Origins, Evolution and the Future
Studies in Islamic Finance, Accounting and Governance series
Chapter 3: Financing the Entrepreneur: The Medieval Islamic Business Partnerships
Verse 2: 275 of the Qur’an, which prohibited riba in the most stringent terms but encouraged trade and exchange, has laid the foundations of many institutions. Indeed, exchange and trade require freedom of parties to contract. This, in turn, implies freedom to produce, which calls for clear and well-protected property rights. Moreover, to freely and conveniently exchange their commodities the parties need a market. But the market itself needs to be controlled according to certain rules and measures facilitating exchange. The level of mutual trust prevalent in the market would lower transactions costs. The level of trust would be enhanced if institutions were to emerge which enforce rulecompliance.1 Probably the most important institutions that emerged in response to the basic principles of Islamic capitalism mentioned above were the various business partnerships. This is because, in a culture which prohibits the rate of interest in the most stringent manner, combining the factors of production emerges as a major problem.2 Indeed, if capital, labour and entrepreneurship are factors owned by different individuals, how can transactions between these persons materialize? If the owner of capital is not rewarded for the risks he takes by the rate of interest paid over and above the capital he has loaned, why, indeed, should he make his capital available for the entrepreneur? In Islam, it is the institution of business partnerships which solves this problem. Put simply, the owners of these diverse factors of production form partnerships and it is in this way that they transact. Thus,...
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