Abstract
In the past, Muslims and non-Muslims mainly depended on equity-based financing while debt was an exception, but this whole system was altered with the inception of banks followed by the corporations and the role of partnerships started to shrink. Accordingly, many issues emerged concerning the current financial system, for instance three different banking theories were developed that are based on different understanding of how banks and money function and each lead to different economic and policy implications. Frankly, the new entire system was borrowed from the English law and hence raised doubt about its compliance with Sharī’ah. Accordingly, the study aims to re-examine the structure of corporations, especially the concept of legal personality, and the provision of debt finance under the principles of Islamic law and their effect on the economy as compared to partnerships. The study employed library research, content analysis as well as case study approaches and found that the only correct banking theory that is supported by an empirical evidence is the credit creation theory which states that banks can create money out of nothing. Moreover, after analyzing the concept of legal personality, the concept proved not to be accepted by the classical scholars although the majority of the contemporary scholars insist on its validity. Furthermore, the whole structure was found to contradict some of the main principles of Islamic law. Finally, partnerships were found to be more efficient than the debt-based system in terms of allocating the investable resources and the marginal efficiency of capital.
Highlights
1.1 BackgroundPreviously, partnerships which entirely depend on equity were considered the best channel used by Muslim investors and many scholars adopted studies that showed its importance and positive impact on the whole economy
This study seeks to clarify how the structure of the current debt-based financial system affects the economic system, how and why it diverges from the principles of Islamic law, and why the equity-based system is more efficient in allocating the investable resources
He used similar analysis to conclude that the concept of juristic person is attached to mosques, bayt al-māl, hospitals, universities, orphanages and charitable institutions. He concluded that the Muslim Ummah is considered a separate legal entity form its head of state. Sanūsī has supported his opinion by referring to some texts used by some of the contemporary scholars, like Muṣṭafā Al-Zarqa and ‘AbdulQādir ‘Aūdah. Muṣṭafā Al-Zarqa said the following: “When we referred to the original texts and sources of the Sharī’ah, we found in it legal provisions which in substance propounds the concept of juristic person and its legal status
Summary
Partnerships which entirely depend on equity were considered the best channel used by Muslim investors and many scholars adopted studies that showed its importance and positive impact on the whole economy. Partnerships were the prevalent method for commerce since the prophet time as he (pbuh) and his noble companions (mAbpwt) themselves used to engage in partnerships especially muḍārabah. Not exclusive to the Muslim society, partnerships reached Europe through the so called commenda and societas. This equity-based system is no longer prevalent since the whole financial system was altered with the inception of banks which became the main provision of debt financing; their main job is extending loans and collecting fixed returns out of it. Scholars have not yet come to any consensus about how the banks and money are functioning under the banking system, and they have developed three theories where each theory leads to totally different economic and policy implications
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