Islamic vs. Modern Business

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

INTRODUCTION

Business is one of the occupation, work, or trade in which a person is engaged, for example the wholesale food business, trading business and others. All people over the world choose business as one of their career. Business is one of the works that can earn profit and might be loss also. People have known how to manage their business to be the successful in their life. Because no business could be regarded as gainful if it brings profits, however huge they might be, for some time but ultimately ends up with bankruptcy or in which overall losses exceed the acquired gains.

For the profit purposes, people always do their business through conventional business rather than Islamic business. The conventional business is secularism business or non Islamic business that not follows the rules of Shariah. Besides, the Islamic business is the business that follows the guidelines and rules of Shariah. The differences between both of this business can be classified through interest, ethic and their contract.

ISLAMIC BUSINESS VS CONVENTIONAL BUSINESS

• IN TERM OF RIBA’

The most significant different between Islamic business and conventional business is riba’. In Islam, riba’is absolutely prohibited. Literally, riba’ means excess, increase, expansion or growth. Technically, riba’ refers to the addition in the amount of loan in consideration of the time for which it is advances for which the repayment of loan is deferred. There are many definitions of riba’ according to scholars. Ibn al-Arabi defines riba’as excess in return of which no reward is paid. While Mawdudi defines riba’ as predetermine excess or surplus over and above the loan received by the creditor conditionally on relation to a specified period.

In the Quran, prohibition of riba comes in 4 stages. Firstly in Surah Al-Rum verse 39. This surah compare riba’ with zakat and charity and it emphasize in praising Zakat but not riba’. Second is Surah Al-Nisa’ verse 160-161 that said the practice of riba’ is same like Jews and consider the practice as inequity. Third Surah is Surah Al-Imran verse 130 that prohibit the practice of charging double and multiple riba’. The last Surah is Surah Al-Baqarah verse 275-281 that conclusively prohibited all form of Riba’.

There are two types of riba’, namely riba’ al-nash ‘ah and riba al-fadh. Riba al-fadh is the one that is prohibited in the Al-Quran and later by our prophet (pbuh) while riba al-nasiah is the additional amount on loan, usually on the basis of time. In short, Islam prohibited both riba. In Islam, Hadith that says about riba’ is reported by Abu Sa’id Al Khudri, “ the exchange of gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt, must be on basis of equantity and on the spot possession. Whoever adds or demands an addition commits riba’, the giver and the receiver of (additional quantity) are equally blameworthy.

Riba is prohibited in Islamic business transaction because it is prohibited by Allah in the Al Quran. Allah prohibited riba’ because it is the processes of increasing one party wealth only while the other party suffered from the process. Furthermore, the party can increase their wealth without incurred any expenses or effort as well as without taking any risk of loss. There is always a profitable in riba’ process compared to trade where there exist profit and loss sharing.

One of the most common features of Islamic banking system today is interest-free transaction. Application of Al-Bai Bithamin Ajil and Murabahah contracts is an alternative to replaces interest- based loan transaction. Murabahah and Al-Bai-Bithamin Ajil (BBA) financing is considered legitimate because in trading and commerce, the capital is combined with labor.

According to conventional business, interest is like a reward for capital, like wages for labor. When an entrepreneur pays interest for the use of capital, it will increase total sum of price of inputs. Here, interest enters in the cost of production. Therefore, any increase in interest rate leads to higher cost of production, which simply leads to increase in the price level. As a conclusion, the changes in interest rate affect price level. That is if interest rate increase then the price also increase and vice versa. It is means that interest lead to inflation.

Quranic ayah according to the prohibition of riba’

Allah (SWT) says,

"Those who eat Riba (interest) will not stand (on the Day of Resurrection) except like the standing of a person beaten by Shaitan leading him to insanity.  That is because they say: "Trading is only like Riba (interest)," whereas Allah has permitted trading and forbidden Riba (interest).  So whosoever receives an admonition from his Lord and stops eating Riba (interest) shall not be punished for the past; his case is for Allah (to judge); but whoever returns (to Riba: interest), such are the dwellers of the Fire - they will abide therein." (Surah Al-Baqarah 2:275)

Hadith according to the prohibition of riba’

Hazrat Abu Hurairah reported that Prophet S.A.W said: Usury has got seventy divisions. The easiest division of them is a man marrying his mother.

(Ibn Majah)

Hazrat Abu Hurairah reported that the Messenger of Allah s.a.w said: I came across some people in the night in which I was taken to the heavens. Their stomachs were like houses wherein there were serpents, which could be seen from the front of their stomachs. I asked: O Gabriel! Who are these people? He replied these are those who devoured usury.

(Ahmed, Ibn Majah)

Ethics show the necessary methods for people’s protection himself from bad deeds and their acquiring good and nice behaviors; it purifies soul and turns the badness to goodness. In other words, ethics mean value or attitude towards the things that people done. How they done the work and how sincere they finished the work too

Our great religion gives great importance to ethics. The Holy Quran and Hadith draw our attention to this subject which has important place for the development of individual and society. Both the Holy Quran and Hadith Prophet stressed the topics belief, worship and ethics with great care. The Muslim has to show the way to the next generations by producing numerous works on business. Islam holds man responsible not only towards Allah but also it requires him to have responsibility against all matters whether they are material or spiritual which may be of interest for man.

In conventional business normally they do the business for the sake of profit. Not other than that reason. So, when they do the business and deal with customer they are not thinking about justice or amanah. Besides, they just think that they will get profit and hope that they will not be bankrupt. Seems like once they invest they must get something return back. For example A want to change his dry date with B’s wet date. Although the thing is still same type but one is dry and one is wet, so the quantity is not same even the weight is same. In Islam this business transaction is prohibited because there is unjust to the one of the customer. In other word, if A want to change date with B, the date must be both dry or both wet. This is because to make sure it is balance and no harm between both parties.

In fact, in conventional business they also cheat the customer. In Islam, business can gain a profit but when the profit has exceeded fifty percent of the cost price of the goods, it is prohibited. But in conventional they do not have this rule, so they can up the price to get more profit. When they do like that, seem like they want to kill the customer. Nowadays, the retailer or producer or seller only want a big profit to ensure that their business run smoothly without thinking anyone else or customers welfare. They are always selfish to others to get their own benefits.

Islamic business is more convenience rather than conventional business, because in Islamic business they always take care of both parties’ (seller and customer) benefits. The things that are seen as beautiful by Islamic ethics are the acts that Quran commands people to perform. Again the things that Islamic ethics sees as bad are the acts that Quran ask people to avoid from. The principle of to order goodness and causing to avoid badness which is on of the main of the duties that Islam loads to people, shows us the importance that Islam gives to ethics.

Quranic ayah according to good ethics and moral conduct Allah (SWT) says,

“Let there arise out of you a band of people inviting to all that is good enjoining what is right and forbidding what is wrong; they are ones to attain felicity.” (Surah Al-Imran 3:104)

“Ye are the best of peoples evolved for mankind enjoining what is right forbidding what is wrong and believing in Allah. If only the people of the Book had faith it were best for them; among them are some who have faith but most of them are perverted transgressors.” (Surah Al-Imran 3:110)

“The parable of those who spend their substance in the way of God is that of a grain of corn: it growth seven ears, and each ear hath a hundred grains. God giveth manifold increase to whom He pleaseth: and God careth for all and He knoweth all things.” (Surah Al-Baqarah 2:261)

“Those who spend their substance in the cause of God, and follow not up their gifts with reminders of their gifts with reminders of their generosity or with their injury,-for them their reward is with their Lord: on them shall be no fear, nor shall they grieve.” (Surah Al-Baqarah 2:262)

Hadith according to the good ethics and moral conduct

“A good moral is the great ethics of Allah The Most High.”

“The most auspicious of you is the one who is the most beautiful in respect of morals.”

“The most matured of the believers in respect of faith is the one who act mildly and generously to his family by having the most beautiful moral qualities.”

“I was sent to complete good morals.”

Contract is the important binding between two parties. In other word, contract is agreement between buyer and seller in the sale of product. With contract, we can know the period, the price and other information related to the agreement that will be agreed by those parties. Both in conventional and Islamic business need contract in selling goods business.

In conventional business, it is simple because they just need offer and acceptance by two parties and the contract is done. They do not care about subject matter or witnesses or place and time. Even the subject matter or goods are defect or not perfect, there is no problem as long as there is offer and acceptance the contact is bind. After the contract is bind, if there is any defect, the customer cannot change the goods to the new one or want to make a replacement to other goods. The seller does not want to take any risk, if the buyer has accepted the contract they have to take the risk occurred after that. In fact, if there is offer and acceptance, it is complete. They also do not have specific contract, the entire contract is same for any transaction or sales.

Besides, the Islamic business has three Islamic contracts which are relevance to business and finance activity is widely recognized in the contemporary and classical literature. They are:

It is generally agreement should agreed by two parties, buyer and seller. The agreement should be concluded:

Contracts that involve prohibited items or that are structured in a way that is prohibited may in certain circumstances be rectified by removal of the objectionable clause, or may result in the entire contract being annulled. Let us see the contract in sales. How it could be done.

Bay’a or sales refers to any transaction in which ownership of an asset is exchanged between seler and buyer, in return for money or by barter. Bay’a can be made as a musawamah, in which case the price of the item is stated and the buyer agrees or refuses to buy, or as a murabahah in which case the seller discloses the costs of the goods being offered for sale so that the buyer may agree the profit margin. Referring to the kinds of absolute sales, Ibn Rushd derives the nine possible forms of sale, and highlights the prohibition of the general form of sale that involves the exchange of two liabilities:

“Each transaction between two individuals is an exchange, either of corporeal property for corporeal property, or of corporeal property for a corresponding liability, or of a liability for another liability… Each one of these three again is either immediate for both parties, or delayed for both, or is immediate for one party and delayed for the other. The kinds of sales (that emerge) are thus in number. Delay from both sides is not permitted by consensus either in corporeal property or in liabilities as it amounts to a proscribed exchange of a debt for a debt.”

The exchange transactions can be for immediate or deferred exchange. Furthermore, it is recommended that future contracts be evidenced in writing and also witnesses are needed. The item for sale also should be under ownership of the seller and in his physical or constructive possession at the time of the contracting sale.

Hadith according to contract of sales

“The messenger of Allah forbade me to sell a thing which is not my property.”(At-Tirmidhi)

“The messenger of Allah forbade me to sell a thing which is not my property or something that is not apparent and seen clearly.” (Al-Bukhari)

Quranic ayah according to contract of sales

“O, you who believe! When you contract a debt for a fixed term, record it in writing. Let a scribe record it in writing between you in (terms of) equity. No scribe should refuse to write as Allah has taught him, so let him write, and let him who incurs the debt dictate, and let him observe his duty to Allah his Lord, and diminish naught thereof. But if he who owes the debt is of low understanding, or weak, or unable himself to dictate, then let the guardian of his interests dictate in (terms of) equity. And call to witness, from among your men, two witnesses. And if two men be not (at hand) then a man and two women, of such as you approve as witnesses, so that if the one errs (through forgetfulness) the other will remember. And the witnesses must not refuse when they are summoned. Be not averse to writing down (the contract) whether it be small or great, with (record of) the term thereof. That is more equitable in the sight of Allah and sure for testimony, and the best way of avoiding doubt between you; save only in the case when it is actual merchandise which you transfer among yourselves from hand to hand. In that case it is no sin for you if you write it not. And have witnesses when you sell one to another, and let no harm be done to scribe or witness. If you do (harm to them) lo! It is a sin in you. Observe your duty to Allah. Allah is teaching you. And Allah is knower of all things.” (Surah Al-Baqarah 2:282)

CONCLUSION

As you may have realized, giving and taking interest is unlawful. Unfortunately, the basis of many of the transactions (especially in banking and insurance), personal or business involves interest. Thus it is becoming increasingly difficult for the majority of the Muslims, especially those who are western orientated to abstain from dealings involving interest. Our advice to anyone who is involved in any form of interest is that the individual should minimize his expenditure in these dealings and if possible abstain completely from these transactions. In any case, every individual should continue to seek Allah’s forgiveness. The philosophy shows that a person who takes interest does not gain anything in reality but through the explanation of the Quran verse,

“Allah decreases interest and increases sadaqah"

That in reality the money just goes to waste and the person does not even realize, and a person who gives money in the path of Allah, in whatever form it may be, actually gains although in reality it seems as though he is loosing out.

Every person should take all necessary precautions in their financial and social dealings. If a person neglects in keeping a watchful eye on financial dealings, this negligence will slowly spread to other aspects of religion. This will have a very detrimental effect on religious matters.

The summary of the matter is that interest is hazardous and should be abstained from in all manners. If anybody has a case they wish to solve then they should contact a Mufti and present their problem as it is.