Types of Companies in Islam

(Read Company & Trade Laws Here)

(Read Rules of Selling Here)

There are 5 types of companies defined in Islamic Economic System:

1. The Company of Equals (Al-‘Inan): This is a type where all partners put their money into a business and all work with it.

Both partners would have the right to buy and sell and make progress with the company, 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 doctors or builders. They may invest some of their money but their skill is the basis for the company.

3. The Company of Body & 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 & 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 & standing and based upon this the company trades. For instance the partner could be a famous, known & rich merchant whose name ensures business for the company.

5. Company of Negotiation (Mufawadha): This could be a combination of the above types.

The differences & issues between Islamic & capitalist company structures can be summarised as:

a-      Modern day corporate doesn’t have formal “Offer & Acceptance”. One party can enter or leave a business via share trading. There are incidents when a company is completely taken over by another party by buying shares even though majority of the staff & current owners disliked it. This could not be done in Islamic Economics.

b-     The present day company is an individual & separate entity from its owners. This contradicts Islamic law whereby the partners are “the company”; if the company is taken to court, it is the partners who are liable. The current corporate takes all personal elements away  from the company. Public Limited Company is one such example. 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 receive nothing. Many people lose millions in Pakistan & abroad. Banks going bust is one good example. If a person owes money to someone, he has to pay it back.
 

Trading in Current Share Business is Not Allowed:

Reasons are simple to understand:

1- In share system the share owner does not have any control or say in the company business. Suppose you bought 25% shares in the above-mentioned Banana Company. Out of a blue, the Banana management decides that they would start importing Cocaine from Columbia since it is quite profitable; you have no means of controlling this. Islam requires a partner to have an equal control over the business so that it could be kept on track.

2- There is no offer & acceptance in present day share system. The share buyer has to accept the laid down terms; there is no Offer & Acceptance.

3- The shares are bought & sold without the consent of existing share holders. This essentially means that an unknown person becomes partner in the business who might have earned money through undesirable means. In Islam, all partners must agree upon allowing a new partner to join, and then there should be a contract signed.

4- The share buyer has no real interest in running & growing the business. All he is after is quick money. The moment he hears about any losses, he sells his shares and moves on.

The End..