Contradiction Between Modern Corporation with Following the Riba Rules

Abstract

In this entire report, it will be discussed about the modern corporation, its conventional view and Islamic view, Concept of corporation and Islamic injunction, Shariah compliance of corporation from Islamic view. Then there will be a brief discussion about riba, the prohibition of riba from Quran and Sunnah point of view, principles of riba, types of riba, the rationale behind prohibition of riba, how the modern corporation can be legit as riba free and Shariah compliant. After that, there will be comparison between a Muslim and Non-Muslim country about conflicting issues on following Islamic rules in corporation, there will be resolution on the issues and at last suggestion and recommendation will be given on the issues.

2.0 Introduction

A modern corporation is a legal entity that is separate and distinct from its owners. Corporations enjoy most of the rights and responsibilities that an individual possesses; that is, a corporation has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes. It is often referred to as a "legal person." A corporation can consist of financial institutions like Banks, credit unions, offshore trusts, investment banks, cooperatives; Companies like Charities, unincorporated associations, firms, cooperatives, partnerships, limited partnerships, public limited companies, private limited companies; Investment Schemes like real-estate investment trusts, investment trust companies, investment trust companies, open-ended investment, schemes collective investment, schemes various types of funds.

From Islamic view, modern corporations can be Shariah compliant only if it follow the Shariah rules and be free from Riba, gharar and maisir. The corporations must pass some stages to be legit as Shariah compliant corporation. If the corporation fails to prove itself as Shariah compliant and free from riba then it will have huge contradiction with Shariah rule and it can be called as non Shariah compliant corporation.

3.0 Corporation from Conventional View

In the existing environment, the most popular business vehicle is the “corporation,” an artificial person or legal entity created by or under the authority of the laws of a state. A corporation: is an association of persons created by statute as a legal entity; is treated by law as a person that can sue and be sued; is distinct from the individuals who comprise it (shareholders); survives death of its investors, as shares can usually be transferred; and has a personality and existence distinct from that of its several members. The purpose of a corporation is either to carry out a business for profit or to provide a service. As an artificial person, a corporation needs some form of aql (brain) to carry out business. This brain or decision-making power can be lodged in an individual, or in a group of individuals, such as the board of directors. In either case, these groups act as agents of the company. As a legal person, a corporation can own property in its name. It can transact business, incur liabilities, and engage in litigation to protect its interest and observe legal duties and restrictions. Also, it has all rights and privileges of an individual, subject to limitations imposed by law or constraints from its nature as an artificial person.

The purpose of the business enterprise is to create wealth. Corporations create wealth in many different forms—earnings for investors, compensation for employees, benefits in excess of costs for customers and others. The attraction of the corporate form of enterprise, as it has emerged in advanced industrial countries, lies in its capacity to amass capital from multiple sources and to spread financial risks, always for the purpose of creating wealth. The diverse and flexible variants of the corporation that emerged during the 20th century proved uniquely appropriate, and highly successful, in accomplishing this objective. Recent improvements in global wealth, welfare, and opportunity are most likely to be sustained in the 21st century by an economic system that operates on market principles and provides ample opportunity for creation of new enterprises, as well as the growth of established firms. And the long-term success of the corporate system requires greater and systematic managerial attention to the interests and concerns of the diverse individuals and groups who are voluntarily or involuntarily affected by corporate activity.

The reasons for the corporation’s extraordinary success in creating new wealth for its constituents are well known. One is that most of the corporation’s primary constituents—investors, employees, customers, and suppliers—voluntarily contribute resources to the corporation in pursuit of their own interests. And, as Adam Smith long ago recognized, the pursuit of individual benefits through such arrangements often generates benefits for all. A second reason for the success of the corporate system is its general openness to competition and innovation. Businesses compete not only for customers in the marketplace, but also for investors, employees, locations, ideas, and every other resource needed to pursue their productive purposes. Resource providers—including host communities and sometimes customers—compete for the benefits provided by the firm. When competition is absent or weak, the corporation is no more immune from corruption and inefficiency than any other form of bureaucracy. But when the competitive environment is open and active, the pursuit of individual gain through market processes— including the introduction of innovative technologies and the creation of new enterprises and industries—has usually produced widespread economic and social benefits.

4.0 Corporation in Islamic Law

In Islamic law, the corporate form of a business organization as a separate legal entity does not appear directly. Strictly speaking, Islamic business organizations do not have legal personality; they do not exist independently of those who invest in them. The OIC Fiqh Academy accepts the concept of a legal or fictitious personality and so do Muslim scholars. The scholars have approved the corporate form on the basis of fiqh principles of qiyas and istihsan, or masaliha mursalah. This, however, does not mean acceptance of any modern business corporation within the framework of Islamic law.

The closest approximation to corporate legal entities found in Islam have been bayt al-māl (public treasury), mosque property, waqf and Muwafada. However, it must be noted that institutions such as bayt al-māl and awqāf are essentially non-economic organizations,