Understanding of Business Under Islamic Economy

By:
Prof. Dr. Mohd. Ma’sum Billah
masum@applied-islamicfinance.com
masum2001@yahoo.com
+6019-3699542

INTRODUCTION

Islam really encourages his followers to involve in business. This is because nine out of ten of rizq in this world are come from business. Thus, this paper will tell you more about business in Islamic perspectives.

For beginning, there will be the concept of Islamic business that covers the definition itself. Then, we include the list of prohibited actions- maysir, riba and no gambling. Next is we discusses the most important part which is the principles of Islamic business. There are al-ibahah al-asliah (original permissibility), mutual consent, ta’lil (ratiocination) & Qiyas (analogy), maslahah (interest), qawaid al-fiqhiah (Fiqh maxims) and observance of prudence (ihsan).

Besides, there are some contracts based on this Islamic principle that are ordered sale, manufacturing sale and deferred sale. Examples of business activities like banking, fund insurance is given here. Last part will be the conclusion on this topic.

CONCEPT OF ISLAMIC BUSINESS

The definition of concept itself is an idea or a principle that is connected with something. Thus, the concept of Islamic Business is concerned with how private enterprise provides goods and services for satisfying human needs according to Islamic principle. Islam has permitted and in fact encouraged business. The Quran states:

"Allah has made business lawful for you"

The early Muslims were not only engaged in trade but they went to distant lands in connection with business. Islam in fact reached East and West Africa, East Asia through the business people. Islam has given detail laws of business. Islam has not permitted selling and purchasing of goods that are prohibited in Islamic law. The Prophet of Islam has said:

"When Allah prohibits a thing He prohibits (giving and receiving) the price of it as well."

PRINCIPLES OF BUSINESS IN ISLAMIC ECONOMICS

Basically, all humans actions are govern by rules and regulations and if these rules and regulations being threatened, individuals and society will live in chaos and destructive lives. So, Islam has provided in its creed all the comprehensive principles or rulings on order to ensure peace and tranquility in humans’ lives. These principles are applicable across all times and circumstances even though there is some new evolution in this more dynamic and changing environment.

This paper basically studies the business concept in Islamic economics and sometimes has some contradictions with the conventional studies of business concepts. To stress here, economics studies about production, distribution (e.g zakah ), consumption and exchange. On the other hand however, business governs issues such as commerce, trading, purchasing, banking, import/export, manufacturing and etc. In fact, all of these transactions are governed by some principles that have been underlined by the Syari’ah principles and will be discussed in turn:

In this principle has stated that, all of the principals transactions are allowed as long as it is in line with the underlying Syari’ah principles even though if there is some new evolution regarding forms of transactions or any new development in it. Thus, this evolution/development of transactions must not engage in prohibited activities and the prohibited activities will be discussed in the next following topics.

In dealing with any transaction in business activities, the contacting parties should have the mutual consent as it is in accordance with Section 26 of Contracts Act 1950, which underlined that any agreement without consideration is void unless:

Al-Qur’an also mention about the importance of mutual consent in Surah Al-Nisa’ verse 29:

“O ye who believe! Eat not up your property among yourselves in vanities: but let there be amongst you traffic and trade but mutual-good will: nor kill (or destroy) yourselves: for verily God hath been to you Most Merciful”.

Rationalization of transactions can be done by looking at the wisdom, rationale or derived effective cause. All of the transactions are acceptable by using these elements, for instance, in the case like bay’ al-wafa’.

In dealing with business transactions, Islam has provided principle in which the society’s interests should be emphasis than the private interests. However, if there is any conflict between the two, the interests of the society should be prevailed (e.g taking preventive measures against people who are carrying transmitted diseases, punishment..etc).

(i) Al-Kharaj bi al-daman

Any gain in transactions should observe the liability that comes with the profits.

Ghurm is what causes a person in getting something ghunum (the agin obtained according to the wish) and this principle is the opposite of Al-Kara bi al-daman.

This principle states that any transaction should have mutual values and counter values.

Prudence means the attitude of being cautious in dealing with any practical matters such as the management of the properties, meanwhile the observance is to act due diligent when performing transactions so as not to jeopardize the spirit of transaction.

BUSINESS TRANSACTIONS: THE PROHIBITED ACTIVITIES

Prohibited activities are the activities that engaged in riba, maysir and gharar. In fact, these activities are strictly prohibited by the Syari’ah and it will be discussed according to their turns:

Riba linguistically means increment in something, but scholars differ in their opinions in the technical meaning of riba. According to Hanafi, riba is an extra/increment of wealth without any return in the exchange of wealth while Hanbali’s explained that it is an extra/increment of something/wealth which is defined in accordance of Syari’ah measurement. Furthermore, Syafi’e and Maliki mentioned that riba as contract which is without equal return of something during the contract or with lapse of time in the exchange and in line with the Syari’ah. Nonetheless, riba can take several types:

It can be defined as “anything taken extending new period of debt after the lapse of the appointed period” and is also known as riba al-jahiliyyah as it was practices during the jahiliyyan period. The prohibition of such riba comes from the Al-Qur’an.

This type of riba is closely related to the exchange of goods and there are namely 6 kinds of goods including gold, silver, wheat, barley, dates and salt. Moreover, the prohibition of such riba comes from the tradition of Prophet Muhammad S.A.W and Qiyas (increment without return). Thus, these prohibitions have some good reasons:

# On the basis of value.

The value can be due to lapse of time because the current value is better than the later value and this is due to the inflation.

# On the basis of physical increment without return.

This is due to the exchange of physical wealth of either different goods.

Linguistically, gharar is khatr (risk) and its original meaning is “nuqson” (insufficient). In addition, technically it can be referred to as the consequence/outcome that is uncertain. Gharar can be unknown consequences of either it will happen or not, while bay’ al-gharar is an exchange in which there is an element of deception either through the ignorance of the goods or the price through faulty description of the goods. Thus far, we have discussed briefly about gharar, now let us list some types of gharar:

It happens when there is unfamiliar sources of capital equity such as blood money, money of inheritance and etc which can lead to extensive gharar.

The general rule the transfer of title is that, only the owner of the goods can transfer the title, otherwise the contract will become void and it is in accordance with Section 27 of the Sale of Goods Act codifies the Latin phrase “nemo dat quod non habet” which means that “no one can give what he/she has not got” or “no one can give better title than he ahs himself”.

Now, we will be listing some type of gharar in exchange:

Maysir means anything having risks (khatr) or in risks. In addition, maysir can be in the form of gharar when something has the probability of either to be in existence or otherwise. The prohibition of maysir comes from Al-Qur’an:

“They ask thee concerning wine and gambling. Say : “in them is great sin and some profit for men; but the sin is greater than the profit” (Surah Al-Baqarah:219).

Some forms of maysir are as follow:

Thus far, we have been discussing some principles and prohibited activities in regard to dealings/transactions. The wisdoms behind all these prohibitions is that, the Syari’ah trying in its best effort in order to ensure that public interests must be prevailed in an effort to avoid exploitation from the rich group, be benevolent /mercy and devoid of cooperation.

CONTRACT

Human are social beings. They need to interact and cooperate with each other. It is tough these interactions and co-operations that humans fulfill their mutual economic and social needs. Cooperation may take various forms, which may also include varieties of contracts. Islamic law of contract lays down the principles of commercial transactions, freedom of trade, and the exchange of goods and services.

There are principles that are needed in our daily life. The fundamental principles governing the law of contract are used as a basis for all commercial transactions. These principles are then applied to the various forms of transactions that individuals may enter into.

Islam defined contract as an agreement of both parties to the fulfillment of a certain things rising from the agreement and the concurrence of the offer and acceptance,

As stated in Quran:

“O you who believe fulfill (all) your undertaking”

According to most Muslims scholars, there are 4 pillars of contract that must fulfilled, which are offer (ijab) and acceptance (qabul), two contracting parties, subject matter and the mode of expression (sigha). Some examples of contracts are:

Salam/ Ordered Sale

It refers to purchase of deferred goods by price. The characteristics of the contract are:

As the hadith below states:

From Ibnu Abbas he said: The Prophet saw came to Madinah when they were practicing Salam for fruits for a year and two. The Prophet said: “Anyone practice Salam for fruits, he should do it with known weight, known measure, for known due date”.

Deferred Sale

It is a contract of sale in which both contracting parties agree that the payment of price for the product shall be deferred. The deferred sale is legal in Islam and there are versus in the Quran which proved the legality of the contract. There are Syariah rules of sales which are applicable to this contract:

Manufacturing Sale

Manufacturing Sale is a contract of sale in where the buyer gave an order to a

workman (seller) to make a definite thing with an agreement to pay definite wage or price for that thing when it is made. It is similar to ordered sale since it is also something non-existence but the price need not be paid in advance, no specification of delivery and the subject matter is not available in the market.

BUSINESS ACTIVITIES IN ISLAM

1. Banking

The best known feature of Islamic banking is the prohibition on interest. The Qur'an forbids the charging of Riba on money lent. It is important to understand certain principles of Islam that underpin Islamic finance. The Shari'ah consists of the Qur'anic commands as laid down in the Holy Qur'an and the words and deeds of the Prophet Muhammad (s.a.w.). The Shari'ah disallows Riba and there is now a general consensus among Muslim economists that Riba is not restricted to usury but encompasses interest as well. The Qur'an is clear about the prohibition of Riba, which is sometimes defined as excessive interest.

"O you who believe! Fear Allah and give up that remains of your demand for usury, if you are indeed believers”.

Muslim scholars have accepted the word Riba to mean any fixed or guaranteed interest payment on cash advances or on deposits. Several Qur'anic passages expressly admonish the faithful to shun interest.

The rules regarding Islamic finance are quite simple and can be summed up as follows:

2. Insurance

The majority of the Fuqaha said that insurance of any kind is haram with the exception of car insurance due to its obligatory nature and the near-imperative-need (hajaaw darura) nature of having a car for one's livelihood. If a similar darura can be ascertained in other cases, then the ruling changes to permissibility. It might be hard to ascertain that one is forced by absolute necessity to buy a house rather than rent one.

3. Fund during retirement plans

All funds provide helpful information about the distribution of their investments among various industries and companies in their annual and semi-annual reports. In retirement plans, our choice is normally limited to a few funds offered by the plan management. Thus, we need to do the following:

1. Try to convince our plan management to offer the few Islamic funds that are available in today’s market.

2. Select from these available funds just like we select those funds that have least involvement of prohibited stock. Prohibited stocks are those of companies in the financing sector, bonds, the entertainment industry, military industry, and the like.

3. We need to make a periodic estimation about the amount of return that comes from funds invested in some non-permitted stocks and in bonds, and when you liquidate, we should give away a percentage of the estimated return that comes from non-halal investment to Muslim charities

CONCLUSION

Islam is a perfect way of life as it covers the worlds, duniya and al-akhirah. In its teachings also, we can find that, every aspect of humans’ lives are guarded by rules, regulations and principles. In the fist topic of this paper, we talk about definition of concept and the business itself. While, in the second part of the paper, we cover the principles and some activities prohibited by the Syari’ah. Nonetheless, in the final part of the paper we discover some contracts in Islamic business. Lastly, we are thankful to Allah for His blessings and our friends fro helping us so much in completing this paper.