Islamic Influence on Western Commercial Loan Financing
It is remarkable the extent to which Western style loan-based commercial financing reflects Qur’anic economic ideals. Up until just over 100 years ago, commercial financing in the West was broadly inflexible as an instrument of enterprise creation and economic development. In fact, it has taken the Western commercial loan financing industry over 1,000 years to catch up with the templates that have been available in Islamic finance from its inception in the Qur’an.
While finance and debt laws across Europe showed great variation historically – from the liberal approach of Holland and Poland 300 years ago to the relative strictness of England – the idea of a corporation recognized as a legal entity under the law and distinct from its principals is a very recent development. But this concept has existed and indeed fostered in Islam for centuries.
The corporation, a non-person legal entity that could borrow money, be sued and held accountable for its actions is responsible for much economic improvement in the world. Evidence of this can be seen in the early successes of groups in England who would pool resources to offer limited insurance against loss of cargo on the open sea and from other dangers. The European guilds also utilized a similar system for insurance and capital loans for the mutual support of their member-dedicants. But all these examples are of a modified co-operative structure. What was needed was a true corporation having limited liability for its officers and principals, thus legally separating the actions of the investor, individuals and employees from the actions of the corporation itself.
Limited liability means that the company exists independently of its stockholders and officers in the sense that the individuals of the company may not be held personally responsible for the debts and mistakes of the company, including its contracted debts. The benefit of this structure is in its ability to enable the economy to recover from a downturn and begin rebuilding the employment and trading base. With simple interest-bearing loans to pay off, the economy is saddled with bad debts resulting from the previous downturn from which it cannot be extricated, thus slowing down recoveries and reducing their possible scope; limited liability was needed. Take, for instance, the situation within the US after it suffers an economic downturn, where corporations are allowed to declare bankruptcy or reorganize and reschedule their debts. This allows the economy to quickly write off these debts and begin growing again. Compare this to developing countries today that, because they still owe huge amounts of money to lenders from the developed world, cannot generate the cash to finance needed growth and job-creating enterprises. Of course, financial discipline is essential for the long-term success of any enterprise; but when developing countries are offered the same opportunity to cancel their debts, gains have followed losses and growth has followed downturns, all else being equal.
In my opinion, the concept of the limited liability company – the modern corporation – has its roots in the economic teachings of the Qur’an. The basis for this assertion is that Qur’anic teachings support production, partnerships and enterprise creation and maintenance, while eschewing personal debt and usury. Thus, commercial industries with their job creation are supported through joint investment and limited liability, while personal borrowing is strongly discouraged.
Do we really see evidence of commercial law in the Qur’an? No. However, it is strongly hinted at in the Qur’an’s insistence on treating commercial agreements with due diligence and seriousness; to get witnesses and contracts covering all tangible agreements and to stay away from interest-bearing personal debts, while at the same time to promote trade. There are even special rules about trading during the Hajj and at other times, and with allies or those with whom a state of war exists – all as a separate discussion from other laws and ordinances regarding personal status and actions.
The number of Qur’anic teachings focusing on the proper conduct of business is, I think, unprecedented in historic religious dispensations. It makes plain and establishes for the first time the importance of commercial enterprises, suggests that commerce is sanctioned by Allah, and that wealth earned from work and trade is acceptable in His sight, all else being equal. And with its references to trade between states at war or at peace, it also lays a foundation for establishing international trading practices.
It has been shown that with the Crusades, which lasted over two centuries, numerous Islamic teachings, habits, and customs, both casual and formalized in law and jurisprudence, were transferred in whole or in part to Europe. I believe it can also be argued that these borrowings influenced the European Renaissance. That the modern corporation traces its roots back to Europe and the US is not surprising, nor does it weaken the strength of its ties to the Qur’an and the commercial teachings of Islam.
Future research may uncover unambiguous evidence that limited liability corporations similar to their familiar contemporary form existed in early Islam. I would argue that there can be no doubt about the similarities between the teachings of the Qur’an and the foundations of modern commercial law in this context.