Mudaraba-based Investment and Finance by A.L.M. Abdul Gafoor*

In any economy, private investment occurs in two different ways: active investment, where one or more persons put their own capital into a project, manage it themselves and enjoy the fruits of their labour and capital themselves; and passive investment, where the investor provides the capital and receives a return but takes no further part in the project. Broadly speaking, a passive investor has three options: one, buy shares in a company and receive a dividend; two, buy bonds or securities and receive interest; three, deposit in a bank and receive interest. In an Islamic economy, active investment and the first option are permissible while the last two options would be regarded as riba (interest) income and therefore prohibited. On the entrepreneur side, he may finance his project using his own capital, by selling shares in his enterprise, or by borrowing on interest (from a bank or by issuing bonds/securities). In an Islamic setting, the first two methods are permissible while the last is not. For clarity the scenarios are depicted in Tables 1 and 2. Table 1. Investment options for capital-holders
Type of investment Mode of investment Type of return on capital Islamic position
Active investment In own enterprise Profit or loss from the enterprise Allowed
Passive investment Shares in a company Dividend (profit or loss) from the company Allowed Bonds/securities Fixed positive return (riba) Prohibited Bank deposit Fixed positive return (riba) Prohibited

Table 2. Financing options for entrepreneurs
Type of financing Mode of financing Type of return on capital Islamic position
Active finance Own funds Profit or loss from the enterprise Allowed
Passive finance Share capital Dividend (profit or loss) from the company Allowed Bonds/securities Fixed positive return