Most of us have studies basic economics in our high school. Then common understanding of a capitalist theory is that capital and entrepreneur are two separate factors of production. Former gets interest while the latter receives profit. It is important to note that profit can only be earned when there is surplus after distributing fixed return to land, labour and capital.
However, Islam does not recognized capital and entrepreneur as two separate factors of production. Why? The answer is very obvious. A person who contributes capital in the form of money to any commercial enterprise assumes the risk of loss, therefore is entitled to a proportionate share in the actual profit.
In this manner in Islam, Capital as an intrinsic element of entrepreneurship, so far as the risk of the business is concerned. Therefore, instead of a fixed return as interest, it derives profit. The more the profit of the business, the higher the return on capital. In this way the profit generated by the commercial activities in the society are equitably distributed to all these persons who have contributed capital to the enterprise, however, little it maybe.
In the modern context, that is the modern economy, it is the banks and the financial institutions who provide capital to the commercial activities, out of the deposits made with them, the flow of the actual profits earned by the society may be directed towards the depositors in equitable proportions which may distribute wealth in a wider circle and may hamper concentration of wealth in the hands of few.
Source: An introduction to Islamic Finance by Muhammad Taqi Usmani.
By: Ramsha Amir
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