Thursday, July 2, 2009

Before answering the question, it is best to consider the concept of modern corporations or companies in the light of the major rules and regulations as practised today. Although these corporation have some similarities with Islamic sharikah by virtue of the fact that they all can come into being when at least two individuals "form" the company or sharikah, and have them registered with the Registrar of Companies, yet once established and registered with the relevant authority these modern companies are recognized by the law as separate legal entities distinct from their shareholders.
In the context of Islamic sharikah however, the shariah envisages the role of the partners as individuals who are to carry out their business activities jointly with a view of making profit. This furthermore boils down to whether what is formed is a mufawadah or inan structure: in the case of the former the partners are agents and guarantors among themselves, whereas in the later case, they are only agents. Hence in the context of Inan, a partner is considered to be acting personally with regard to his portion of the equity of the sharikah, and at the same acting as an agent with regard to his partner’s portion. It is a requirement in Islamic law however that all partners need to put their capitals in an indistinguishable form in a common fund or account separated from their other assets. Nevertheless the liability of the parties in the context of their business dealings with third parties is not necessarily limited to their shares in the sharikah as any act carried out properly in accordance with the agency will bind the respective partners, although loss is to be shared in proportion to their capital contribution.
But if we look closer at modern corporations it will become clear that the purpose or objective of the separate legal entity is to allow for a separate account be created for the entities so that it will be made possible to identify their assets and liabilities because those need to be treated independently from the assets or liabilities of their shareholders. These entities can sue and be sued in the course of their business dealings with outsiders. In a company limited by shares however the liability of the shareholders are limited to the number of shares of certain value subscribed by them precisely because the law consider these corporation as different from their shareholders. Given this position one may think of a mudarabah structure in Islamic law, where the manager is supposed to be different from the capital provider meaning that this mudarib is a different or separate legal entity distinct from the entity of the capital provider. Hence can we consider modern corporations as individual managers/mudaribs in the context of their dealing with the shareholders?
In the case of Islamic mudarabah, it is provided that the rabulmal is going to be held liable up to the amount of the capital he actually contributed and duly handed over to the mudarib. He will not be made answerable for any liability of the mudarabah in excess of the capital so contributed. However in modern company structure, it is the requirement that a shareholder must pay up all shares that he owns but he is not duty bound to pay up for the share until a call is made by the company, and he will be imposed with interest charge in favour of the company if he fails to do just that after the call. This effectively means that he is considered indebted to the company by not obliging to the demand of the call, hence a debt is thus created for which interest is charged.
From an Islamic perspective in the context of mudarabah and musharkah all capitals must be passed on to the account of the mudarabah or partnership otherwise the contract is compromised in term of effectiveness and validity. Because a party in mudarabah if he a capital provider, is free to withdraw from the mudarabah, non payment of the capital to the account of the mudarabah will practically end the agreement as this contract is in the nature of non-binding contract, or at least the mudarabahis to be valid only up to the amount of capital actually contributed. Similarly in the context of sharikah it is part of the requirement of the Islamic scheme that the capital is to be pooled together to create common ownership available for all partners to utilize in the name of the musharakah in line with the concept of mutual agency as between all the partners. However if one party refuses to provide the capital in such a manner, he can be considered as to withdraw from the sharikah since to effectively establish the partnership all capitals contributions must be actually made and not just promised. Like in the case of the parties in mudarabah, partners also can withdraw from the sharikah as a matter of general rule if they so wish.
From a different perspective, practically the operation of modern companies and corporations is not necessarily in line with the rules and conditions of the Islamic sharikah . Modern companies issue shares and loan capitals of various kinds, some of which are subject to interest. Debentures, for instance, are resorted to by modern companies when they want to raise additional money through debt instruments, which are, in essence, interest-based and thus not approved by Islam. They may also issue securities (loan stocks) that pay a fixed rate of return to holders - a process which is also contrary to Islamic law. Then there are the issues of preference share that gives more priority to a certain class of shareholders in relation to profits or returns and the right to repayment of capital upon dissolution of the companies. Therefore, there are many issues that need to handled if the companies and modern corporations are to achieve Shariah compliant status. Not only that they must avoid dealing in haram goods and services, they also need to ensure that their setup and structure are Shariah compliant.

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