through undesirable means. In Islam, all partners must agree upon allowing a new partner to join, and then there should be a contract signed.

4- The share buyer has no real interest in running & growing the business. All he is after is quick money. The moment he hears about any losses, he sells his shares and moves on.

The End..

Companies in Islam

(Read Rules of Trade / Selling Here)
Being a comprehensive way of life, Islam has laid down specific laws for trading and designated various rules for when individuals come together to form a company for business purposes.

Basics of a Corporate or Company

  1. The Company (Sharika in Arabic) is an agreement between two or more people to carry out some business to make profit. Sole proprietors (single person company) are also allowed in Islam.
  2. The Company & its partners (owners) are one unit, not separate entities. It is their personal wealth which is the capital of the business, and upon this the contract is formed.
  3. The profit distribution ratio is agreed in the contract, e.g. 50/50 or 40/60. And it is not linked to the ratio of investment.
  4. The loss ratio is fixed to investment ratio. For example, if one person invests 40%, he would bear 40% loss in case it happens.
  5. All parties have to abide by the contract; One Party Can Not Make a Change on its Own. Change to terms & condition can only be made by mutual agreement which basically means agreeing upon a new contract.
  6. A partner’s liability will not be limited to the amount put in; thus there is no limited liability in Islam. This rule is a huge blessing from Allah. People cannot waste others money and simply walk away, as is common practice in limited liability companies under capitalist system.

Contract- The Foundation of a Corporate:

A corporate is formed when two or more persons agree upon a set of terms & conditions for business. These are then agreed upon by all; hence forming a contract (Aqd in Arabic). This contract has to be correct according to Islamic laws. Take for example, one party offers to setup a business to sell bananas imported from Brazil at a shop by investing equal amount of money and distributing profit equally among two. Other party accepts the offer & joins in, hence a corporation is formed.

Allah Almighty has commanded two simple principals to emphasize the impotence of a contract. These two simple rules eliminate doubts and provide convenience:

1- Write your Contracts:

“O you who believe! When you contract a debt for a fixed period, write it down……………. You should not become weary to write it (your contract), whether it be small or big, for its fixed term, that is more just with Allah; more solid as evidence, and more convenient to prevent doubts among yourselves”. Surah Al Baqarah – 282

2- Take Witnesses:

“And get two witnesses out of your own men……..   ……But take witnesses whenever you make a commercial contract.” Surah Al Baqarah – 282

Areas in which Corporate can Trade:

a- Corporate Can Operate in a Trade that is Beneficial to Society:
Islam allows businesses to deal in permissible areas only. It prohibits trading in haram such as alcohol, and anything that is damaging to the society, be it mentally such pornography or physically such as drugs.

b- Key Utilities Can Not be Used for Private Benefits:

Any commodity that is a basic need such water, gas, electricity & petrol are not allowed to be traded by private business (privatised). Our beloved Prophet Muhammad (SAW) said “Muslims are partners in three things: in water, pastures & fire“. This means that the ownership of key utilities will always remain in the hands of state who will utilize it for the benefit of its citizens only.

In all other sectors of the economy companies can operate freely without any intervention by the state, individuals can come together to fulfil any need in the economy.

Read about types of companies, the differences with current corporate and why preset Share System is not allowed Here in Next Part.

Rules of Selling in Islam

 “An honest Trader will be with Prophets, Shuhadaa and Saaleheen on day of Judgement”. Hadeeth

‘Sale’ (Bai in Arabic) is defined in Shariah as ‘the exchange of a thing or service of value by another thing of value with mutual consent’. Selling is an essential part of everybody’s life therefore Islam has provided detailed rules and guidance in this regard. This is a huge topic which can not be covered in one article. Below is just a summary of important basics.

Selling of an item begins with an Offer from the seller, which is then accepted by the buyer. For that matter both seller & buyer must have to be sane, adults and capable of completing the Offer & Acceptance. As such a child or mentally incapable person cannot conduct the Sale. Honesty & fairness on both parties is fundamental to selling in Islam.

Whosoever sells a defective product without disclosing its defect to the purchaser, shall earn the permanent anger of Almighty Allah and the angels continuously curse such a person.” – Hadeeth

Needless to say here, selling with cheating, lying, forcing, hiding a fault, or dealing in stolen or snatched have no place in Islam.

Whoever buys stolen goods, knowing such goods to have been stolen, becomes a party to the act of theft.” – Hadeeth

Rules for a Sale to be Considered Valid in Islam

Rule 1: The subject of Sale must ‘Exist’ at the time of Sale.

Thus, a thing which has not yet come into existence cannot be sold. If a non-existent item has been sold, even by mutual consent, the sale is void according to Shari‘ah.

Example: A sells the unborn calf of his cow to B. The sale is void.

Rule 2: The Seller must Own the item at the time of Sale. Anything not owned by the seller at the time of sale cannot be sold. If he sells something before acquiring its ownership, the sale is void.

Rule 3: The subject of Sale must be in Physical or Constructive Possession of the seller when he sells. “Constructive possession” means a situation where the possessor has not taken the physical delivery of the commodity, yet the commodity has come into his control, and all the rights and liabilities of the commodity are passed on to him, including the risk of damages to it.

Example: A has purchased a car from B. B, after identifying the Car, has placed it in a garage to which A has free access and B has allowed him to take the delivery from that place whenever he wishes. Thus the risk of the Car has passed on to A.. The car is in the constructive possession of A. If A sells the car to C without acquiring physical possession, the sale is valid.

Gold Dinar from Ummaiyad Khilafat (Dated 105H / 723AD)

 

Selling vs Promise to Selling:

There is a big difference between an actual sale and a mere promise to sell. The actual sale cannot be affected unless the above mentioned three conditions are fulfilled.

However one can promise to sell something which is not yet owned or possessed by him. In this case seller is under a moral obligation only.

Exception to Rules 1 to 3:

There are two types of sale which have exemption from rules of Existence, Ownership & Possession:

(a) Bai‘ Salam: Seller agrees to supply specific goods to the buyer at a future date in exchange of a cash price fully paid on the spot. Item that is sold must be measureable exactly in quality & quantity. So it does not apply on crops of a particular field because one never knows how much crop will yield in future from a specific piece of land. It is applicable on ordinary items bought for cash, not on exchange of currencies, gold or precious metals.

Note, Bai Salam is applicable on ordinary items bought for cash, not on exchange of currencies, gold or precious metals.

(b) Bai Istisna’: This is the sale of a product that does not exist but needs manufacturing. For example, a chair to be made by a carpenter.  The Quantity & Quality is agreed upon and the material is used by the seller. Price can be paid on spot or in instalments.

Rule 4: The sale must be agreed & finalised on that place & time. Payment of Price & Delivery of goods could be in future however.

Example: A says to B, “If party X wins the elections, my car stands sold to you”. The sale is void, because it is contingent on a future event.

Note: Both parties have the right to change their mind before departing. Once left the place, the sale becomes binding on both.

Rule 5: The subject of sale must be a property of value.  An item having no value according to the usage of trade cannot be sold or purchased.

Rule 6: The subject of sale should not be a thing which is used for a Haram purpose only, like pork, wine etc.

Rule 7: The subject of sale must be specifically identified and known to the buyer. For example, a specific apartment in a multi-storey building.

Rule 8: The delivery of the sold commodity to the buyer must be certain and should not depend on a chance or unforeseen event.

Example: A sells his car stolen by some anonymous person and the buyer purchases it under the hope that he will manage to get it back. The sale is void.

Rule 9: The certainty of price is a necessary condition for the validity of a sale. If the price is uncertain, the sale is void.

Example: A says to B, “If you pay within a month, the price is Rs. 50. But if you pay after two months, the price is Rs. 55”. B agrees. The price is uncertain hence the sale is void.

Rule 10: The sale must be unconditional. A conditional sale is invalid, unless the condition is recognized as a part of the transaction according to the usage of trade.

Examples:

(i) A buys a car from B with a condition that B will employ his son in his firm. The sale is conditional, hence invalid.

(ii) A buys a refrigerator from B, with a condition that B undertakes its free service for 2 years. The condition, being recognized as a part of the transaction, is valid and the sale is lawful.

Please note this article is just a summary of a vast subject. You should read it as a first step and then expand upon this knowledge by further reading.

There are two types of Sale due to seller declaring the actual cost of the item:

Murabahah: Seller declares the actual cost to the buyer and then sells the item at some profit.

Musawamah: The seller does not declare the actual cost of the item.

Also, the concept of Writing Contract &  Keeping Witnesses is important

Next we explore the concept of Companies in Islam.

How Corporate Started & East India Company

For many in the 3rd world especially the Muslim world, Multinational companies such as Coca Cola, McDonalds, and General Electric represent awe inspiring success stories of Capitalism. The rulers regularly distribute contracts to foreign companies who extract oil, minerals, build infrastructure, hospitals, and provide services such as banking and insurance as well as production plants which produce food and goods. The corporate global reach & thousands of workers who churn out billions in profits every year for many are aspects of the success that invite imitation. Let’s see how it all started.

(Click photos to enlarge)

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Organisations History:

Companies have been around for a few centuries, the earliest of which existed around the sixteenth century in England and Holland. Originally a corporation, as they were known at the time, was an invention of the state. The state granted a corporate charter, permitting private financial resources being used for public purposes. This initial creation of private finance and the merchants was to aid in the colonial expansion of the then super power Great Britain. Corporations had therefore the potential, from the onset, to become very powerful. As predicted by Abraham Lincoln:

“I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country. … corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavour to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed.

How True Lincoln was!

Mainstream Media & Corporatism

Companies Go Global:

As long-distance trade continued to grow, this gave rise to multinational corporations. The industrial revolution made Europe the centre for international trade. The growth of industrial production was accompanied by a rapid expansion of trade. To ensure this status quo remained, nations began to use the corporations to dominate international trade. In the 17th century making money became the major focus for corporations. Their wealth was used to finance European colonial expansion, or, in simple words to invade foreign countries in Asia, Africa and the Americas with intention of sucking their resources.

Do you Remember East India Company?

– EIC (East India Company) was the First Ever Commercial Corporation established by British merchant adventurers. It was granted the Royal Charter by Queen Elizabeth I in 1600.

– It shipped out gold and silver to Asia in return for spices, textiles and luxury goods. It introduced Tea from Chinese to British and Indians.

– It was the most powerful commercial organisation that the world has ever seen.

– EIC ruled Fifth of the World Population and had quarter a million private army as well as support from British Army.

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– EIC issued its own Currency

– Established itself in India and conquered nearly 50%. As a result India was ruled by 24 merchants sitting in company boardrooms in London.

– In India the Company benefited from ‘gifts’ from local (mostly Muslim) rulers. Between 1757 and 1765 some estimates put the total received at close to £2 million.

– Cricket was introduced in Asia by the servants of EIC.

– Kashmir shawls, imported by EIC, were made from shawl goat pashmina. They were so fine they could pass through a ring. Much sought after, English customers could pay £300 for one shawl – the cost of a house then in a good area of London.

EIC & Corporate Now

Corporations were given Rights as Humans based on 14th Amendment:

Fourteenth Amendment was added to US Constitution in 1868 to protect the rights of freed slaves. Referring to it, the Court ruled that a private corporation is a natural person under the US Constitution, and consequently has the same rights and protection extended to persons by the Bill of Rights, including the right to free speech.

Control the Politicians Conquer the Country – Welcome to DemoCracy:

Thus corporations were given the same “rights” to influence the government for their interests as were extended to individual citizens, thus paving the way for corporations to use their wealth to dominate public opinions and lifestyle. Corporate started to “Donate” millions of dollars to political candidates & parties. Do I need to tell you why? So that politicians could make rules in the favour of companies. Many big politicians became executives, or had shares in these companies. Government resources & mass media was dominated and used to control masses. As a consequence, corporate were issued with a Free License to sell; Sell whatever you can to make profit, be it tobacco, alcohol, pornography, guns or junk food.

 

Kickbacks, Bribery & Corruption in 3rd World by Ruler & Companies

We all know the role big companies play in national economies of the Third world. Their influence and control over resources are seen as the prominent aspect of modern day colonialism; also known as neo-colonialism. The rights given to them make them very powerful and able to influence policies. IMF and World Bank play a role also by imposing conditions on creating free markets and privatising key industries which foreign multinationals have been all too happy to snap up. In the pursuit of corporate interests wide scale abuse and corruption have commonly been uncovered by many multinationals in the third world. Kickback & corruption is a common knowledge in Pakistan to hand lucrative contracts to ‘friendly’ foreign companies.

People Need Food Not Weapons

Also, there are numerous bloody conflicts virtually everywhere in the 3rd world. Did you ever wonder where weapons come from for these wars?

Not All is Bad:

We should make a distinction between the greedy concept behind the establishment of corporate i.e. “make money by hook or crook”, and new technology and good processes & procedures to yield high productivity. It developed & introduced smart processes; such as yielding high productivity, economies of scale, automation, Research & Development, and above a Good Management principals.

And there are many new technologies invented due to Research & Development by corporate as well as new drugs. It was made possible because the corporate have resources to pursue these. These useful concepts & technologies should be learned and adopted wherever possible.

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Does Islam have a solution? Let’s look at the Fundamental Rules of Selling in Islam.