It has been cogently pointed out that although the current interest in Islamic economics is relatively recent, Islamic economics is not a new paradigm. In fact, the roots of Islamic economics can be traced to the time of the revelation of the Holy Qur’an. The philosophical thinking underlying the principles of the Islamic financial system is the implementation of a financial system (wealth accumulation and wealth distribution) that is fair, just and unbiased towards the rich minority at the expense of the poor majority. The ultimate aim is to spread socioeconomic justice amongst people throughout the world. Although Islamic banking is a core component of the Islamic financial system, it is a common fallacy to identify the Islamic financial system exclusively with Islamic banking and to define the economy as a whole only on the basis of being an “interest-free” economy.
Many Western scholars have suggested that the prohibition of interest is anti-capitalist and an obstacle to the proper functioning of a modern economy and a limiting – if not an impeding – factor to economic development and growth. On the other hand, others have argued that there is no moral or economic justification for charging or receiving interest. Charging interest, they argue, is counterproductive and adds to the burdens of the entrepreneur. Moreover, an interest-based economy is deemed inappropriate in providing socioeconomic justice.
Detractors of the positivist viewpoint on interest argue that charging interest
tends to drive the poor into more poverty and create more wealth for the wealthy without doing work or sharing the risk involved in every business undertaking. Interest creates wealth but is not the outcome of productive economic activity orthe result of an increase in commodity supply. Islam, therefore, considers all interest-based financial arrangements to be unfair, unjust and morally unjustifiable, and all money generated by such transactions to be unearned money.
Money generated from “rent-seeking activity” such as charging interest creates new but artificial capital which is by no means the lifeblood of the markets. Partnership arrangements between the financier and the entrepreneur eliminate the negative effect of banning interest, if any, on the markets. Mudaraba and musharaka are two Islamic financial instruments used as alternatives to the interest-based arrangements employed by conventional banking. Mudaraba and musharaka operate under the concept of ‘rate of return’ where the financier and the entrepreneur share the risks; hence they also share the profit/loss generated by the investment according to an agreed-upon ratio. This is in contrast to the fixed pre-determined ‘interest rate’ to be paid by the entrepreneur in addition to the borrowed principal regardless of the outcome of the business undertaking.
Each country is faced with an exclusive set of obstacles that hamper the development of its entrepreneurship sector, and despite the uniqueness of the problems facing individual entrepreneurs in their quest to establish their businesses, there are certain difficulties shared by the vast majority of entrepreneurs. A crucial issue that must be accounted for in the process of constructing any developmental model is ensuring compatibility and integration between its various elements; most notably its cultural and institutional components. Regardless of how entrepreneurial the Islamic culture is, it still needs an accommodating environment and supporting institutions in order for it to demonstrate its will.
Entry into business is often hindered by the lack of financial resources, government regulations, and social attitudes that often discourage risk-taking. However, the procurement of capital to start a business is widely recognized to be a major obstacle for most potential entrepreneurs irrespective of their location. The validity of this statement is not limited to a particular culture or confined to a certain landscape, although it is more pertinent in the context of developing countries.
Cooperation between (potential) entrepreneurs and conventional lending financial institutions in Islamic countries is usually held back on the following grounds: firstly, commercial lending institutions are reluctant to extend their credit to potential entrepreneurs. This reluctance is largely attributed to the high risk (high failure rate) and high administrative costs of lending to small firms where the size of the loan is often too small to be economically viable. However, a lack of understanding of the nature and the dynamics of SMEs, coupled with a lack of qualified bank personnel when appraising feasibility studies and evaluating and monitoring small business loans are believed to be the real reasons behind such reluctance.
Some of the conditions imposed by lending institutions such as requesting prior business records showing profitability to guarantee the repayment of the loan are hard to fulfil, especially by new and potential entrepreneurs who do not have an established credit history. Commercial banks are also hesitant to take risks in financing innovations since new products lack an account of historical success and the guarantee of future performance and acceptance by the markets remains to be proven (lack of reliable information). To protect their investment and ensure the security of the loan, banks require entrepreneurs to come up with substantial collateral, in most cases, to a value exceeding the value of the loan. The inability of the entrepreneur to meet the tough conditions set by commercial banks means that he/she cannot count on the conventional banking system to secure needed start-up capital. This leaves the entrepreneur with the difficult task of trying to find another financing alternative – where excessive interest is often charged – or abandoning the dream of becoming an entrepreneur.
Even if the potential entrepreneur was able to satisfy the requirements of the lending institution and prove his/her eligibility for the loan, the entrepreneur will then be held accountable to repay the pre-determined interest charges in addition to the borrowed principal. The high cost of raising the capital needed to undertake the business venture imposes a heavy debt burden on the entrepreneur. The extra cost of finance places the entrepreneur in a detrimental position from the start, hence increasing the odds against the success of his/her business venture. Furthermore, the commitment to repay the loan and the associated interest is inescapable and is irrespective of the future yield of the business activity. Should the venture prove to be a success and the rate of return is higher than the ongoing interest rate, fixed arrangements would not then be fair to the lender. On the other hand, if the business activity turns sour and ends up a failure, the entrepreneur is left to his/her fate, while the lender unfairly recovers. This practice is deemed unfair and unjust hence it is explicitly prohibited in Islam.
“The inability of the entrepreneur to meet the tough conditions set by commercial banks means that he/ she cannot count on the conventional banking system to secure needed start-up capital. This leaves the entrepreneur with the difficult task of trying to find another financing alternative – where excessive interest is often charged – or to abandon the dream of becoming an entrepreneur.”
Secondly, the majority of potential Muslim entrepreneurs do not wish to deal with conventional banks on religious grounds. They consider commercial banks to be unethical institutions that widen the divide between the wealthy and the needy through their immoral interest-based financial practices. Scholars tackling this topic frequently overlook this factor despite its significance and immense implications. Thirdly, a sizable portion of Muslim entrepreneurs would prefer sharing rather than bearing the risk associated with new business undertakings motivating of the entrepreneur.
The personal motives of entrepreneurs for starting their businesses are considered important indicators explaining the status and the direction of entrepreneurship in a country. The ability of the entrepreneurs to orchestrate and lead economic transformation and to carry out needed fundamental changes in the cultural, social and economic structure of the country depends much on the entrepreneurial motives of new business founders. Motives also act as guiding instruments for policymakers when weighing their options and allocating their resources, by identifying and targeting entrepreneurs who are most likely to develop growth-oriented businesses and generate new job opportunities.
People start their own businesses for various reasons: to earn more money, an opportunity to be creative, to build a social position and increase status, to be independent, to have greater control over one’s work, to have a comfortable lifestyle and the need for a job or fear of unemployment. Researchers have categorised startup motives into a number of distinct groups: economic and lifestyle reasons, creativity of small firms, social aspects of being self-employed and small businesses as a means of employment.
Categorisation based on the concept of ‘push’ / ‘pull’ analysis has gained acceptance by the research community and is widely circulated in the literature. Central to conventional economic theory is the theme that individuals start their own businesses based on an Affirmative choice and are attracted by the opportunity or the ‘pull’ of perceived profit. Unemployment or the threat of it and career dissatisfaction are considered “push factors” since they tend to push individuals towards self-employment as the best or the only available alternative to their current situation.
Islam endorses entrepreneurship as long as it stands on moral and ethical grounds and adheres to an Islamic code of conduct. Stimulating entrepreneurship in Western societies is mainly driven by the prospect of material rewards. Islam has nothing against Muslims seeking profit through the creation of, or engagement in, business ventures. The only condition that must be preserved is the realisation that every business undertaking is intended to please Almighty Allah. Accordingly, business activities are meant to strengthen the Muslims’ faith (iman) by committing them to the remembrance of Allah and attending to His religious duties. “By men whom neither traffic nor merchandise can divert from the remembrance of Allah, nor from regular prayer, nor from the practice of regular charity” (Qur’an, 24, 37).
The moral dimension of Islamic entrepreneurship is evidenced by the high standards and the strict guidelines set by Islam to regulate profit accumulation by prohibiting dishonesty, greed, exploitation and monopoly. The Prophet (PBUH) explained that anyone who stockpiles commodities anticipating an increase in prices with the intention of making an unlawful profit is a sinner. Islam aspires to create high-quality Muslim entrepreneurs and productive Islamic entrepreneurship. Thus, Muslim entrepreneurs are permitted and encouraged to be involved only in morally accepted and socially desirable productive business activities. Activities that involve alcohol, drugs, usury, prostitution, gambling, and highly speculative business behaviour are strictly prohibited, despite the possibility of their economic viability.
Other very important motives associated with Islamic entrepreneurship – but mainly absent from Western entrepreneurship – are religious and altruistic motives. It is strongly argued that Islam considers entrepreneurship as being fard kifayah on the Muslim ummah: it is something that brings Muslims closer to fulfilling their religious duties and strengthening their faith (iman). Moreover, entrepreneurship in Islam is a means by which Muslim entrepreneurs extend help to their Muslim brothers and participate in the development of the Muslim nation. Hence, entrepreneurship is viewed from a larger perspective and the entrepreneur assumes an altruistic role that goes beyond satisfying his/her immediate needs and personal interest. Thus, the “pursuit of self-interest” and self-centred wealth creation are not the primary motives behind Islamic entrepreneurial activity. Altruistic motives override personal considerations and self-interest shall be realised as a natural outcome of advancing the society’s common welfare.
Entrepreneurship in Islam is also seen as a means of thanking The Almighty Allah for His countless blessings and a way to help others:
But seek, with the (wealth) which God has bestowed on thee, the Home of the Hereafter. Nor forget thy portion in this World: but do thou good, as God has been good to thee, and seek not (occasions for) mischief in the land: For God loves not those who do mischief (Qur’an, 28, 77).
Numerous Qur’anic verses and Prophetic traditions urge Muslims to give generously in order to promote the spirit of cooperation and spread socioeconomic justice among Muslims. One can argue that starting new businesses with the intention of helping others through the creation of employment opportunities can be considered as a form of giving or spending in the way of The Almighty Allah. Such action warrants the Muslim entrepreneur rewards in the hereafter as well the satisfaction and potentially high return on his/her investment in this life. In fact, the positive implications of helping fellow Muslims to earn a halal income far exceed the benefits of giving in a charitable manner.
While the Western system employs material incentives to motivate individuals to undertake entrepreneurial activities, Islam mainly uses moral incentives without failing to account for the material stimulus. Although the Muslim entrepreneur is mostly motivated by the divine incentive system, Islam is the only religion and/or
system that offers such an incentive while accepting and endorsing all other conventional motives. Muslims are expected to strive with all their physical, financial, moral and intellectual resources to seek the good pleasure of The Almighty Allah. By doing so, Muslims are actually advancing their own cause in this worldly life and in the hereafter. Earning a halal income and realising profit through entrepreneurial activities would enable Muslim entrepreneurs to fulfil ibadat of a “financial nature” such as giving zakat and sadaqah while meeting their own and their extended families’ needs. In conclusion, the essence and function of the market is entrepreneurship and trade, and not banking. This is a profound point that needs to be seriously considered by all those involved in the Islamic banking and finance industry.
