The following is a translation from Arabic.
The Company (Partnership) in Islam
Company (ash-sharika) linguistically means mixing two or more shares together such that neither can be distinguished from the other. Company in Shar'a is a contract between two or more persons, in which they agree to perform financial work with the intention of making profit. The contract of the company requires the existence of both offer and acceptance, as is the case with all Islamic contracts. An offer occurs when one party says to the other: ‘I made you a partner in such and such’ and the other party replies by saying, ‘I accepted.’ These actual words are not necessary but the meaning is. There must occur in the offer and acceptance something that indicates that one of the parties addressed the other orally or in writing on the matter of partnership over something, and the other accepted. Therefore, an agreement on partnership only does not represent a contract. An agreement to pay money or property for partnership is also not considered a contract as well. Rather, the contract must include the concept of partnership in something. The condition of validity of the partnership contract in Islam requires that the contracted matter be a right of disposal and that this right of disposal, over which the company contract is concluded, is suitable for representation (wakala) such that what is gained by the disposal becomes shared between the two partners.
Partnership is allowed in Islam because when Muhammad (SAW) was sent as a Messenger people were dealing with companies and he (SAW) did not forbid this. Al Bukhari narrated that Abu Al-Minhal said: “I and my partner bought something in cash and credit. Al-Bara ibn 'Azib came to us so we asked him about this. He said: My partner, Zaid ibn Al-Arqam, and I did the same and we asked the Prophet (SAW) about this. He (SAW) said: 'That which is in cash you take, and that which is in credit you return it back'.” Ad-Daraqutni narrated from Abu Hurairah that the Prophet (SAW) said: “The Supreme said I am the third of the two partners as long as one of them does not betray his companion. If he betrayed, I would withdraw from them.”
Partnership is allowed amongst Muslims, dhimmis (non-Muslims living under Islamic authority), and between Muslims and dhimmis. So it is allowed for a Muslim to enter into partnership with a Christian, a fire-worshipper or other dhimmis. Muslim narrated from Abdullah ibn 'Umar who said: ‘The Prophet (SAW) dealt with the people of Khaybar, who were Jews, for half of the land production of plant or fruit.’ In another narration by Bukhari from Aisha: “The Prophet (SAW) bought food from a Jew in Madinah and he deposited his armour with him as security.’ At-Tirmidhi narrated from Ibn 'Abbas who said ‘The Prophet (SAW) passed away while his armour was left as a security in return for twenty cubic measures (sa'a) of food which he took for his family.’ At-Tirmidhi narrated from Aisha that ‘the Messenger of Allah (SAW) sent for a Jew asking him for two garments (and to wait) until (the time of) prosperity.” Entering into partnership with Jews and Christians and other dhimmis is therefore allowed, as dealing with them is permissible. However, dhimmis are not allowed to sell alcohol and pork while acting as partners with Muslims. Prior to forming a partnership with a Muslim, a dhimmi may have sold alcohol, the proceeds of which would be halal for the company. Partnership is only valid between people whose right of disposal is allowed, as it is a contract based upon the disposal of property. It follows that it is invalid to form a company with a person who is prevented from disposal of property. It is also not allowed to enter into partnership with a person who is placed under guardianship, or a person whose right of disposal is not allowed.
Partnership is either a partnership of properties or a partnership of contracts. The company of properties is a company of assets, such as partnership in a property that has been inherited, bought or gifted. The company of contracts is the subject of discussion regarding increasing of ownership. From the examination of partnership contracts in Islam, and the divine rules (ahkam shar'iyah) related to them it can be concluded that there are five types of company in Islam. These are Al-'Inan (equal), Al-Abdan (bodies), Al-Mudharaba (two or more), Al-Wujooh (faces) and Al-Mufawadha (negotiation).
The Company of Equal (Al-'Inan)
This is two bodies (abdan) associating with their properties. Namely, two persons associate with their properties and share the work dividing the profit between them. It is called a company of 'Inan because they are equal in their right of disposal where ‘inan means two riders in a race if their horses are equal and their race is equal, so their bridles ('inan) are equal. This form of company is allowed by the Sunnah (of the Prophet) and Ijma of the Sahabah (consensus of the Companions). People have entered into this form of partnership since the time of the Prophet (SAW) and the Sahabah.
In this type of company, the capital is represented by money, because money represents the value of the properties and the sales. It is not allowed to enter into partnership over merchandise unless it was evaluated in monetary terms at the time of contract. Its value at this time represents the capital. It is a condition that the capital be defined and disposable. The partnership is thus not allowed to be formed over an unknown capital, absent property or a debt as the capital has to be referred to at the time of division and because the debt cannot be disposed with immediately and this is the aim of the company. It is not necessary that the two property shares are equal or of the same kind. However, they must be evaluated by one measure so that both shares become one property. It is, therefore, valid to become partners with, for example, Egyptian and Syrian money, but these should be evaluated by one value so that there is no difference between them and they become one of the same kind. It is a condition that the capital of the company be one property and common for both such that neither partner can differentiate his property from the other's. It is also conditional that the two partners have authority over the capital. The 'inan (equal) company is based on delegation and trust. The partners trust each other through handing over properties, and by delegating permission to each other to dispose of property. Once the company has been formed it becomes one entity. It is obligatory for the partners to start work themselves as the company is established upon their bodies. Neither of them is allowed to delegate another person to work for the company on his behalf. The company as a whole employs whom it wants and uses the body of whom it likes as its employee not as an employee for one of the partners.
It is allowed for any of the two or more partners to trade in whatever way he feels is beneficial to the company. Each of the partners is also allowed to collect the price and make purchases, to litigate for and request payment of debt, to remit and accept remittance, and to return faulty goods. Each is allowed to hire and lease the capital of the company, as the benefits to the company are as good as the commodities, in a similar way to selling and buying. Each partner would be allowed to sell an item like a car for example, or to lease it in its capacity as a commodity for sale. The benefit to the company becomes like the commodity itself and is as good as this.
It is not conditional that the two partners have equal shares, but it is necessary that they are equal in the right of disposal. With regard to the capital, it is valid that the partners have different or equal shares, while the profit is divided as they stipulate. It is thus valid to stipulate equality in the profit or to give preference. According to what 'Abdurrazzaq narrated in Al-Jami', 'Ali (ra) said: ‘The profit is according to what they stipulated.’ With regard to losses in the 'Inan company, it is according to the capital share only. If their shares are of equal value then the loss between them is divided equally, and if the capital is divided in thirds then the loss is divided in thirds. If they stipulated other than that, no value will be given to their stipulations. The rule on loss is then executed without regard to their stipulations, by dividing the loss based upon the ratio of their capital shares. This is because the body does not lose property; rather it loses the spent effort only. The loss is thus carried on the capital and it is distributed according to the shares of the partners. This is because a company is a form of representation (wakala). The rule is that the deputy is not held responsible for the loss but the loss is carried upon the property of the deputising person. Abdurrazzaq narrated in Al-Jami' from 'Ali (ra): “The loss (al-wadhi'a) is upon the capital and the profit is according to what they stipulated.”
The Company of Bodies (Al-Abdan)
This is a company in which two or more persons participate by their bodies only, without their capital. They share in that which they gain by their labours of intellectual or physical nature. Examples of such labours are by craftsmen who share in work using their craft and divide that which they profit amongst themselves such as engineers, doctors, fishermen, porters, carpenters, car drivers and the like. It is not necessary that the partners be of the same craft, nor that they are all craftsmen. It is allowed that craftsmen of different crafts associate in an allowable (halal) form of profit. Their partnership is valid (sahih) just as if they were of the same craft. It is acceptable for the partners to perform a particular role in the company, so that one administers the company, another receives the money and the third works by his hands. This means that it is allowed for labourers in a factory to enter into partnership together, whether or not all of them understand the process of manufacturing. They can associate with other craftsmen, labourers, clerks and guards, and they can all become partners in the factory. However, it is stipulated that the work they associate together in for the purpose of making a profit be halal. If the type of work is haram, then to form a company undertaking such work is forbidden.
The profit in the company of bodies is distributed according to the agreement of the partners, whether equally or preferentially. As it is the work which produced the profit and since it is allowed for the partners to differ in work, it is allowed that they differ in profit which is derived from the work. Each of the partners has the right to collect all of their wages from their employer, and to demand the price of the goods they manufactured from prospective purchasers. Similarly, the one who employed them or the one who bought goods from them has the right to pay all wages or to pay the whole price of the goods to anyone of them. He will be cleared of responsibility once he has made the payment to any one of them. Even if only one of the partners worked, the income is still divided amongst all of them, because the work is guaranteed by all of them together, and through their joint responsibility for the work. The wage in other words, deserves to be shared. In other words, the wage is for all of them as the responsibility is carried by all of them. None of them is allowed to deputise on his behalf a person as partner in the company or to employ a person to do the work on his behalf as a partner. He himself must be the one who handles the work directly as the contract stipulates this in this type of company. However, each partner is allowed to hire employees and such hiring would be by the company and for the company, even if only one of the partners handled the employment. The employee would then not be that partner’s own deputy, agent or employee. The disposal of each partner would be on behalf of the company, and every one of them is bound by the work accepted by his partner.
This form of company is allowed due to what Abu Dawud and al-Athram narrated from Abu 'Ubaydah from his father, 'Abdullah ibn Mas'ud, who said: “I shared with Ammar ibn Yasir and Sa'ad ibn Abu Waqqas in whatever we gained at the day of Badr. Sa'ad came with two captives, while Ammar and I brought nothin” and the Messenger of Allah (SAW) consented to this to both of them. Ahmad ibn Hanbal said: “The Messenger of Allah (SAW) associated them together.” This hadith is an explicit evidence about the partnership of bodies of a group of the Sahabah to perform an action, which was fighting against the enemies, and to divide amongst themselves that which they gained in terms of booty if they won the battle. With respect to the rule of the booties being in disagreement with this partnership, this is not relevant to this hadith because the rule of the booties was revealed after the battle of Badr. When this company of bodies occurred there was not yet any rule of booties. In addition, the rule of booties which was revealed after the battle did not abrogate the company which occurred before. Rather it clarified the shares of the benefactors, and the rule of the company of bodies’ remains as established by this hadith.
The Company of Body and Capital (Mudharaba)
This is called loaning (qiradh), and it is the partnership of a body with property. It means that one pays his property to another person for him to trade with and the resulting profit is divided amongst them according to what they stipulated. The loss in the mudharaba is not subject to the agreement of the partners but rather to that which came in the Shar'a. This loss is defined by Shar'a only on the property, none of it is upon the body (mudharib). Even if the capital partner and the mudharib were to agree that the profit and loss is divided among them, the profit would be between them while the loss is only on the property. This is because the company is similar to representation (wikala) and the agent (wakeel) does not guarantee. The loss is upon the principal (muwakkil) only. This is due to what Abdurraziq narrated in Al-Jami from Ali (ra): “The loss (al-wadhi'a) is on the property and the profit is according to what they stipulated.” The body however does not lose property, it loses what it spent of effort only and the loss remains on the property.
Mudharaba would not be valid until the property is given to the worker ('amil) and he is given a free hand over it, because mudharaba requires handing over the property to the mudharib. In mudharaba, the share of the worker must be defined and the property used in the mudharaba contract must be of a defined amount. It is invalid for the owner of the property to work with the mudharib, even if he stipulated to do so. This is because he has no right to dispose of the property that belongs to the company, on the company’s behalf. It is the mudharib who disposes and works, and he has full control over the property. This is because the contract of the company was concluded on the body of the Mudharib, and the property of partner. It is not concluded on the body of the owner of the property, who is like a foreigner to the company and who does not have the right to dispose of anything which belongs to the company. However, the mudharib is restricted in his disposal to that with which the owner of the property permitted. He is not allowed to disagree with him because he disposes by permission. If he permitted him to trade with wool only or he prevented him from shipping the goods by sea, the owner has this right to restrict him in these matters. However, this does not mean that the owner of the property disposes in the company. Rather it means that the mudharib is restricted within the limits defined by the owner of the property. Despite this, the disposal in the company is confined to the worker (mudharib) only, and the owner of property has no right of disposal.
One form of mudharaba is where two properties (of two persons) enter into partnership with the body of one of them. So if two persons had between them three thousand of something, one of them having two thousand and the other one thousand, and the owner of the two thousand permitted the other to dispose of the capital so that the profit is divided between them by halves, the company would be valid. The worker would be the owner of the one thousand of the items as a mudharib to the owner of the two thousand, and would also be his partner. Similarly, mudharaba could be through the partnership of the capital of two persons and the body of a third person. All these are forms of the mudharaba.
Mudharaba is allowed by Shar'a due to the narration that “Al-'Abbas ibn 'Abdal-Muttalib used to pay the property of the mudharaba and put certain conditions on the mudharib.” This (information) reached the Messenger of Allah (SAW) and he consented to it. Ijma of the Sahabah was established that the mudharaba is allowed. Ibn Abu Sheeba narrated from 'Abdullah ibn Hameed from his father from his grandfather “that 'Umar bin Al-Khattab gave him the property of an orphan as a mudharaba so he worked with it and gained a profit, and 'Umar divided the surplus with him.” Ibn Qudamah narrated in Al-Mughni from Malik ibn al-'Alaa ibn 'Abdurrahman from his father from his grandfather that “Uthman loaned him property as a mudharib (qaradh).” It was also narrated from ibn Masoud and Hakeem ibn Hizam that ‘the two of them entered in loan (qaridha).’ All of this occurred with the knowledge of the Sahabah and none was reported to disagree with the proceedings or deny their validity, confirming their Ijma on the mudharaba.
The Company of Reputation Faces (Wujooh)
This company is an association of two bodies with the property of a third, namely a person gives his property to two persons or more as a mudharaba, so the two mudharibs are partners in the profit through the property of another person. They may agree to divide the profit in thirds, to each mudharib a third and to the owner a third. They may also agree to divide it in fourths, where the property takes a fourth, one of the mudharibs takes a fourth and the other takes a half. Or they may agree on conditions other than these so that it is possible that there are preferential shares of the profit between the two workers. Their claim to preferential shares of profit is based on the reputation (wajaha) of one or of both of them, whether in regard of their profession in work or of their skills in disposal and management, despite the fact that the right of disposal they have in the property is equal. This company is therefore different from the company of mudharaba, although in reality it reverts to mudharaba.
Among the company of wujooh is when two or more persons associate in what they buy using the trust of merchants in them, and the reputation that is based on this trust, without having property. They would agree that the property they bought is owned by them in halves or thirds or fourths or the like. When they sell that property and what they gain of profit is divided between them in halves, thirds or fourths or whatever else they agree. It is not based on the previous agreement of the share of ownership. However, the loss is in proportion of their shares of the purchased goods, because these shares represent their property. It is not according to what they may agree about the loss, nor according to their share of the profit, whether the profit was divided between them according to the value of their purchases or otherwise.
Thus the company of the wujooh with its two forms is allowed. This is because if the partners associated with the property of another person it is like the mudharaba company, which is confirmed by the Sunnah and Ijma. If however they associated with what they take from the property of another person, by buying goods through their reputation and the trust of the merchants in them, then it is like the company of Abdan, which is also confirmed by the Sunnah. The company of Wujooh is thus confirmed by the Sunnah and Ijma.
However, it is necessary to know what is meant by trust in this regard. When trust is mentioned in the matters of trading and company matters and the like, it is meant to be the trust in payment, which is the financial trust, not notability nor esteem. Therefore, a person may be a notable person yet he is not trusted to pay, so there is no financial trust in him and thus there is no trust in him in the subject of trading and partnership. He could be a minister, a rich man or a great merchant, but if he is not trusted to pay, there is no financial trust in him nor is he trusted in anything. Therefore, he cannot buy any goods from the market without paying its price. He could be a poor person, but if the merchants trust him to pay his debts, he can buy goods without paying their price immediately. In the company of wujooh, the trust is thus focused on payment not on notability. What occurs in some companies is that a minister of the government is included as a member in the company and assigned a certain share of the profit, while he contributes no property nor participates with any effort. He is associated as a partner due to his standing in society so as to facilitate the dealings of the company. This is not considered as a wujooh company nor does the definition of a company in Islam apply to it. This type of partnership is not allowed and such a person is not a partner and he is not allowed to take anything from such a company. What happens in some countries like Saudi Arabia and Kuwait is that the non-Saudi or the non-Kuwaiti person is not allowed to have a license for trading or working so he includes a Saudi in Saudi Arabia or a Kuwaiti in Kuwait as a partner. He assigns to him a share of the profit, while the Saudi or Kuwaiti person does not contribute any property or his body to the company, rather he is considered a partner because the licence is issued in his name and he is given a share in the profit in return for this. This type of company is also not considered of the company of wujooh, nor is it allowed by Shar'a. Such a Saudi or Kuwaiti is not considered a partner and it is not halal for him to take anything from the company, because he does not fulfil the conditions which the Shar'a requires in the partner in order to become a legal partner. These conditions include associating in the property or by his body or by the trust in payment, so that he works with the goods he takes through this trust.
Company of Negotiation (Mufawadha)
This is where two partners share in all the types of companies mentioned before, like a combination between the companies of 'Inan, Abdan, Mudharaba and Wujooh. For example a person may contribute some property or capital to two engineers in partnership with their properties so that they build houses to sell. The two engineers agree to work with property greater than that which they hold, so they start to take goods without paying for them immediately, based on the traders' trust in them. Thus, the partnership of the two engineers together with their bodies is a company of bodies. With regard to their craft and paying for property with which they work, it is a company of 'Inan (equal). The fact that they take property from other people’ means it is a company of Mudharaba. As they share in the goods which they buy based on the trust of the traders in them means it is a wujooh company. This company has therefore combined all the types of companies allowed in Islam. It is valid because each type of these companies is allowed by itself and they are also valid together. The profit is according to their agreement. It is allowed to make it proportional to the two properties. It is also allowed to make it equal even if the properties are different. And it is allowed to make it preferential even if the properties are equal. This type of company of negotiation is allowed, because the Shari'ah text allows it. Some jurisprudents have mentioned about other types of negotiation company, where two persons participate, such that they are equal in their property, their right of disposal and their debts and cash and each of them can deputise for his colleague in absolute terms. This type of company is absolutely prohibited. No Shari'ah text can be used as an evidence for it. As for the hadith which they quote to say: ‘If you negotiate then improve the negotiation’ or the hadith, ‘Negotiate as it is more blessing,’ neither of these two hadith have proven to be valid (sahih), even assuming that their meaning is correct. Moreover, this company is a partnership of unknown property and unknown action, which is enough by itself to make the company invalid. Additionally, included in their property is the inheritance which is given to them after the death of an inheriting person, and one of the partners could be a dhimmi (non-Muslim). How then could he receive a share of the inheritance? Further, it is not allowed, because the company includes deputation, which is not allowed over unknown things. All this indicates the invalidity of this type of negotiation company.
Dissolving the Company
The company contract is one of the contracts which is allowed by Shar'a. It becomes void by the death of any partner or his becoming insane or if he was declared incompetent and put under guardianship, if it is a company formed of two persons. Dissolution of the company by one of the two partners is valid because it is a permissible contract, which is annulled in the same way as deputation (al-wikala). If one of the partners dies leaving behind a mature inheritor, he has the option to continue with the company and his partner has to permit him to dispose (tassaruf) in the company. However, he also has the option to demands dissolution of the company. If one of the partners demands dissolution of the company then the other partner must accept his request. If they were more than two partners, and one of them demanded the dissolution of the company and the rest were happy to continue with the company, then the existing company would be dissolved and renewed between the remaining partners. However, the dissolution of the Mudharaba company should be differentiated from the other types of companies. In the Mudharaba company, if the worker demanded the sale of the company and the mudharib demanded division, then the demand of the worker will be accepted because his right is in the profit which will not be known except when selling. However, in the other types of company, if one partner demanded division and the other demanded sale of the company, the demand of division is accepted rather than that of sale.
The company in the Capitalist system is a contract according to which two persons or more are bound to associate in a financial project by providing a share of property or work, so as to divide amongst themselves the profit or loss which may result from this project. It is of two types: companies of people and companies of properties. With regard to the companies of people, they are those in which the personal element exists and it has an effect upon the company and in assessing the shares. This is like the commercial companies of joint liability and the simple limited partnerships. This type is different from the companies of properties where the personal element does not exist, nor does it have any consideration or effect. Rather, it is based on annulling the existence of the personal element, and considers only the financial element in the establishment and performance of the company, like the joint stock (share) companies and the limited (share) companies.
Commercial Company of Joint Liability (Unlimited Liability Company)
It is a contract between two persons or more, in which they agree to trade together under a certain name. All its members bind themselves towards the debts of the company with all their wealth, with joint liability, and without any limit. Therefore, no partner of the company can concede his rights in the company to another person without the permission of the remaining partners. The company is dissolved by the death of any of the partners or by his incompetence, bankruptcy or insanity, unless there is an agreement which prevents this. The members of this company are liable jointly towards its commitments to others by fulfilling all the contractual commitments of the company, and their responsibility in this matter is unlimited. Every partner is held accountable to discharge all the debts of the company, not only from the property of the company but if necessary from his own property. He has to pay from his property what is left unpaid of the debts of the company after its property runs out. This company does not allow extension of the project. The company is formed from a few people, who trust each other and know each other well. The main element considered in this company is the personality of the partners, not by being people only but with regard to their standing and influence in the society. This company structure is invalid, because the stated conditions disagree with the conditions of companies in Islam. For the divine rule (hukm shar'i) places no condition upon the partner except that he is allowed to dispose, and the company should have the option of expanding its activities. If the partners agree to expand the company by either increasing their capital or by adding other partners to them, then they are free to do what they like. The partner also is not responsible, personally, in the company except in proportion of his share in it. He has the right also to leave the company any time he likes without need for the approval of the other partners. In addition, the company is not dissolved by the death of any of the partners, or due to his incompetence, rather his partnership alone is dissolved, while the partnership of the other partners remains if the company is formed of more than two persons. These are the Shari'ah conditions. The conditions of the joint liability company as stated earlier differ, and even contradict with these divine conditions, thus making it an invalid company and it is not permitted by Shar'a to associate (become a partner) in it.
Joint-Stock Company (Share Companies)
Share Companies are companies formed of partners who are unknown to the public. The founders of the Share Company are all of those who signed the initial contract of the company. The initial contract is the one which initiates between its signatories a commitment to work for achieving the common aim, which is the company. Subscription in the company is undertaken by the commitment of the person to buy one share or more in the proposed company in exchange for the nominal value of the share. This form of company is one of the forms of disposal by an individual will, where it is enough for the person to buy the shares to become a partner, whether the other shareholders accept him or not. Subscription occurs in two ways. In the first instance, the shares of the company are restricted to the founders who distribute them amongst themselves without offering them to the public. This is done by writing the constitution, which organises the company and includes the conditions upon which the company proceeds, then signing it among themselves. Everyone who signs the constitution is considered a founder and a partner, and once they all have signed, the company is founded. The second way of subscription is that which is most prevalent in the world, where a few people establish the company and define its constitution. Then the shares are offered to the public for general subscription in the company. When the time of subscription expires, the constituent assembly of the company will be invited to meet and review the system of the company for agreement and to appoint its board of directors. Every shareholder, irrespective of the number of shares he holds, has the right to attend the constituent assembly, even if he owns only one share. The company commences its activities once the time of subscription expires.
Both of these means represent one form which is to pay for the properties. The company would not be considered as established except by completing the signature of the founders in the first method, and by the expiry of the subscription time in the second one. So the contract of the company is a contract between properties only. There is absolutely no personal element in it. Thus the properties, rather than their owners, are the partners.
These properties are entered into partnership together without the existence of any person. Accordingly, there is no authority for any partner, no matter how many shares he holds, to take charge of the activities of the company in his capacity as a partner. He also has no right to work in the company or to control any of its functions in his capacity as a partner. Rather, the one who takes charge of the activities of the company, works in it, controls it and supervises all of its work is a person called the Managing Director who is appointed by the board of directors. This board of directors is elected by the general assembly, in which every person has votes equal to his shares, not according to his personality, as the real partner is the capital and it is this which defines the number of votes. There is no consideration of the person subscribing to in the share company; consideration is for the capital only. Moreover, the share company is considered to be permanent, and it is not restricted to the life of the shareholders. The shareholder may die and yet the company is not dissolved and he may become incompetent and still remain a partner in the company. With regard to the capital of the company, it is divided into equal-valued shares, which are called stocks. The shareholder is a partner whose personal merits are not thoroughly investigated, and his responsibility is determined his share of the company capital. In addition, the partners are not bound by losses except by the amount of their stocks in the company. A partner’s share is liable to circulation, so he is allowed to sell it, or associate other people in his shares, without the permission of the remaining partners. The stocks owned by every person are currency notes, securities or bonds that represent the capital. These stocks may be for the bearer (anonymous bonds) or designated to their holder where their ownership moves from person to person. The investor who subscribes by buying stocks is obliged only to pay their nominal value. So the stock is a part of the entity of the company, and it is indivisible, but is not a part of its capital. The stock notes are considered as registration papers in this share, and their values are not the same (wahid), but change according to the profits or losses of the company. This profit or loss is not the same in all years; it can differ. The stocks therefore do not represent the capital contributed at the time of establishing the company; they represent the capital of the company at the time of its sale, namely at a specific time. They are like paper currency whose value falls if the stock market declines and increases when the stock market rises. The value of stocks declines when the company makes losses, and increases when the company profits. The stock after the company is formed thus ceases to be a capital and becomes a currency paper of a specific value that rises and falls according to the market, the profitability of the company or according to the degree of interest or otherwise of the people in it, for it is a commodity subject to supply and demand. Stocks transfer from one hand to another like the movement of bank notes among people, without any clerical measures in the company records if the stocks are for the bearer (anonymous) and through such measures if they bear their holders' names. The company is considered in profit if the value of the assets of the company is greater than the value of its liabilities at its annual inventory. Profits are distributed annually at the end of the financial year of the company. If the value of the company's assets increased due to unexpected conditions without there being profits, nothing prevents the company from distributing this excess. However, if the contrary occurred, and the value of the assets declined and the company made profits, but the total of its profit and value of its assets was not greater than its liabilities, then it could not distribute the profits. At the time of distribution of profits, a part of it is assigned to the reserves and that which remains is divided among the shareholders. The company is considered as a corporate entity, which has the right to sue and be sued in its own name in the courts. It also has its own residence and particular nationality (country of incorporation including where its head office may be registered) Neither a shareholder nor any member of its management in his capacity as partner or in his personal capacity fills its place. The only one who has this right is the one who has been authorised to speak on behalf of the company. The one who has the right of disposal is the company, the corporate personality, rather than the person who disposes directly.
This is the stock company and it is a void company in Shar'a. It is one of the transactions that a Muslim is not allowed to participate in. The reason of its invalidity, and the prohibition of associating with it, appear clearly from the following points:
1) The definition of company in Islam is as follows: it is a contract between two or more persons, in which they agree to carry out financial work with the intention of gaining profit. It is thus a contract between two or more persons and an agreement from only one side is unacceptable. It is necessary that the agreement occurs from two or more sides. The contract of the company must be focussed on performing financial work with the aim of making profit, and not on paying the capital. It is also not enough that the aim be partnership only. Carrying out the financial work is the basis of the company contract, and the financial work has to be by the two contractors, or by one of them together with the capital of the other. A contract between two persons in which a person other than these two contractors (signatories) carries out the financial work is not legitimate and no one is bound by it. This is because it is only the contractor who is bound with the contract, it applies to his own disposal (dealings) and not on others. So carrying out the financial work must be limited to the contractors, either by both of them or by one of them with the capital of the other. The necessity of carrying out the financial work by one of the contractors in order that the company is legally established makes it inevitable that there must exist a body in the company upon which the contract is concluded. In Islam it is thus a condition that already exists in the company. In this body is a fundamental element in concluding a company. If the body existed the company will be established and if the body does not exist in the company, then it is not established and doesn’t exist in the first place.
Capitalists define the joint stock company as a contract according to which two or more persons contribute to a financial project by providing a share of capital in order to divide the profit or loss that may result from the project. It appears, from this definition and from the reality of forming the company by the aforementioned two methods, that it is not a contract between two or more persons according to the divine law (Shari'ah). This is because legally a contract is an offer and acceptance between two parties of two or more persons. There must be two in the contract. One of them is entrusted with the offer by speaking first with the offer of the contract. This Statement could be something like ‘I married to you’ or ‘I sold to you’ or ‘I leased to you’ or ‘I associated with you’ or ‘I granted to you.’ The other party is entrusted with acceptance with the response ‘I accepted’ or ‘I agreed’ or the like. If the contract is devoid of the existence of two sides, or an offer and acceptance, then it would not be established, and accordingly it would not be a divine contract.
In the joint stock company, the founders agree on the conditions of partnership. They are not directly and actually involved in the partnership when they agree on the conditions of the company, rather they only negotiate and agree on the conditions. They then draw up a document, which represents the constitution of the company. This document is then signed by everyone who wishes to enter into the partnership, the signature being considered as an acceptance. Once a person does this, he is then considered as a founder and a partner. In other words his partnership is established based upon the completion of his signature or when the subscription period comes to an end. In this process it is evident that there is an absence of two parties who, together, conclude the contract, and there is no offer and acceptance. Instead, there is one party who agrees on the conditions, and by its acceptance becomes a partner. In can be seen that the joint stock company is not an agreement between two parties, it is an agreement of one party on certain conditions. Thinkers of the Capitalist economy and Western law say that the commitment in this type of company is a type of disposal by individual will. The individual will occurs when any person commits himself with a certain matter from his side towards the public or another person, irrespective of the acceptance or non-acceptance of the public or the other person, such as a promise to give a prize. The joint stock company, in their view and in reality, is where the shareholder or the founder or any person who signs a document commits himself with the conditions contained in the document regardless of the acceptance or non-acceptance of the others. Thus they consider it as a type of disposal by individual will. The contract of the joint stock company by the individual will is invalid (batil) in Shar'a because a contract in Shar'a is the linking of an offer originating from one of the contractors with the acceptance of the other contractor in a way that reveals its effect in the issue over which the contract is concluded. This does not occur in the contract of the share stock company as no agreement between two or more persons occurs in the contract. Rather, one person commits himself, according to this contract, to share in a financial project. Regardless of the number of contractors and partners who committed themselves to that project, the one who committed himself is still considered as one person.
It may be argued that the partners agreed together on the conditions of the company, so their agreement is considered to be an offer and acceptance, and that the writing of the document is just a formal matter to record the contract which they agreed upon. So why is this not considered a contract? The answer to this question is that the partners agreed together on the conditions of the company. However, according to their agreement they did not consider themselves actually partners, and they did not commit themselves by such an agreement to the conditions of the company. It is allowed for every one of them to withdraw and not to associate after their agreement on the conditions and after writing the document. None of them is committed to their agreement over the conditions, according to their technical terminology, except after he signs the contract. Once he signs the contract he becomes committed, while before that he is not committed to or bound by anything. Therefore, their agreement on the conditions before signing the contract is not considered, in their view and in the view of the Shar'a, as a contract. This is because the agreement over the conditions of partnership, and over the partnership, is not considered a company contract. According to their agreement, they are not considered obliged to it before the signing, whereas the contract is that which the two contracting sides are obliged with. Therefore, their agreement on the conditions of the company and on partnership is not considered offer and acceptance. It is not considered, according to the divine law and even in their own view as a contract.
It may also be said that the acceptance of the partner to sign the contract should be considered as an offer from his side towards the others and the signature of the next person is considered as acceptance. It may asked why offering the document detailing the contract is not considered an offer and its signing not considered acceptance. The answer is that every partner who signed the contract has only accepted, but the offer did not originate from any particular person. There is no offer, either from the founders or from the first signatory; there is only acceptance from every partner. Thus the signatory accepts and commits to the conditions by himself without them being presented as an offer of disposal from anyone, without anyone saying to him: ‘I shared with you.’ The action of giving him the document for signature is not considered an offer. The reality of the share stock company is that every partner has only accepted, and acceptance added together with acceptance is not considered a contract in Shar'a. There must exist an offer in words which indicates offer not acceptance. The acceptance then comes after that in words, which indicate this explicitly. Nobody who signed the company document is therefore considered an as an offeror, they are all acceptors. Thus, only acceptance without offer has originated in the share stock company, so it is not considered as concluded.
The Capitalists call the document of the company its constitution and consider this as a contract. They also say that the contract was signed. However, in Shar'a, this document is not considered a contract as a contract is an offer and an acceptance between two parties. The share stock company is therefore not considered a contract in Shar'a.
In addition, there is no agreement in the contract to undertake financial work for the purpose of gaining profit. Rather the founder or the subscriber agrees to pay money into a financial project, so it is devoid of the element of an agreement to carry out work. Instead it only contains the individual commitment from the person to provide property, without any reference to the work in that commitment. Carrying out the financial work is the aim of the company, not merely association and so the absence of agreement to carry out work in the contract negates the contract. A company does not, therefore, merely exist because there is an agreement to contribute capital only, as there is no agreement to carry out the financial work. From this discussion it can be concluded that the company is invalid (batil)
It can be argued that the document of the company may have included the type of work, which the company carries out, such as production of sugar or trading. There was, therefore, an agreement to carry out financial work. However the type of work mentioned is the work which the company may carry out and no agreement existed on the part of the partners that they will indeed carry it out. They only agreed on being partners and on the conditions of the company while conducting the work was left to the corporate personality, which the company would have after its establishment. An agreement did not exist between the partners to carry out any financial work them.
In addition to this, it is necessary that the body (badan) which is the disposing person exists in the company in Islam. What is meant by the body (badan) in the company is trading (selling), hiring and the other contracts and this is defined as the disposing person, not the physical body or effort. The existence of the body is an essential element in establishing the company. If the body did not exist, the company could not have been established. The share stock company has no body (badan) at all, and in fact intentionally removes the personal element from the company. The contract of the share stock company is a contract between properties only. The personal factor does not exist as the properties alone are associated with each other and not their owners. In other words, the properties associate with each other without the existence of a body. The absence of an associating body means the company is not established and it is invalid in view of the Shar'a. Shar'a dictates that the body is the disposer of the property, and the disposal of the property depends upon it alone. If the body does not exist, then disposal cannot exist.
The people who own the capital are the ones who directly agree on the subscription of the properties, and they elect the board of directors who carry out the work in the company. However this still does not mean that there is a body in the company, for their agreement is upon making the property as a partner rather than themselves as partners. So the property and not its owner is the partner. With regard to their election of the board of directors, this does not mean that the board are their deputies. Rather their property has been represented by deputies (the board) selected by them, and no deputation was made on their own behalf. The evidence for this is that the shareholder has votes equal to his shares, so the person who has one share would have one vote or one deputy. The person who has one thousand shares would have one thousand votes that is, one thousand deputies. So the deputation is on behalf of the property and not the person. This indicates that the element of the body is missing from the company, which is composed of the element of property only.
The definition of the share stock company thus indicates that it does not contain the necessary conditions required for establishing a company according to Islam, as no agreement occurs between two or more persons. Rather it is a commitment made by an individual will from one side. Furthermore, no agreement has occurred to carry out a work; instead, one person commits himself to offer property. There is also no body which practises the disposal in his personal capacity, rather it is only property without a body. The contract of the share stock company is thus invalid. It is invalid, because it was not established as a company, as defined by Islam.
2) The company is a contract over disposal of property. When increasing the property by using a company this increases the ownership. Increasing ownership is one of the disposals allowed by Shari'ah. All the Shari'ah disposals are verbal disposals which originate from a person and not from property. The increase of the ownership must result from the one who can dispose, that is, from a person and not from property. The share stock company assumes the increase of property by itself without a partner which is a body, and without a disposing person entitled with the right of disposal. Instead it assigns the disposal for the property as the share stock company, consisting of properties gathered together empowered with the right of disposal. The company is accordingly considered a corporate personality, which alone has the right of legal disposal like selling, buying, manufacturing and suing. The partners do not have a legal right of disposal; rather the disposal is confined to the personality of the company. In the Islamic company, the disposal originates only from the partners, and each one of them disposes by permission of the others. The property of the partners as a whole does not have the ability of disposal; disposal is confined to the person of the partner. The actions which originate from the company’s in its corporate personality are therefore invalid in the view of Shar'a. This is because the disposal should originate from a certain person and this person should be one of those who has the right of disposal (partners), a matter which is not fulfilled in the share stock company. It is incorrect to say that those who carry out the work are the hired labourers, who are employed by the shareholders who are owners of the capital. It is also incorrect to suggest that the one who handles the administration and action is the director and his board, who serve the shareholders interests. This is because the partner is specified personally into the company, and the contract of the company was concluded on him personally so he is not allowed to deputise somebody to carry out the activities of the company on his behalf, nor to hire somebody to carry out the activities of the company on his behalf. He must carry out the activities of the company by himself. Therefore, the partners are not allowed to employ labourers to carry out the work on their behalf, nor to deputise a board of directors on their behalf. Also, the board of directors is not a deputy of the shareholders, it is merely a deputy of their properties, because the person who is elected to the board is elected by the votes which are according to the amount of shares in the company not the actual shareholders. Moreover, the director and the board of directors do not have the right of disposal in the company for the following three reasons.
Firstly, they act as deputies for the shareholders, who are the partners who elected them. The partner should not deputise for himself because he is the one on whom the company was concluded. This is similar to the fact that it is also not allowed for somebody to deputise another person to marry on his behalf. He is, however, allowed to deputise somebody to make the marriage contract on his behalf. Similarly, he is not allowed to deputise somebody to enter into partnership on his behalf. However, he is allowed to deputise somebody to conclude the company contract on his behalf, but not to be a partner on his behalf.
Secondly, the shareholders who are also the partners have deputised the board on behalf of their properties not on behalf of themselves. The evidence for this is that the election votes are the matter which is considered for deputation, and these votes are considered according to the quantity of shares and not according to the shareholders. The deputation is thus on behalf of their properties and not on behalf of their persons.
Thirdly, shareholders are partners of property only and not partners of body. The partner of property has absolutely no right of disposal in the company. It is not valid for him to deputise somebody to dispose in the company on his behalf. The disposal of the company's manager and the board of directors is therefore considered invalid in Shar'a.
3) It is contradictory to Shar'a that the share stock company is permanent. The company is legally of the type of permissible contract which becomes null by the death, insanity or the incompetence of any one of the partners and by dissolution requested by one partner when it is formed of two partners. If the company was composed of more than two partners, then the partnership is dissolved if a partner dies or becomes insane or is judged as incompetent. If one of the partners died and he has a person to inherit from him, then the matter is examined. If the inheritor is not mature he has no right to continue in the company. If he is mature, he has the choice to endorse the company and the other partner gives him the permission of disposal, or to demand the dissolution of the company. If the partner was judged incompetent, the company is dissolved, because it is necessary that the partner have the ability of disposal. If the share stock company is permanent, and it continues to function despite the death or the incompetence of any of the partners, then it is invalid (fasid). This is because it included an invalid condition which is related to the entity of the company and the nature of the contract.
In summary, the share stock company is not established as a company in the first place as those who exist are partners of property only and there is no partner of body. The presence of a partner of body is an essential condition, for the company is established as a company by him and, without him, it would not have been established. In the share stock company however, partnership in the view of those who form it, exists by the presence of partners of property only. The company functions and conducts activity without the existence of a partner of body. It is thus, an invalid company as it was not established as a company according to the Shar'a. Those who carry out the actions in the company are the board of directors who are agents for the shareholders, that is for the property partners. The partner is not allowed, in Shar'a, to deputise somebody with the right of disposal in the company on his behalf whether he was a property partner or a body partner. The contract of the company is concluded on him personally, so he has to act by himself. It is incorrect to deputise or hire somebody who takes charge of disposal and action in the company on his behalf. From Shar'a, only the partner of property has no right of disposal in the company, nor the has he the right to work in the company as a partner in any way. The right of disposal and to work in the company is confined to the partner of body only. The share stock company becomes a corporate personality which has the right of disposal. However, these actions are only accepted in Shar'a from a human personality who has the competence to dispose and must be mature and sane, or sane with a mind of discretion. Any action that does not originate in this manner is invalid in Shar'a. Entrusting the disposal to a corporate personality is thus not allowed, rather it should be referred to a human being who has the competence of action. It can be concluded that the share stock companies and their actions are invalid. All the properties earned through them are invalid properties which were earned by invalid actions, so they are not allowed to be owned.
Shares of the Share Stock Companies
The shares of this company are currency notes which represent the value of the company at the time of its evaluation not the capital of the company at the time of its establishment. The share is an indivisible part of the entity of the company and it is not a part of its capital. It is a form of security paper representing the value of the company's assets. The value of the shares is not fixed and can change according to the profits or losses of the company. It is not fixed for all years but can differ and change. The share stocks do not therefore represent the capital paid at the time of the establishment of the company but the capital of the company at the time of selling at a certain time. It is like the currency paper or bank note whose value falls when the market declines and rises when the share market rises. The share thus ceases to be capital after the company starts its work; rather it becomes a currency note which has a certain value. The divine law (hukm shar'i) in regard to the currency notes must be examined. If they are security notes which include sums of halal money like the currency notes which are backed by an equivalent amount of gold or silver, then buying or selling them is allowed (halal) because the property they include is halal. However, if they were security notes that represent sums of haram property like bonds of debt in which the property is invested by usury, or in bank stocks and the like, then their trade is prohibited (haram) as the property they represent is haram. The shares of the stock companies are security notes which include mixed sums of halal capital and haram profit in a contract, and transactions considered invalid in Shar'a, without any distinction between the original property and the profit. Each security note represents the value of a share from the assets of the invalid company. These assets have been earned by an invalid transaction forbidden by Shar'a, so this property is haram. The stocks of the share stock company thus include sums of haram property. Consequently these currency notes which are shares, are haram property, and are forbidden to be sold, purchased or dealt in. The above discussion raises questions about the Muslims who buy shares of these companies, associate in establishing them, or hold shares due to their subscription in such companies. Was their action haram, even though they were ignorant of the divine law (hukm shar'i) at the time of their subscription into these companies? Or if some scholars, who did not understand the reality of the share stock company, and gave them a fatwa (of permission) with regard to them, are these stocks and shares which are owned by them halal properties, even though they were earned by a void transaction in Shar'a? Or are they haram, and accordingly not legally owned by them? And are they allowed to sell these shares to (other) people or not? The answer to these questions is that ignorance of the divine law (hukm shar'i) is not an excuse, because it is compulsory upon every Muslim to learn about that which he needs in his life of the divine laws (Ahkam Shari'ah) so that he can carry out all his actions according to the divine law. If that law is one of those laws which are usually unknown for such persons, then he is not blamed for that action and it would be a valid action for him, even though it is invalid in Shar'a. This is because "the Messenger (SAW) heard Mu'awiya ibn Al-Hakam praying for someone who sneezed while he was in prayer. After they finished the prayer, the Messenger of Allah (SAW) taught him that speaking during the prayer would nullify it, and praying for the one who sneezes nullifies the prayer, but he (Messenger of Allah (SAW) did not order him to perform the prayer again." This is the meaning of what was narrated by Muslim and An-Nisai' from Ata'a ibn Yasar. This is because the rule (not talking during the prayer) is usually unknown to a person and so the Messenger of Allah (SAW) excused him and considered his prayer valid. The prohibition of the share stock companies in view of the Shar'a is one of the rules whose like is unknown to many Muslims and so their ignorance can be excused. The action of those who took partnership in them is considered valid, though the companies are invalid, like the prayer of Mu'awiya ibn al-Hakam which is considered valid though he did something in it that invalidates it, as he did not know that talking during prayer invalidates it. The fatwa given by the scholars also takes the rule of ignorance with respect to the one who seeks the opinion. However, the scholar who gives the opinion is not excused because he did not exhaust his effort to understand the reality of the share stock companies before he gave an opinion about them. With regard to the ownership of the shares by the shareholders, it is a valid ownership and these shares are halal properties so long as Shar'a judged that their action was valid. It is not invalid as they are excused for being ignorant of its invalidity. Selling these shares to Muslims, however, is not allowed, because in Shar'a they are invalid currency notes and the allowance of their ownership is incidental, based upon ignorance (of the hukm) that was excused. When the divine law about it becomes known, then it becomes a haram property that is not allowed to be sold or bought, nor can one delegate other (Muslims) to sell it for him. The way to dispose of these shares which were owned due to the ignorance of the divine law is to dissolve the company or transform it into an Islamic company. Alternately one can find a non-Muslim who considers the shares of the share stock company allowed and delegate him to sell the shares on his behalf and then receive the subsequent proceeds. It was reported from Suwaid ibn Ghafalat "that Bilal said to 'Umar bin Al-Khattab: “Your administrators ('ummal) take wine and pigs as kharaj.” He said, “Don't take (these things) from them, but delegate them to sell them and take their price” narrated by Abu 'Ubayd in Al-Amwal. No one denied this action from 'Umar, though it would have been denied if it disagreed with Shar'a, so it became Ijma. Wine and pigs are of the properties of the dhimmis and cannot be properties for Muslims. When they wanted to give them to Muslims in exchange for jizya, 'Umar ordered Muslims not to accept it, but to delegate them to sell them and take the proceedings. Since shares are of the Capitalists properties are haram and cannot be of the properties of Muslims, when passed to Muslims hands, it is not valid for Muslims to take them. Instead they have to delegate to them their sale. Just like the right of Muslims in jizya and kharaj has been confirmed in wine and pigs, and 'Umar allowed them to let the dhimmis sell them on their behalf, it is also the right of Muslims in these shares that they are allowed to delegate the dhimmis to sell (the shares) for them.
A co-operative is one kind of share stock company. It is a company even if called a Co-operative. It means participation between a group of people who agree amongst themselves to associate according to their individual activities.
The Co-operative originates in the usual trading form aiming to help its members or to secure their defined economical interests. Thus the Co-operative is a corporate body regarding rights and duties, although it differs from the other Co-operatives which are not economically oriented. Co-operative work to increase the profit of its members, not the interests of others, a matter that requires establishing a strong linkage between its economic activity and the economic activity (business) of each of its members.
A Co-operative is formed between as many as seven or more members or as few as three, but cannot be less than that. Co-operatives may be of two types: One is a company with established shares where any person in the company may be considered a partner by virtue of acquiring shares. The second is a company with no established shares, where joining the company is achieved through paying an annual fee decided at the annual general meeting.
Five conditions must be fulfilled in the Co-operative:
Firstly: Freedom of joining the Co-operative. Subscription stays open for everybody, according to the same conditions that applied for preceding members. With Co-operative laws, limits and reservations are applied on the new members, whether these laws were of a local nature like those for the people of a village, or they were of professional nature like those for Barbers (Hairdressers) as an example.
Secondly: Co-operative members have equal rights, particularly the right of voting, thus every member is given one vote.
Thirdly: A specified profit is assigned for the shares. The Co-operative pays to its permanent shareholders a certain profit, provided the profits of the company allow.
Fourthly: The surplus profits of the investment are repaid, and net profits are distributed amongst the members in proportion to the transactions they carried out with the Co-operative, such as purchases or use of the utilities and facilities of the Co-operative.
Fifthly: A Co-operative fund must be formed by crediting the reserve funds.
The authority which runs the Co-operative through its management and carries out its activity is the board of directors elected at the annual general meeting and formed from the shareholders, where every shareholder has a vote irrespective of the number of his shares. So one with one hundred shares is no different from a shareholder with one share, and each of them has one vote in electing the directors.
Co-operatives are of many kinds, like professional Co-operatives, the consumer Co-operatives, agricultural Co-operatives, and production Co-operatives. These Co-operatives, as a whole, are either consumer Co-operatives, where profits are divided according to purchases, or production Co-operatives, where the profit is divided according to the production.
This describes Co-operatives. Co-operatives are invalid and contradict the rules of Islam according to the following:
1. The Co-operative is a company, so it should fulfil the conditions of a company as stated by the Shar'a in order to be valid. The company in Islam is a contract between two or more persons, in which they agree to run an economic project for the purpose of achieving a profit. Therefore, there must be a body so that the activity of the company is carried out by partners. In other words, the company should include a body (partner) who has a share in the company to be legal. Thus if there did not exist in the company a partner who has shares in the company and additionally runs the work which the company was established for, then no company exists. If we apply these conditions to Co-operatives we find that they are not legally valid companies, because they are built upon property (capital) only. They are not based on an agreement to carry out work; the agreement is to provide capital and establish a management that will run its activities (work). Therefore, the people who subscribed to the company only associate together via their properties (capital); thus the company does not have a body. Accordingly the Co-operative does not establish a legal company, as it does not include a body. It is considered non-existent in the first instance as the company is a contract to manage capital, and this action requires a body. When a company has no body, it fails to be a company from the Shar'a point of view.
2. Furthermore, distributing profits proportional to purchases or according to production, rather than relative to the capital or relative to the work is not allowed. If the company was concluded on the basis of capital then the profit should be determined by the capital, and if it was concluded on the basis of work it should also be determined by work. So the profit follows either the capital or the work, or both of them. But to stipulate the distribution of the profit according to purchases or according to production is not allowed, because this contradicts the contract in the opinion of the Shar'a. And every condition that contradicts what is required by the contract is an invalid condition (Fasid). Distributing the profit according to purchases or according to the production contradicts what is required by the contract, because the contract in the view of the Shar'a, applies upon the property (capital) or the work, so the profit should be in proportion with the capital or the work. If it is stipulated according to purchases, or the production, it would be an invalid (Fasid) condition.
Extract from the book 'The Economic System of Islam' by Sheikh Taqiuddin an-Nabhani