The Islamic Origins of Capitalist Enterprise

Author: Harris Irfan

Publisher: Constable & Robinson

Pages: 347 pages

Price: Rs 999

The work of Abu Hanifa [in 7th century Iraq] and others like him on the fundamentals of jurisprudence, followed by the codifying of commercial law, would eventually lead to the development of a widespread money economy, with gold and silver giving way to paper notes. At first, traders relied on prophetic injunctions against usury or uncertainty in transactions or manifest examples of immoral behaviour. As scholars like Abu Hanifa built upon prophetic traditions, cheques and letters of credit followed naturally and before long a market-oriented capitalist economy — underpinned by an ethical code — was thriving in the Islamic world.

Arab and Persian merchants forged trade links with India and the Far East, becoming indispensable in the chain of trade between East and West. An Arab merchant from Baghdad might travel to Cordoba in Spain, taking with him a letter of credit — a suftaja — to be encashed on arrival by an agent, part of a network of money transfer that came to be known as hawala. Indeed the hawala would go on to influence the development of the agency concept in common and civil laws throughout Europe. The saqq — the forerunner of our modern-day cheque — allowed the early banker to become indispensable to every trader as a guarantor of paper money at markets and cities throughout the Islamic world…

Muslim traders would share the profits of their ventures with their sponsors in a pre-defined manner that would come to be the hallmark of Islamic economic activity, an investment partnership that modern Islamic banks refer to as musharaka and mudaraba. An exchange economy became the framework for Islamic merchant capitalism.

Within a few centuries, the Crusaders would encounter Arabian merchants and carry their new-fangled ideas — such as the trust law encapsulated in the Waqf and the agency concept intrinsic in the hawala — back to the Mediterranean. Not only would the techniques of commerce and finance filter through to medieval Europe, but also an entrepreneurial spirit which had been less widespread before. Ironically, given the negative connotation that “capitalism” has today — with all its implications of greed and selfishness — it was the Islamic world that institutionalised capitalism and brought it to the West in the form that we are familiar with today. Somewhere along the way, “Islamic” capitalism — of the type which Abu Hanifa legislated in favour of, and that afforded protection to the weak and the needy – became diluted…

Although earlier banking systems like the hawala method of money transfer were still widely in use, and the 100,000 pilgrims travelling annually to Makkah continued to make use of the suftaja bill of exchange to draw money at their journey’s end, court records of Anatolian cities show that interest-based lending was a frequent and apparently tolerated practice. Most disputes were in relation to small-scale transactions from person to person, with interest rates ranging from 10-20 per cent. There appeared to be no attempt to conceal the interest-bearing nature of the transaction and indeed, the local pious endowments became important providers of credit in major urban centres. Though some clerics denounced the practice of charging interest as incompatible with Sharia, the majority adopted the pragmatic view that  disallowing the practice might harm  the community.

Ottoman merchants continued to make use of the business partnership models such as the mudaraba, or investment partnership, which typically financed long-distance trading ventures without resorting to a fixed interest charge… However, little development of an Islamic system of economics and finance took place during the 600 years of Ottoman power. As European money-lenders gained in prominence, eventually Ottoman practices fell into line, and it would not be until the middle of the 20th century that Islamic finance would reassert its identity.

Founder of Cordoba Capital, Harris Irfan has headed Islamic finance at Deutsche Bank and Barclays.