A firm is a transaction whether it is run according to the capitalist or to the Islamic system. To know the Islamic point of view with regard to a firm, we must understand the firm’s entity very well, not according to our own imagination or interpretation, but according to the capitalist system itself, since it is one of its practices and transactions.

So the first step to know the Islamic viewpoint in the firm’s nature, is to understand this nature and see later how Islam looks at it.

In the capitalist system a firm is not like sale and rent which takes place between two parties, but is like endowment and will which are carried out by one party. So a firm is an individual obligation of one person according to the conditions registered in the paper of agreement, which is called a contract, because one enters into a business enterprise by contributing shares or skill to accrue what the enterprise earns of gains or losses. Hence a firm is, according to the capitalist system, a single will where there isn’t offer and agreement between two or more parties. But it is a certain agreement on certain conditions which are written, and thereafter any individual regardless of anyone else, can oblige himself to the contract. So by this obligation he becomes a partner in this firm. This is the nature of the firm in the capitalist system. But in the eye of the Shari’a, a firm is a contract between two or more persons in which the contractors agree to operate a business enterprise for the sake of profit. The contract is reached in the form of offer and consent in one council. So to be in conformity with the Shari’a, a firm should be formed by an agreement between two parties, and the contract should be made through offer and consent between them in one council, this is the Shari’a viewpoint in a firm, and it is obvious that it disagrees with the nature of the firm in the capitalist system, where there aren’t two contractors but rather one, and there is no agreement between two parties but rather an absolute agreement which id decided by the one who wants to oblige himself to it; in addition, there is no offer and consent and no council of contract. Thus it is devoid of all legal conditions, and it is therefore legally invalid. But the joint-stock company or partnership, though placed under the term “firm” in the capitalist system, is nevertheless a pure monetary type of enterprise where there is no place for the personal element, because the firm in the capitalist system is of two kinds.

1. Sole Proprietorship
2. Money Corporations

Sole proprietorship firms are those in which the personal element enters and influences the firm in the estimate of shares, such as the insurance company. Here, what is remarkable is the personality of the partner, not as a governor but as regard his position and influence in society. These firms would have been valid with respect to the Islamic rulings, had they not lacked other conditions including the contract between two persons through offer and consent.

But in a money corporation there is no place for the personal element in formation, as well as in the operation of the enterprise. Money enterprises include the joint-stock companies where the contribution of fund takes two forms:

1. The founders hold all shares, and that is done by writing the company is formed, that is, its legal charter which contains the conditions which organize how the company should operate. The charter is then signed individually, and everyone who signs it is considered a founder and a partner; and as all founders sign it, the company is established. This company is limited to the founders, and so no one is allowed to join it.

2. Several persons agree to establish a company by writing the legal document or charter, and obtaining the consent of everyone of them to its terms individually, then they invite the public to contribute in the funds, after they determine a time limit for that contribution. When that time is over, the constituent assembly (formed of the founders) meet and appoint a Board of Directors. Thus the joint-stock company is established. In this way, it is an individual obligation, whether it is formed according to the first or second procedure; this is because in the first procedure, there is negotiation but no agreement, since after their meeting is over the founders come in a second meeting and sign the contract individually; one is considered a partner only if he presents his individual will. In the second procedure, there is negotiation among a limited number of people; then they invite the public to buy the shares of the firm. If one buys a share or more shares than another, he becomes a partner in the company, and his contribution is an individual conduct.

This is the nature of the joint-stock company. This nature, viewed in terms of the law of Allah, proves to violate that law because, according to Islam, the firm is a contract between two or more persons, reached by offer and consent in one council for the sake of profit. So the Islamic ruling with respect to the validity of the company’s formation, states that there should be legal contract, not an individual conduct. There should be two parties, offer and agreement between them in one council; and agreement between them in one council; and the offer and agreement should take place before the session is closed. These conditions; which have been imposed by the legislator to consider the firm valid, are not available in the joint-stock company. The latter is a company based on an individual obligation because it is established by an individual conduct, where there is only one party, and also lacks offer and consent in one council. Therefore, it is legally invalid to understand its invalidity more clearly. We call attention to the fact that transactions are of two types.
One type where two parties are needed, such as “sale” and “rent”, and another type where one party is sufficient, such as “endowment” and “will”. Obviously a contraction which cannot be reached except by two parties needs two parties; otherwise, it is said to be invalid. However a construction which can be reached by one party is said to be valid without the need for a second party. For example, “sale” needs necessarily two parties to be contracted, while endowment needs one party. This is the nature of transaction in all systems of economy. But there the number of parties needed for a contract to become valid. In the light of this view a capitalist system considers sale, rent, and sponsorship as examples of transactions which cannot be accomplished by on party but need two parties, otherwise they are considered invalid. Likewise, it considers endowment, will, and a prize-promise as examples of transactions which can be accomplished by a single party, and there is no place in such transactions for a second party. Therefore, firm in the capitalist system (for example the joint-stock company) is an individual matter decided by one party. But Islam considers the firm one of the transactions which cannot be contracted except by two parties. According to the Shari’a a firm is like sale and rent. The Prophetsays: “Allah helps the two partners”, and “I am the third of any two partners”.

Thus, the joint-stock companies are, according to Islam, legally invalid. Invalidity is opposed to validity. The validity of a transaction means its agreement to the ordinance of the legislator. Thus we say a valid sale, or a valid firm; and in this case its consequences are positive. Invalidity means disagreement to the ordinance of the legislator, thus, we say an invalid sale, and invalid firm; and in this case its consequences are negative. For example, if one of the conditions of sale is ignored, sale is said to be invalid, and so punishment following this world and in the Hereafter. We use the term invalidity to describe transactions as well as daily worship. An invalid transaction is characterized by:

1. Being a taboo! So Allah punishes its doer.
2. Being unrewardable.

Our Proof is that the Prophetsays: “Whoever does an action which we did not order shall be refused” and “whoever introduces that which is not in our religion shall desert his Faith.” This means that his act is wrong and invalid. In this respect, the Prophetsays: “And that which I have prohibited, you shall not do” thus, the legislator has prevented us from violating the Shari’a quite strictly, he prohibited us to violate his imperatives and interdiction whether they deal with transactions or daily worship.

In the light of this analysis, it is prohibited to form, participate in, or benefit from a joint-stock company, simply because it is an invalid firm.

But if a Muslim buys a commodity made by the joint-stock company, not from the company itself but through a valid contract, then he is permitted to utilize it, because it is not the commodity itself which is prohibited but the way it is owned. For example, if a cigarette dealer buys cigarettes from the joint-stock company, his act is prohibited because the contract by which he owns the cigarettes is false. So his is prohibited to sell or get profit from them. but anyone who buys cigarettes from the cigarette dealer takes something permitted because the contract by which he owns the cigarettes is legal, since it takes place between two parties; thus selling, buying and profiting from him is permitted.

This is true when the owner of the joint-stock company is a Muslim who is subject to Islamic law. But if the joint-stock company is owned by non-Muslims or pro-capitalists, such as European and American firms, one is not, in this case, prohibited to deal with them. In fact, a Muslim is permitted to carry out all contracts with them.

Consequently, a Muslim who wants to travel can go on a plane owned by a European joint-stock company, but never on one owned by a Muslim joint-stock company. A Muslim should, according to the Shari’a, find out in this connection if the joint-stock company is Muslim owned or not, in order to decide whether he has or has not to deal with it.