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Behavior Of An Islamic Firm

By Adeel Ahmed, Farhan khuram and Shahzaib Mubashar

Instructor: Prof. Azmat

Course: Islamic Studies
Lahore School of Economics
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Contents
Introduction .................................................................................................................................................. 3
Goals and objectives ..................................................................................................................................... 4
Code of business ethics ................................................................................................................................. 6
Behaviour in Markets, Oligopoly and monopoly. ....................................................................................... 10
Capitalist Vs Islamic..................................................................................................................................... 11
Conclusion ................................................................................................................................................... 12
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Introduction

A growing number of Muslin countries are expressing the desire, and in some cases (Pakistan,
Saudi Arabia and Iran) are taking serious actions to turn to Islamic laws and teachings in
modeling their way of life including their economic behavior.

Muslim countries vary a great deal in the degree in which they follow the Islamic teachings.
Some are much stricter than others. However, there is no Muslim country, at present, which can
be called an Islamic economy in the sense defined above (i.e., an economy which is following
the Islamic laws in a strict fashion and in which these laws are enforced by faith and civil laws).
Also, the experiences of early Muslim economies is not always directly applicable now since
these economies were much less complex than those of contemporary Muslim countries.

A Muslim entrepreneur engages in business activated by the relatively impersonal motive of

filling his obligation of trust. The principle of economic trusteeship in an Islamic economy is
dramatically opposed to the self-interest principle which is the corner-stone of the free-market
economies of non-Islamic societies.

This clearly suggests that the object of an Islamic firm will not be profit maximization. Rather,
the firm may be satisfied to realize a "reasonable" or "fair" level of profit if that enables it to
achieve the more important goal of doing good to please God. Quran says:

"O my Lord! grant me that I may be grateful for Thy favour which Thou hast bestowed
upon me and upon both my parents, and that I may do right acceptable unto Thee. And be
gracious to me in my issue. Truly have I turned to Thee and truly do I bow (to Thee) in
Islam".(1)
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Goals and objectives

So basically, a firm should be having these goals and objectives in order in order to conduct a
business but The Islamic firm would differ from non-Islamic firms not only in its goals but also
in its economic policies and market strategies:

1. Achievement of al-Falah
2. Fair and Equitable Distribution
3. Provision of Basic Human Needs
4. Establishment of Social Justice
5. Promotion of Brotherhood and Unity
6. Achievement of Moral and Material Development
7. Circulation of Wealth
8. Elimination of Exploitation

Siddiqi (1979, 1992) attempts to rationalize the Islamic producer behavior in the context of the
objective of the firm. Siddiqi states that a Muslim entrepreneur who is equipped with the
knowledge and Islamic values will be inclined to live up to the Islamic ideals of justice and
benevolence. Thus, the main aspects of business motivation in Islam are full compliance with the
Islamic concept of justice and an urge to serve the society which makes the entrepreneur take the
welfare of others into consideration when he makes his entrepreneurial decisions.

Discussing the goal of the firm in Islamic economic framework, Hasan (2002) argues that it is
important to understand what is being maximized, how, and for what purpose. He says that
maximizing survival, employment, equity, or the pleasure of God would probably be welcome to
most of the people. The author opines that if the firms fulfill their Islamic duties towards the
consumers, the employees, and the society in general in arriving at their total revenue curves,
then profit maximization is not objectionable. He argues for internalizing social costs and
benefits to enable the use of profit maximization with requisite modifications and restrictions.
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Azid et al. (2007) share the view that competition and cooperation can be a complementary
concept on the moral plane. For achieving productivity and avoiding wastage of resources, the
pursuit of efficiency is not problematic to achieve the best output to input ratio. On the other
hand, when markets do not cater to social problems, ills and negative externalities, ethical and
moral behaviour by showing cooperation for social gains is desirable and recommended in the
Islamic ethos.

In exploring mathematical modeling of a firm’s behavior, Metwally (1997) describes an Islamic

firm as one that would seek the maximization of utility which is a function of the amount of
profits and the amount of spending on charity or good deeds. The author suggests using the
utility as a broad function which includes net profits as well as charity as parameters. However,
the amount of profit would, after the payment of all imposed taxes (Zakāt and other dues) be no
less than a minimum level which is ‘safe’ to keep the firm in business.

One problem with this way of modelling firms in Islamic framework is that altruism is treated in
the utilitarian framework and thus, it affects the purity of altruistic activity and motive. In the
Metwally (1997) model, higher payments in charity have supposedly a higher effect on price. If
this happens due to improvement in the social image, then the purity of altruistic activity
becomes questionable if the sacrifice of profits in charity is recouped through higher prices.
Secondly, in an economy where it is not obligatory to pay charity, increasing price by a firm
motivated through Islamic principles would not be possible without diminishing its demand,
especially in competitive markets with standardized products. Finally, in situations where prices
decline, this charity spending which was depending on transfer pricing, would decrease in
society when it is needed most in the period of deflating prices when economic investment and
employment opportunities decline.
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Code of business ethics

As Muslims, we have to adhere to ethical standards, not only in business but also in all aspects of
life. Both business and ethics are interrelated. There is more to transactions than simple trade; in
Islam, there is a certain and specific “code of business ethics” that must be followed. The Islamic
principles in transactions refer to those principles and rules that have been derived from the
sources of the Islamic Law, or Shari‘ah, and which pertain to transactions in general and include
such things as commercial transactions, economic transactions and financial transactions. These
principles have, as a reference, the decisions and fatawa (legal verdicts) issued by the
jurisprudence academies relating to contemporary issues. Individual opinions are not to be
considered if they contradict those of the Muslim scholars or those of the jurisprudence
academies. Understanding and observing the Islamic principles in transactions has a host of
benefits such as seeking Allah’s pleasure, guidance and mercy and avoiding contradicting His
Laws. It also results in increasing one’s wealth. Moreover, it helps to avoid falling into
prohibited acts and thereby eschewing sins and evil deeds. It also avoids suspicion among
Muslim community and establishes justice amongst all people in transactions. Eventually, it
leads to setting an ideal example for the Muslim businessman in the arena of life and enables the
implementation of Allah’s Law with a view to save humanity from misery and suffering. Prophet
Muhammad (pbuh) was an ideal human being. He was the best teacher, preacher, and guide; the
best statesman, lawgiver, judge, diplomat, negotiator of treaties, and military commander; the
best family man, a good husband, a kind father, a good neighbour, and friend of his people. He
was also a very honest and successful businessman. There is a reference to this point in the
Qur’an: For you in the Messenger of Allah is a fine example to follow (Al-Ahzab 33:21).

The Prophet was chosen by God to be His last prophet at the age of 40. Before that he was very
much involved in business. He was born in Makkah, frequented by caravans from Syria in the
north and Yemen in the south. The Prophet would join these caravans and that is how he traveled
to Syria, Yemen, Bahrain, and many other places in Arabia. Some historians have also suggested
that he probably traveled to Iraq and Ethiopia.
From his early age, he was involved in commerce. He had a good reputation as a hardworking,
truthful businessman. It was due to this reputation that Khadijah, a wealthy businesswoman,
hired him to work for her business. Many people in Makkah had asked for her hand and worked
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for her, but they either cheated her or she was not satisfied with their work. Finally, she found
Muhammad (he was not a prophet at that time) and she asked him to work for her. He made
several business trips. She was impressed with his work as well as his impressive personality,
they later got married. After marrying Khadijah, the Prophet took several business trips
throughout parts of Arabia. Ancient Arabia used to have commercial fairs in almost all major
towns and regions; it is probable that the Prophet visited some of these commercial fairs. After
becoming a prophet, his business activities decreased, although he would occasionally participate
in business transactions. His vast business experience helped him in dealing with people with
great care.

The Prophet emphasized that honesty and kind dealings with customers are the secrets of success
in business. He said, “The truthful and honest merchant is associated with the Prophets, the
upright and the martyrs” (Al-Tirmidhi). “God shows mercy to a person who is kindly when he
sells, when he buys and when he makes a claim” (Al-Bukhari). The Prophet gave many
teachings on business and economic issues, he covered almost every aspect of business and
economics.

In the light of the Holy Quran and Holy Prophet (S.A.W) teachings, a detailed code of ethics can
be framed for the guidance of businessmen and traders. The basic rules of this code of ethics are
as follows:

1) Halal things alone should be sold or purchased. There are certain requirements which
a seller specifically must consider to ensure that the sale is Halal. The most basic
principle is that neither anyone is permitted to be engaged in the sale and purchase of
unlawful things nor trading in these things in any way. Moreover, correct standards of
weights and measures should be used and no short weight or short measure be given to
the customer. Liberality and generosity should be shown in giving weights and measures
as the Holy Prophet (S.A.W) saw a weigher and said to him: “Go on weighing. Let the
scale weigh down.” The adulteration or mixing in goods should be totally avoided.
Lastly, the customer should be informed of any defects in the article prior to the state as a
sale should be made purely on honesty.
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2) Sale and purchase should be executed by mutual agreement of the parties. This
means that while dealing with each other, the seller and the buyer should observe
courtesy, leniency, forgiveness and toleration as the Holy Prophet (S.A.W) said: “May
Allah Almighty bless the man who in selling or buying or collecting his loan shows
leniency and toleration.” For instance, if one party wishes to cancel the deal, the other
party should be liberal enough to agree to do so. This is known as ‘Aqala’. The Holy
Prophet (S.A.W) has recommended ‘Aqala’ by saying: “Whose gives Aqala (agrees to
cancel the deal) to the party which shies away from the deal, Allah will give him Aqala
(agree to write off) all his sins on the Day of Judgement.”

3) The motive of the sale or purchase should be profit but it is strictly forbidden to
show any dishonesty. Sale and purchase should be singularly free of falsehood i.e lies
and deception. According to a saying of the Holy Prophet (S.A.W): “The whole goodness
and blessing of trade lies in Bai Mabroor, that is, virtuous, good and entirely honest
dealing.” The goods should be supplied at the notified rate. Sometimes , in compliance to
government orders or for some other reason a rate is displayed on the board outside the
shop, but inside the shop a higher rate is charged from the customer. This practice
violates the code of business ethics and should be shunned. Moreover, if the deal is made
on credit, the terms should be soft and convenient. Moreover, the motive should not be to
exploit the other party or indulge in any unethical activity such as practices like Tabkhees
should be scrupulously avoided. This implies that the standard of a commodity should not
be reduced in order to make more profit on it. The practice of Akhatar i.e hoarding of
goods to earn greater profit should be shunned. Profiteering by artificial increase in prices
through monopolistic control of supply should not be resorted to. Dummy customers
should not be brought to raise the price. All deals should be executed honestly and in
good faith for mutual benefit. The second buyer should not step into the deal till the first
buyer has withdrawn his offer to buy an article. When the vendor and the purchaser have
made a deal at a certain price, the third party should not offer to buy the same thing at a
higher price. The Holy Prophet (S.A.W) said: “No man should bid after his brother’s
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bid.” No mode of dealing should be adopted which is purported to cause loss to the other
party. The Holy Prophet (S.A.W) said: “Neither take nor give loss.” Further, He (S.A.W)
warned: “A Muslim is he from whose hand and toungue the other Muslims are safe.”

4) Sale and purchase should not involve any dispute. The purchasers should avoid
forming a league to force the seller to reduce his price. The parties to a bargain must
always be willing to remedy errors in account or other mistakes through oversight. For
instance, the seller made a deal to supply goods of inferior quality, but actually supplied
superior quality goods. The buyer should either pay the difference in price or return the
goods. The buyers and sellers should abide by their agreement under all circumstances.
Suppose the seller has made a deal at a price. Suddenly there is a rise in the price. The
seller should not repudiate the deal, but should supply the goods at the agreed price.
Similarly, the buyer has struck a bargain and has agreed to pay a certain price. Suddenly
the price falls. He should not refuse to take delivery of the goods, but should complete the
deal of the agreed price. If the buyer is unable to pay the full price at the stipulated time,
his earnest money should not be forfeited. He should be given more time to complete the
deal. Similarly, if the vendor cannot deliver goods at the stipulated time, he should not be
made to pay damages. In such cases the buyer and seller should deal with each other in
good faith. Important deals should be put in writing to remove he possibility of dispute
and to preserve documentary evidence of the ownership of goods.

5) Quality of goods: False oaths should not be sworn to push through the sale of goods.
Goods offered for sale should be pure, clean, neat and hygienically prepared and
preserved. The buyer and seller should make a deal over existing goods. The sale and
purchase of birds flying in the air, fishes in the river or offspring in the womb of a female
animal etc. is invalid. The total supply of goods should conform to the sample shown at
the time of the deal. The practice of “showing one thing and giving another” has been
strictly forbidden.
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Behaviour in Markets, Oligopoly and monopoly.

Amin et al. (2003) explain that in the Islamic economic framework, it is assumed that economic
agents are guided by Islamic values. Thus, a Muslim producer, being accountable to Allah, treats
the resources at his command as a trust and the production of goods as a duty, and he will base
his production decisions on the concept of ‘Maslaha’. The author opines that a producer in an
Islamic market could still be profit-driven; but, being governed by the Shariah, the Islamic
producer’s valuation of economic costs will be modified. Hence, the producer will internalize the
externalities in its utility and cost functions.

But nowadays the behavior of markets is totally against the Islamic denotion of economical
markets. Markets are rational and profit driven. They are run by capitalistic firms that hold the
motive of profit maximization and gaining market shares to hold a monopoly ( only one firm
holds all the market share) or oligopoly ( where there is a very limited competition and only few
buyers and sellers), thus barriers for new firms is hardened. Due to thus capitalistic approach,
there are high rates of inflation, firms exploit consumers and all of the markets go against what
Islam told us to. There is discriminative pricing even in markets which operate in Muslim
countries and exploitative marketing is the top priority to maximize the sales.
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Capitalist Vs Islamic

Islam does not deny the market forces or the Market economy. Even the profit margin is
acceptable to a reasonable extent. Private ownership is also not totally neglected, yet the major
difference between Islamic firms and capitalistic firms is the firms that hold a capitalistic
approach moves to a motive of high profit margins that can provide them with the power to
change the economy ca using huge imbalances in the society.

In a capitalistic firm, Interest, gambling, speculative transactions tend to concentrate wealth in

the hands of the few. Unhealthy human instincts are exploited to make money through immoral
and injurious products. Unbridled profit making creates monopolies which parlyse the market
forces or, at least, hinder their natural operation. Islamic firms prohibits the profit motive and the
above mentioned situation. After recognizing private ownership, profit motive and market forces,
Islam has put certain divine restrictions on the economic activities. These restrictions being
imposed by Allah Almighty, Whose knowledge has no limits, cannot be removed by any human
authority. The prohibition of riba (usury or interest), gambling, hoarding, dealing in unlawful
goods or services, short sales and speculative transactions are some examples of these divine
restrictions. All these prohibitions combined together have a cumulative effect of maintaining
balance, distributive justice and equality of opportunities.

Islamic firms would furthermore not engage in any activity that is forbidden by Islam e.g. No
Islamic firm would be dealing in the production of Alcohol or the production or sale of pigs or its
meat or using interest rates within the business operations.

An Islamic firm must also follow fair rules in all its dealings while acting as a buyer or seller in
all its dealings. Islamic firms also differ from Capitalistic firms as they do not engage in
deceptive advertisements that would influence a form of desire in the minds of the consumers to
gain market share.

Lastly Islamic firm differs also as it avoids all acts of exploitation, discrimination of restrictive
trade practices as they are all denounced in Islam.
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Conclusion

The objective of this report is to demonstrate function of the firms that operate in Capitalistic
ways and those that work in Islamic ways and guides us through how Islamic firms operate
through the laws dictated by the teachings of the Holy Quran and the traditions of Prophet
Muhammad (Peace be upon Him). It also guides us the strategies and ways to operate in the
economy through the Islamic way by putting trust in Allah Almighty and being true and honest
in one’s dealings.

Islam reminds business people and businesses about their role and responsibilities. All human
beings should be treated with respect, equality, and fairness. Exploitation of one group by
another should stop. There should not be any division among people because of their race, color,
nationality or gender. Furthermore, the resources of the Earth are not only for us, we share this
biosphere with other species, and so we take care not to waste or destroy them. The universal
golden rule states, “Like for others what you like for yourself.” We should try to empower others
and work to eradicate poverty, hunger, illiteracy, disease, and unsanitary conditions in order to
live in peace and tranquility. Businesses should promote ethical standards in their enterprise,
People involved in business should always be honest, truthful, and fulfil all promises and
commitments. We must eliminate fraud and cut-throat competition and we must live our lives
according to the will of Allah.
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