Re-Examining the Structure of Firms and the Provision of Finance: The Case for Islamic Partnerships

In the past, Muslims and non-Muslims mainly depended on equity-based financing while debt was an exception, but this whole system was altered with the inception of banks followed by the corporations and the role of partnerships started to shrink. Accordingly, many issues emerged concerning the current financial system, for instance three different banking theories were developed that are based on different understanding of how banks and money function and each lead to different economic and policy implications. Frankly, the new entire system was borrowed from the English law and hence raised doubt about its compliance with Sharī’ah. Accordingly, the study aims to re-examine the structure of corporations, especially the concept of legal personality, and the provision of debt finance under the principles of Islamic law and their effect on the economy as compared to partnerships. The study employed library research, content analysis as well as case study approaches and found that the only correct banking theory that is supported by an empirical evidence is the credit creation theory which states that banks can create money out of nothing. Moreover, after analyzing the concept of legal personality, the concept proved not to be accepted by the classical scholars although the majority of the contemporary scholars insist on its validity. Furthermore, the whole structure was found to contradict some of the main principles of Islamic law. Finally, partnerships were found to be more efficient than the debt-based system in terms of allocating the investable resources and the marginal efficiency of capital.