Islamic Model of Entrepreneurship

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

The word entrepreneurship is well recognized in this globalization era. When we talk about this word, we cannot easily run to deeply discuss about its authentic definitions, its strategies to expand the businesses, the available resources that are going to be used in contributing towards the development and enhancement of the production of goods and services, the suitable characteristics that must be possessed by the entrepreneurs, the entrepreneurial processes that must be performed successfully etc.

Firstly, let us mention what is this term is all about. Entrepreneurship is the process of creating something different with value by devoting the necessary time and effort, assuming the accompanying financial, psychic, and social risks, and receiving the resulting rewards of monetary and personal satisfaction.Usually, most entrepreneurs use the strategic management steps which comprise of strategy formulation, planning, analysis, strategy implementation, execution and evaluation.

Moreover, to be surviving in this world which full of competition, we as entrepreneurs must have the resources because without the inputs of course we cannot produce the valuable outputs. There are 6 types of business resources which are physical, reputational, organizational, financial, intellectual and human and technological. In addition, the business cannot be smoothly operated if it has been handled by unskilled and unknowledgeable entrepreneurs. Because of that reason, there are some personalities that should exist in order to be a successful entrepreneur which are hard work, self-starting, setting of personal goals, resilience, confidence, assertiveness, information seeking, eager to learn, attuned to opportunity, receptive to change, commitment to others and comfort with power.

Now, it comes to the most important part in this assignment which is the clarification about the procedures and mechanisms in entrepreneurship. By the way, let us first make a proper distinction between these 2 words, procedure and mechanism. Procedure simply means the way conducting business etc. or performing task; set series of actions while mechanism is defined as structure or parts of machine; systems of parts working together; process, method.In this assignment, we decide to thrash out about this topic in 2 separate sections which at first, we talk about the procedures and then the mechanisms.

In the conventional practices, the entrepreneurial process includes identify and evaluate the opportunity, develop business plan, examine which resources are required and manage the enterprise.

It is a most difficult task. Most good business opportunities do not suddenly appear but rather result from an entrepreneur being alert to possibilities and, in some cases, by establishing mechanisms to identify potential opportunities. Since most entrepreneurs do not have formal mechanisms for identifying business opportunities, some sources are often fruitful: consumers and business associates, members of the distribution system and technical people. Often, consumers purchasing products to fit a certain life-style and business associates purchasing products are the best sources for ideas for a new venture. Channel members of the distribution system also see product needs resulting from their close contact with the end-user. Finally, technically oriented individuals often conceptualize business opportunities when working on other projects. Regardless of whether the opportunity is identified from consumers, business associates, channel members or technical people, each opportunity must be carefully screened and evaluated. This evaluation of the opportunity is perhaps the most critical element of the entrepreneurial process as it allows the entrepreneur to determine whether the specific product or service has the returns needed or the resources required. It is important for the entrepreneur to understand the factors causing the opportunity. Is it technological change, market shift, government regulation or competitive change? Each of these factors and the resulting opportunity has a different market size and time dimension. Eventually, the opportunity must fit the personal skills and goals of the entrepreneur. This aspect is of critical importance if the entrepreneur is to be able to put forth all the time and effort required to make the venture succeed. Although many entrepreneurs feel that the desire can be developed along with the venture, typically it does not materialize, dooming the venture to failure. An entrepreneur must believe in the opportunity so much that everything will be sacrificed so that the resulting organization will succeed.

A good business plan must be developed in order to exploit the opportunity defined. This is perhaps the most difficult phase of the entrepreneurial process. An entrepreneur usually has never prepared a business plan and often does not have the resources available to do a good job. A good business plan is not only important in developing the opportunity but is essential in determining the resources required and then managing the resulting venture.

The resources needed to successfully meet the opportunity must be assessed. This process starts with an appraisal of the entrepreneur’s present resources. Any resources that are critical must be delineated from those that are just helpful. Care must be taken not to underestimate the amount and variety of resources needed. The downside risks associated with insufficient resources should also be assessed. Acquiring the needed resources in a timely manner, while giving up as little control as possible, is the next and indeed a most difficult step in the entrepreneurial process. An entrepreneur should strive to maintain as large an ownership position as possible, particularly in the start-up financing stage. As the business develops, more funds will probably be needed, requiring more ownership to be relinquished. Every entrepreneur should give up each piece of the venture only after every other alternative has been explored. Not only must alternative suppliers of these resources be identified but also their needs and desires. By understanding their needs, the entrepreneur can structure a deal which enables the resources to be acquired at the lowest possible cost and loss of control.

After the resources are acquired, the entrepreneur must put them into action through implementation of the business plan. He or she must also deal with the operational problems of the growing enterprise. This involves implementing a management style and structure, as well as determining the key variables for success. Problem areas must be identified and carefully monitored through an implemented control system. Some entrepreneurs have difficulty managing and enlarging the venture they created - a difference between entrepreneurial and managerial decision making.

All the procedures applied in the conventional entrepreneurship can be used in the Islamic way of doing entrepreneurship as long as do not negate the teachings prescribed in the Shariah principles. In general, the procedures of entrepreneurship are widely implemented in the business industry whereby it can be applied in the Islamic financial system also in the Islamic banking system in this world as a whole. At this point, let us discuss first the realization of entrepreneurship in the area of Islamic financial system. The basic framework for an Islamic financial system is a set of rules and laws, collectively referred to as Shariah, governing economic, social, political and cultural aspects of Islamic societies. Shariah originates from the rules dictated by the Quran and its practices, and explanations rendered (more commonly known as Sunnah) by the Prophet Muhammad. Further elaboration of the rules is provided by scholars in Islamic jurisprudence within the framework of the Quran and Sunnah. The basic principles of an Islamic financial system can be summarized as follows:

Prohibition of Riba, a term literally meaning "an excess" and interpreted as "any unjustifiable increase of capital whether in loans or sales" is the central principle of the system. More precisely, any positive, fixed, predetermined rate tied to the maturity and the amount of principal i.e. guaranteed regardless of the performance of the investment is considered Riba and is prohibited. The general agreement among Islamic scholars is that Riba covers not only usury but also the charging of "interest" as widely practiced.

Because interest is prohibited, suppliers of funds become investors instead of creditors. The provider of financial capital and the entrepreneur share business risks in return for shares of the profits.

Money is treated as "potential" capital - that is, it becomes actual capital only when it joins hands with other resources to undertake a productive activity. Islam recognizes the time value of money, but only when it acts as capital, not when it is "potential" capital.

An Islamic financial system discourages hoarding and prohibits transactions featuring extreme uncertainties, gambling and risks.

Islam upholds contractual obligations and the disclosure of information as a sacred duty. This feature is intended to reduce the risk of asymmetric information and moral hazard.

Only those business activities that do not violate the rules of Shariah qualify for investment. For example, any investment in businesses dealing with alcohol, gambling and casinos would be prohibited

In conjunction with the Islamic financial system, we as entrepreneurs must know that all business dealings has their own procedures and must follow it accordingly also should be inline with the Shariah principle. As mentioned above, we should follow totally what is stated in the principle of Islamic financial system such as avoiding the practice of Riba, preventing ourselves from involving in any kinds of illegal business activities etc. Allah the Almighty has bestowed all valuable resources whether in the land, in the air and in the sea to His vicegerents and is up to us whether want to utilize them in a useful way for the sake of ourselves in this world and in the Hereafter, for the society and for the country or in a wasteful way which can give harm to anyone. Also, we as entrepreneurs must be just in terms of profit and loss-sharing among other members in the business industry also must be willing to face the risks which normally will occur in the business field with other partners.

Furthermore, we must give assistance to other poor entrepreneurs who do not have enough capital to set up their own enterprise or facing other problems pertaining to their dreams to be a victorious entrepreneur in quest to alleviate the level of poverty that will occur as result from their incapable of setting up their business although their have adequate skills and very knowledgeable about the entrepreneurship as in aggregate. From all that we have mentioned above, we can simplify that the procedures of entrepreneurship is largely observed to promote mutual relationship (ukhuwwah) among the entrepreneurs on the basis of Islamic code of ethics.

Entrepreneurship also can be seen and broadly implied in the Islamic banking whereby the principle of Mudharabah (trustee financing) takes place. In a Mudharabah-based transaction, the microfinance program and the micro enterprise are partners with the program investing the money and the micro entrepreneur investing the labor. In both Mudharabah and Musharakah, the financing organization and the business work in partnership. But in Mudharabah, the financier invests only money and the entrepreneur invests labor while in Musharakah, both the financier and the entrepreneur invests funds. The micro entrepreneur is rewarded for his or her work and shares in the profit; the program only shares in the profit. The profit-sharing rates are predetermined, but the profit is unknown. In effect, the microfinance program takes “equity” in the micro enterprise through the loan. Initially, the program may own 100% of the shares and would hence be entitled to its predetermined share of all the profit. But as each loan installment is repaid, the microentrepreneur “buys back” shares. As a result, the microfinance program earns less profit with each repayment received.

From this situation, it is clear to say that the procedures of entrepreneurship is commonly been used in the field of Islamic banking mostly engaged in Mudharabah type of business. The role of entrepreneurs in Mudharabah is very important and crucial because they have been given all the available resources by the investors in terms of financial capital in order to run the operation efficiently. As we know, capital is very essential tool to at the beginning set up the business because from that investment, there will be opportunity to gain profit and business improvement in the future. Additionally, the entrepreneurs have been given trust (Amanah) by the investors to manage the business. So, they must execute that responsibility in conformity with the teachings of Islam.

Although they know that 9/10 of the sustenance in this world is coming from business and trade, they should obtain them in the permissible way as prescribed in the Quran and Sunnah. It is because Amanah is a heavy responsibility actually because not many people can take that as mentioned in the Quran about the story of the Angels of Allah who cannot take the Amanah which is given by Allah but at last, Prophet Adam is willing to receive that accountability. It is shown that Allah has given His slaves a high rank in the sight of Him and He want to test them whether they can accomplish it inline with His injunction or not. His slaves (at this point is the entrepreneurs) have been bestowed an entity which can differentiate between themselves and other creatures which is the mind or brain (‘Aql) so they must use it wisely in order to prevent any kind of disagreement of opinions and views among other entrepreneurs so that the management of business will be effectively operated.