Companies in Islam

 For many in the Muslim world Multinational companies such as Coca Cola, McDonalds, ExxonMobil and General Electric represent awe inspiring success stories of Capitalism. Their global reach, thousands of workers and the ability to mobilise resources and people who churn out billions in profits every year for many are aspects of the West that demand imitation. The Muslim rulers regularly distribute contracts to foreign companies who extract oil, minerals, build infrastructure, hospitals, and provide services such as banking and insurance as well as production plants which produce food and goods. Saudi Basic Industries, Saudi Arabia's chemical organisation, is the 157th largest company in the world and the only company from the Muslim world to make the famous Forbes list with assets of $36 billion.

Companies have been around for a few centuries, the earliest of which existed around the sixteenth century in England and Holland. Originally a corporation (as they were known at the time) was a social invention of the state. That is, a state grants a corporate charter, permitting private financial resources being used for public purposes. This initial creation of private finance and merchants was to aid in the colonial expansion of Britain and served to expand colonial and imperial interests to start with, as well as help in war efforts between empires. Corporations had therefore the potential, from the onset, to become very powerful. Even Abraham Lincoln recognized this: "I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country. … corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavour to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed."[1]

As long-distance trade continued to grow, this also gave rise to corporations. Shareholding broke down the social barriers among different classes of merchants and enabled individuals to divide their goods among ships destined for different ports. No longer was international trade limited to those who could afford to travel. Such companies although created by the state were privately owned and managed, held national monopolies over trade with certain regions. The industrial revolution made Europe the centre for international trade. The growth of industrial production was accompanied by a rapid expansion of trade. To ensure this status quo remained nations began to use the corporations to dominate international trade. In the 17th century making money became the major focus for corporations. Their wealth was used to finance European colonial expansion. Companies were used by the imperial powers to maintain control of trade, resources and territory in Asia, Africa, and the Americas.

The first of such companies was the East India Company, set up by British merchant adventurers and granted the Royal Charter of Queen Elizabeth I in 1600. Partners combined their personal stock, turning it into company stock to create the world's first commercial corporation. It shipped out gold and silver to Asia in return for spices, textiles and luxury goods. The East India Company expanded into a vast enterprise, conquering the Al Hind region (India) with a total monopoly on trade and all the territorial powers of a government. At its height, it ruled over a fifth of the world's population with a private army of a quarter of a million. In America, resentment was brewing against British rule, including corporations that ran American colonies with ruthless monopoly powers. Royal charters decreed that raw material was shipped from the colonies to Britain for manufacture, with the colonies forced to purchase the finished goods. The American Revolutionary War began in 1776 with a determination to root out the British.

In 1886 a landmark decision was made by a US court recognizing the corporation as a ‘natural person' under law. The 14th amendment to the Constitution: ‘no state shall deprive any person of life, liberty or property' – adopted to protect emancipated slaves in the hostile South – was used to defend corporations and strike down regulations. Relying on the Fourteenth Amendment, added to the Constitution in 1868 to protect the rights of freed slaves, the Court ruled that a private corporation is a natural person under the US Constitution, and consequently has the same rights and protection extended to persons by the Bill of Rights, including the right to free speech. Thus corporations were given the same "rights" to influence the government in their own interests as were extended to individual citizens, paving the way for corporations to use their wealth to dominate public thought and debate. The debates in the United States in the 1990s over campaign finance reform, in which corporate bodies can "donate" millions of dollars to political candidates stem from this ruling although rarely if ever is that mentioned. Thus, corporations, as "persons," were free to lobby legislatures, use the mass media, establish educational institutions such as many business schools founded by corporate leaders in the early twentieth century, found charitable organizations to convince the public of their lofty intent, and in general construct an image that they believed would be in their best interests. All of this in the interest of "free speech" and arguably set the stage for the full-scale development of the culture of Capitalism, by handing to corporations the right to use their economic power in a way they never had before.

Today much criticism and debate is taking place to the role companies' play in national economies and in the Third world. There influence and control of resources are seen as the most prominent aspect of modern day colonialism. The rights afforded to them make them very powerful and able to influence policies in foreign countries. Many western companies have benefited immensely from IMF and world bank conditions on creating free markets and privatizing key industries which foreign multinationals have been all to happy to snap up. In the pursuit of corporate interests wide scale abuse and corruption have commonly been uncovered by western multinationals in the third world. In March 2003, James Giffen of the Mercator Corporation was indicted, accused of bribing President Nursultan Nazarbayev of Kazakhstan with $78 million to help ExxonMobil win a 25 percent share of the Tengiz oilfield, the third largest in the world. In June 2001 a lawsuit against ExxonMobil was filed in the Federal District Court of the District of Columbia under the Alien Tort Claims Act. The suit alleges that  ExxonMobil knowingly assisted human rights violations, including torture, murder and rape, by employing and providing material support to the Indonesian military forces, who committed the alleged offences during civil unrest in Aceh.[2]

Companies in Islam

Islam has laid down rules for ownership and designated various rules for when individuals come together and distribute profits amongst themselves. This is different to employment (Ijara) where one is compensated for the use of their skill or labour in the form of wages or a salary.

In the Khilafah companies will operate in pre-determined spheres of the economy, due to Islam designating any utility regarded as indispensable for the community, such that its absence would require people to search far and wide for it, as a public property.  This means the utilities would be publicly owned and the revenue generated would be administered for the benefit of all citizens. This is derived from the hadith of the Prophet (SAW) "Muslims are partners in three things: in water, pastures and fire". This means ownership of key utilities will always remain with the state; however the extraction, development, refining or construction can be undertaken by companies who will be paid for such a contract. This will ensure the Khilafah becomes self sufficient and not reliant on foreign companies.  

In all other sectors of the economy companies can operate freely without any intervention by the state, individuals can come together to fulfil any need in the economy.

A Company (Sharikah) is essentially a contract where people come together and instead of paying themselves a salary they distribute the profits amongst themselves. In origin a company is a contractual matter and Islam has laid out detailed rules for contracts. In Islamic contracts there must be an offer and acceptance between partners over something i.e. over the thing they will trade in. Thus there are always two parties or more in the formation of a company. The work they do forms the subject matter of the contract because this is the reason they have some together. One of them as a minimum must be able to dispose on behalf of the company i.e. make purchases, dispose of assets etc, as a result Islamic companies came to be defined as the following:-

1. The Company of Equals (Al-'Inan) this is where both partners put their money into a business and work with it. Both partners would have the right to buy and sell and take the company forward, hence all partners are all equal in their deposal.

2. The Company of Bodies (Al-Abdan) this is where two or more people come together with their skills such as a consultant, doctor or craftsmen. Although they use their money, the skill they have is what constitutes the basis of the company.

3. The Company of Body and Capital (Mudharaba) this is where one funds the capital of the business and the other partner works with it. The partner who provides the capital element is a silent partner and takes no part in the running of the business. The other partner buys and sells on behalf of the company. 

4. The Company of Reputation (Wujooh) this is a company similar to madharabah but the capital is provided by a silent partner who has respect and standing and based upon this the company trades. The partner could be a rich merchant, which would mean debts will always be paid by this company as they are backed by a wealthy individual.

5. Company of Negotiation (Mufawadha) this is any combination of the above.

An Islamic company can be summarised as follows

  • – The Sharika (Company) is an agreement between two or more people to do some type of work in order to make profit. So one partner usually provides the capital and the other works with it. Sole proprietors are allowed in Islam and this would be the investing of an individual's wealth.
  • – The Company and its partners are one unit, not separate, it is their personal wealth which is the capital of the business, and upon this the contract was formed.
  • – The profit distribution ratio can be decided according to what is agreed in the contract i.e. 50/50, 40/60 etc whilst the loss is distributed relative to the amount each partner invests in the business, thus if only two people owned a company, and the company failed with debts of $15 billion, the partner who contributed 40% of the capital would need to pay 40% of this debt. A partner's liability will not be limited to the amount put in; thus there is no limited liability in Islam.

Understanding this shows us there are some fundamental differences between the corporations in the West compared to companies in Islam. Fundamentally this is down to two core issues:-

The corporation represents a particular type of contract in the West. The ‘Solitary Will' is where an individual agrees to the written constitution of a company by purchasing its shares with no formal offer from anyone. This came to be termed as the Individual Will whereby shares could be exchanged very quickly without the need for two people to continuously sit down and have a formal offer and acceptance. An example of this is the take-over bid of the world's richest football club, Manchester United FC by Malcolm Glazier. He imposed his will on the company (i.e. he brought shares) and even though other shareholders were against such an action it was a valid form of acquiring ownership from a legal perspective even though there was only one person in the contract (acceptance but no offer).

Most contracts involve two parties where one party offers terms and the other accepts, however under corporate law in the West setting up a business is a contract of ‘solitary will.' It is not a contract between two or more people, rather it is an agreement that all agree to when they subscribe for shares in the company. So an individual joins himself to the conditions of a company – through purchasing their shares. This means to become a partner one does not actually need to seek the permission of the owners.

This contradicts Islam as a company is a contract between two people over terms; in corporate law in the West they see giving charity, claiming insurance and the setting up of a company and trade as the same type of contract.  In Islam these are viewed as different types of contracts.

According to corporate law in the West once a company has fulfilled all the legal requirements it is then established and the partners become separate to the company as the company become ‘a legal entity in its own right.' This means a company is a physical person and liable to pay its own tax and can be taken to court and sued. This evolved from a number of incidents that occurred in history but fundamentally if one was to take McDonalds to court, the wealth of the shareholders, the employees or the directors will not be held in contempt, this intangible person called McDonalds is on trial.

This contradicts Islam as the partners are the company; if the company is taken to court it is the partners that are liable. The corporation takes all personal elements away from the company thus in the case a company goes bankrupt the owners only lose what they put in and no more and all those who are owed debt will not receive anything.

From this short exposition it can be seen there are some fundamental differences between companies in Islam and those in the West, the structure of the corporation in the West fundamentally disagrees with the Islamic rules of company structures, this would make the purchase of shares in them invalid as well as the shares represents a piece of the company and the company is invalid from Islam.

Below are some facts and statistics on the influence of corporations in the West.

  1. Of the 100 largest economies in the world, 51 are corporations; only 49 are countries (based on a comparison of corporate sales and country GDPs).
  2. The Top 200 corporations' sales are growing at a faster rate than overall global economic activity. Between 1983 and 1999, their combined sales grew from the equivalent of 25.0 percent to 27.5 percent of World GDP.
  3. The Top 200 corporations' combined sales are bigger than the combined economies of all countries minus the biggest 10.
  4. The Top 200s' combined sales are 18 times the size of the combined annual income of the 1.2 billion people (24 percent of the total world population) living in "severe" poverty.
  5. While the sales of the Top 200 are the equivalent of 27.5 percent of world economic activity, they employ only 0.78 percent of the world's workforce.
  6. Between 1983 and 1999, the profits of the Top 200 firms grew 362.4 percent, while the number of people they employ grew by only 14.4 percent.
  7. A full 5 percent of the Top 200s' combined workforce is employed by Wal-Mart, a company notorious for union-busting and widespread use of part-time workers to avoid paying benefits. The discount retail giant is the top private employer in the world, with 1,140,000 workers, more than twice as many as No. 2, DaimlerChrysler, which employs 466,938.
  8. US corporations dominate the Top 200, with 82 slots (41 percent of the total). Japanese firms are second, with only 41 slots.
  9. Of the US corporations on the list, 44 did not pay the full standard 35 percent federal corporate tax rate during the period 1996-1998. Seven of the firms actually paid less than zero in federal income taxes in 1998 (because of rebates). These include: Texaco, Chevron, PepsiCo, Enron, WorldCom, McKesson and the world's biggest corporation – General Motors.
  10. Between 1983 and 1999, the share of total sales of the Top 200 made up by service sector corporations increased from 33.8 percent to 46.7 percent. Gains were particularly evident in financial services and telecommunications sectors, in which most countries have pursued deregulation.

Top 200: The Rise of Corporate Global Power, Institute for Policy Studies

[1] U.S. President Abraham Lincoln, Nov. 21, 1864 (letter to Col. William F. Elkins)  "The Lincoln Encyclopedia",

  Archer H. Shaw (Macmillan, 1950, NY)