Understanding Islamic Finance - Doha Academy of Tertiary Studies

36 Understanding Islamic Finance4. The entrepreneur or organization – which brings together the other three factors, makesuse of them and bears the risk of profit and loss in production – its compensation is“profit”.The factors of production in Islamic economics are:1. Capital – includes those means of production which cannot be used in the process ofproduction until and unless they are either wholly consumed or completely altered inform during the production process; it cannot fetch any rent. “Profit” is compensationof capital in the Islamic framework, but it comes with responsibility or liability. So theprofit on any capital is the residual revenue of a business conducted with that capital aftermaking payment to all other parties; if the residual is negative, the capital owner has tosuffer a loss that is the shortfall in the principal employed in the business.2. Land – all such means of production which are used in the process of production insuch a way that their corpus and original form remains unaltered. Their compensationis rental; these can be lent or leased. For example, an owner of a factory would claimrent of land and that of the installed machinery and plant; similarly, owners of houses,vehicles, machines, etc. are entitled to rent.3. Labour – that is, human exertion, whether physical or mental and also includes organizationand planning. Its compensation is wages.Profit, according to Islamic theory, is the result of the productivity of capital that anentrepreneur has invested or a reward for his workmanship or for shouldering responsibility.It is not a reward for capital or for enterprise per se. An entrepreneur who, for example,brings together factors like land, labour, machinery and uses his own financial resources(money capital), has to pay wages and rental for the use of land or machinery as per agreedterms; he will make a profit on his capital or reward for his entrepreneurship only if there issome residual after payment of the rental, wages and other expenses on raw materials, etc.If the money capital is taken as a loan, the entrepreneur is bound to repay the same amountof loan without any addition or shortfall, irrespective of the fact that he earned a profit orincurred any loss in the business. In a case where the whole or a part of the money capital istaken from anyone else who wants a profit on it, and the business suffers a loss, the moneycapital would pro rata reduce and the provider of the capital would be obliged to accept theshortfall or erosion of the whole amount. Therefore, a capital provider or an entrepreneuris not entitled to profit simply by virtue of being a capital owner or an entrepreneur. Allparticipants in a joint business have similar rights and liabilities according to the nature ofthe activity or the terms of the agreement.The above discussion is suggestive of five factors of production, namely: land, capital,labour, management and responsibility/liability. While land as a factor of production includesall nonconsumable assets that can be rented, the concept of capital requires some detail.This is so because of a different treatment of capital in the conventional economic theorywhich narrows down the concept by restricting capital to borrowed money; hence its claimon interest, which is discarded by Islam. Money itself is not recognized as capital and assuch it cannot earn a profit in itself. It cannot claim the rent as it is consumed and itsform changes when it is used. As the provider of funds is liable to loss, if any, he is anentrepreneur as well. He will get a profit/loss for his capital and wages/remuneration for hisentrepreneurship/labour. If he does not manage the business himself and provides capital toany other individual/group of individuals for any business, he will have a share in the profitwhile the manager of the business will get “wages” in the form of a share in the profit. But