By Mufti Taqi Usmani
Excerpt from Introduction to Islamic Finance
According to the capitalist theory, capital and entrepreneur are two separate factors of production. The former gets interest while the latter is entitled to profit. Interest is a fixed return for providing capital, while profit can be earned only when there is a surplus after distributing the fixed return to land, labor, and capital (in the form of rent, wages, and interest).
Islam, on the contrary, does not recognize capital and entrepreneur as two separate factors of production. Every person who contributes capital (in the form of money) to a commercial enterprise assumes the risk of loss and therefore, is entitled to a proportionate share in the actual profit. In this manner, ‘capital’ has 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 profits generated by the commercial activities in the society are equitably distributed to all those persons who have contributed capital to the enterprise, however little it may be. Since in the context of modern practice, it is the banks and 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 the few.