Composition of Capital Basis as Postulated in Interest-Free Financing Systems: The Islamic Legal Approach

Abstract

In the aftermath of the states of financial instability that had occurred repetitively in the past decades, it is imperative that academic studies be undertaken on alternative systems for financial management available in other legal traditions. In this regard, relevant features of interest-free financial systems such as the mode put forward by Islam, can be a rich field for research and analysis. The current paper is an explorative attempt to probe the reasons and wisdom behind the stress placed on the existence and presence of capital at the commencement of joint equity ventures in the Islamic legal precepts. A perusal of classical and contemporary Islamic verdicts pertaining to equity capital in joint ventures would reveal that the presence of capital in the initial stages of the partnership is held as a necessary requirement. Classical jurists had placed extraordinary emphasis on the existence and the presence of capital at the inception of a partnership venture. Debts have been categorically disallowed from forming the initial basis of a partnership. This research suggests that the emphasis placed by Islamic law on having real assets, instead of debts, as the capital base in partnerships, could have important economic connotations, such as acting as a curb on unrestrained monetary expansion and inflation.