As against the four types of remunerations/rewards to factors of production recognised in contemporary economics namely, wages, rent, interest and profit, Islam recognises three, that is, wages, rent and profit. Interest remains the taboo. In fact, the Arabic word for wages (Ujrat) comes from the same root as rent (Ajr). If this logic is accepted, the rewards of factors of production in Islam fall into two distinct categories, namely Ajr and profit.
Wage is the payment against utilisation of the services of human beings for any specific period. Rent is similarly the payment for utilising natural resources like land, minerals, vegetations, etc. for any specific period. The shape or form of both these human and natural resources does not change. It remains intact. Thus the reward is only for employment or deployment of these resources which are themselves not consumed. In other words, justification for both wages and rent emanates from usufruct rights. Alternatively, it may be understood as the opportunity cost of using these human and natural resources. For example, take the case of a taxi hired for a specific period, say eight hours, along with a driver and payments are made severally for both the hire charge of taxi and fruits of labour to the taxi driver. Both the taxi and the taxi driver remain intact after that period of eight hours and both get payments for their respective usufruct. In other words, these payments are in the nature of opportunity cost. The taxi and its driver were available to a particular user thereby losing the opportunity of being utilised for some other purpose, or may be by some other client. However, both the taxi and taxi driver remain intact and in the form in which they were before their engagements.
Profit is the reward for the risk that an entrepreneur takes. His stakes are high like his cash capital, capital goods, time, and goodwill; all may be lost if the projections based on which he commenced the enterprise do not hold good. There is no method by which the success of any enterprise may be ensured and the uncertainty and risk involved can be avoided.
INTEREST IS UNJUSTIFIED
Capital brought in as cash does not remain intact. It changes form as it is utilised for purchasing trading goods, acquiring capital goods or meeting other expenses or investments including payments against services. The goods and services so produced are traded, that is exchanged and distributed, in accordance with the consumption requirements of the market and then any real income is generated. Profit can be computed thereafter. The real income and consequently the actual margin of profit are not known beforehand. The capital provider is justified to get any remuneration or reward only after profit is earned. The remuneration or reward that he will get will be out of the profit added to the enterprise as a result of the completion of any cycle or period of production process. And the reward will be in direct proportion to the profit.
MONEY CAPITAL AND CAPITAL GOODS
The distinction between money capital and capital goods should be understood. One may understand it by differentiating between an enterprise and the entrepreneur. A business is a separate entity from that of the business man, both being legal persona severally. This is the position from the accounting angle too as we compute accounts of business separate from that of the businessman, the owner. Thus cash capital provided by the capital provider is a liability on the business. The profit earned too is a liability because that portion is payable to the entrepreneur by the business. Loss, by this reasoning, becomes an “asset” to the business because amount due to the owner of the business is reduced by the amount!
An entrepreneur may provide his resources for the enterprise in any one of the following methods:
- In the form of cash as capital
- In the form of immovable properties like land, office building and capital goods like machines by transferring their ownership to the enterprise. Here valuations of these assets have to be done and it will be accounted for as if these have been sold to the business and the consideration is added to the capital account.
- In the form of immovable properties like land, office building and capital goods like machines on hire basis. Here no valuations of these items are required and these assets are not recognised as such in the books of the business.
The remuneration/reward payable to the entrepreneur will be as under in the case of the above mentioned three conditions.
- The entrepreneur is entitled to get profit for the cash capital.
- The total value of assets adding to the assets of the enterprise will be added to the capital. It will be treated as if the entrepreneur has provided cash capital and these items were purchased out of that cash made available to the enterprise. The annual wear and tear in the value of these assets may be charged to the business as depreciation, thereby increasing distributable profit. Alternatively, the depreciated value may be accumulated as a reserve so that the enterprise may have resources at the time when these are to be replaced.
- The entrepreneur will get rent on the land and capital goods provided on hire basis because he has kept their ownership with him. The enterprise will pay the rental for the usufruct rights utilised for these items.
DISTRIBUTION OF PROFIT AND LOSS
The Islamic principle of distribution of profit and loss where there is more than one entrepreneur has some characteristic features. Its salient features are as under:
- Profit will be distributed on predetermined and agreed ratio. While determining this ratio of distribution of profit the entrepreneurs may give relative weightage to factors like cash to be brought in, experience and time to be given and activity (like full time, part time or active or passive partners). For example, agreed profit ratio between an active partner and a dormant partner may be equal where the active one is not providing any cash capital and the dormant is providing the cash. Here equal weightage is given to the activity of one partner and the fund of the other.
- The full time and active entrepreneurs may be remunerated in addition to their share of profit. However, his remuneration will be subject to profit earned. Hence this remuneration of the entrepreneur cannot add to the loss of the enterprise.
- Loss will be borne by the entrepreneurs on the ratio of their respective capital. Thus a partner who has no capital in the business will not share any loss. Hence the predetermined ratio between the partners will only be a profit sharing ratio and not a profit-and-loss sharing ratio.
In the contemporary economics both systems of loss sharing between partners are prevalent. Loss is shared either on the basis of predetermined profit-and-loss ratio or on capital ratio. The latter, known as Garner vs. Murray System because this was decided in England in this particular case, is consistent with the Islamic system.
AN OVERVIEW
Economic activity for any man is basically related to his following needs, desire and propensity:
To Earn and Capital Formation;
To Expend;
To Save;
To Invest; and
To Leave behind Wealth for his Offspring and Inheritors.
Islam, being proactive to economic activities, encourages, with some regulations, all these aspects. Basically, there is no element of undesirability in any of the above propensities. Rather they are desirable and encouraged provided they are duly regulated. The approach of the Islamic regulations is not to discourage and make these activities difficult, dull or tasteless. The Islamic regulations are meant to cleanse economic activities from all harmful and unsavoury elements for the man and humanity, both individually and collectively. Such regulated activities bring real human welfare and these worldly affairs rise to the level of moral and ethical frame. In fact, the line of demarcation between religious and secular domains becomes so much thin that, at times, they may not be seen or noted.
Man’s need and yearning for earning and his attitude to go on increasing, as far as possible, his income and to go for capital formation and asset built-up is regulated to the extent that he is asked to desist from some illegal and amoral modes of earnings.
Level and mode of expenditure is related to the level of earning. Higher earning gives higher opportunity of expenditure. Thus, type, mode and extent of earning of different persons in the society are different. Islam recognises this position. However, Islam has a list of forbidden consumptions. Keeping at bay the expenditure that are not permitted, man can utilise his earnings for the welfare of his self, offspring, and others or for other things dear to him. There is no objection to the permitted expenses, although these, on the face of it, look like temporal and mundane. The litmus test is that earnings from permitted sources are to be utilised for all permitted things only. And it may be noted, as already described elsewhere, that the Islamic approach of permissibility is that all that are not-forbidden are permitted. One may say, it is a negative test that holds good!
Man can save what he has earned. He is required to give a share of his savings as zakat or ushr so that the needs of the poor and the needy in the society are taken care of. He is encouraged to share more than what is obligatory. However, the earning available after the obligatory payment of zakat and ushr or optional sadaqua is clean and no aspersion is to be cast on it.
A person desires to invest his savings and plough back his earnings so that he can earn more. Such urge for higher earning is encouraged. This leads to entrepreneurship and growth in economy. One is free to decide about the way he wants to utilise his savings. He may or may not go for investment. This depends upon his personal disposition, preference, ability and opportunity. Islamic regulation is concerned about the desirability or otherwise of the area of investment so that no unwanted activity ushers in the economy with such application of fund. There is no problem that a rich person becomes richer by investment, rather it is desirable that earning in the society and the economic activities grow as a result of this.
Life span of every person is limited. Even the richest person cannot live for ever and one day destiny makes him leave behind whatever he had earned or built up. People leave behind wealth for the well being of their offspring and inheritors. Islam has provided a detailed law of inheritance thereby curtailing the authority of any person to decide what will be done about the wealth he will leave behind. A person can decide about the disposal of only one third of his property; the rest will be distributed as per the law of inheritance enshrined by Allah. Thus assets and properties accumulated in the hands of one person get distributed to several persons. There is no concept of joint family ownership of riches once accumulated. Thus we find that although Islam lets the rich become richer, the wealth so amassed and gathered is dispersed in the economy after his demise.