Islam, Commerce, and Business Ethics

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Islam, Commerce, and Business Ethics

Imad-ad-Dean Ahmad
Minaret of Freedom Institute

Plenary address at the Loyola Institute for Ethics and Spirituality in Business
International Ecumenical Conference (June 10-12, 2004)


Islam is the only major world religion founded by a businessman, although, in a sense,
Judaism, Christianity and Islam all trace their origins to another businessman, Abraham,
the ancestor of Moses, Jesus and Muhammad, peace be upon them all. Islam has never
had any hostility to the profession of the merchant. In the traditions called hadîth (sayings
of the Prophet and his companions, distinct from God’s direct revelation to Muhammad,
called the Qur’ân), the Prophet is reported to have said, “The truthful and trusty merchant
is associated with the prophets, the upright, and the martyrs.”

I shall begin with an introduction to the notion of spirituality in Islam using a story of the
creation of Adam, a story familiar from the Bible, although the Qur’anic version differs
in certain significant details. I shall then turn to the Islamic perspective on commerce, its
value, the importance of property rights and contract, the laws that govern commerce, and
the place of commerce in man’s spiritual life. Finally I shall offer an observation as to
what it will take to sell the concept of free markets to the modern Muslim world and the
Third World in general.

Theologically, man requires property in order to fulfill his function as the khalîfah, God’s
vicegerent on earth. The word khalîfah is used in Muslim history to refer to the temporal
leader of the Muslim community (the “caliph”), but in the Qur’an it refers to every
individual man and woman as God’s agent, or steward, on earth. Legally, property has
been sanctified in Islamic law. Morally, theft, fraud, and injustice of all kinds have been
prohibited by the shari’ah, the Islamic law. Practically speaking, the objective of falâh,
prosperity, cannot be achieved without respect for economic realities.

The historical success of Islam in providing the framework for a thriving world economy
from the seventh to the fifteenth centuries is a matter of historical record, but it does not
answer the question of whether Islam in particular, or religion and spirituality in general,
are helpful to or necessary for the ethical conduct of business in the modern world.
Modern institutions have allowed for corporate activity on an unprecedented scale,
impossible in the era before the development of the modern corporation. I shall conclude
by examining the advantages and disadvantages of those institutions, the moral
challenges they pose and my opinions as to how religion and spirituality are necessary to
deal with them.


Let me begin with a small sermon and some Qur’anic exegesis.

Behold thy Lord said to the angels: “I will create a vicegerent on earth.” They
said, “Wilt thou place therein one who will make mischief therein and shed
blood? Whilst we do celebrate Thy praises and glorify Thy holy (name)?” He
said: “I know what ye know not” (Qur’an 2:30, trans. Ali).

God is telling the angels he will create mankind and make him His agent on earth. The
angels don’t understand and ask why He would place the earth under the agency of a
being endowed with free will, having the choice whether to obey or disobey God and
therefore with the ability to create bloodshed and misery that the world might become a
terrible place, while the angels are incapable of disobedience to the Lord. In other words,
the angels are as baffled by the “problem of evil” as are some modern philosophers.

God asks the angels to describe the nature of things and they confess that they only know
what God tells them; they have no ability to independently struggle to acquire knowledge
(2:31-32). Adam, however, is able to state the nature of things (2:33). Adam’s free will is
inseparable from his ability to acquire knowledge. Thus, it is essential to God’s plan to
give agency over the earth to a being capable of free choice. Now comes the most
startling part, God tells the angels to bow down to Adam (2:34), indicating that this being
who can choose to obey Him is superior to creatures that obey Him of necessity. Man is
superior; the angels are like any other creature that obeys God’s will by its nature, a
planet swimming in its orbit, a rock rolling down a hill, or the rain falling from the
clouds. Their obedience is without moral merit.

In the company of the angels was Iblis, who refused to bow down (2:34). Iblis is not an
angel, obviously, if he can disobey God’s command. Iblis is another creature with free
will called a jinn in the Qur’an. Jinns are like humans in that they have free will, but
different in that they are not made of clay but of some alien nature described by the
Qur’an as “smokeless fire.”

Another section of the Qur’an adds a significant detail: “God) said: ‘What prevented thee
from bowing down when I commanded thee?’ He said: ‘I am better than he: thou didst
create me from fire and him from clay’” (7:12).

Satan (as Iblis is henceforth called) reveals his nature in this response. If he had instead
said, “I bow down to no one but You,” that would have been a positive response. Instead
he asserts superiority over man on the grounds of his material nature, a petty arrogance
reminiscent of the racist who professes superiority because of the color of his skin. Men
and jinns are volitional beings that God shall judge on their morality, not on their material
nature. Thus, God curses Satan (7:13-15), yet when Satan asks for respite, the all-
merciful God immediately grants it (7:15).


Satan is neither grateful for this mercy nor repentant of his arrogance. He threatens to use
the time God has granted him to lead men astray (15:62).

God said: “Go thy way; if any of them follow thee verily Hell will be the
recompense of you (all) an ample recompense.
“Lead to destruction those whom thou canst among them with thy (seductive)
voice; make assaults on them with thy cavalry and thy infantry; mutually share
with them wealth and children; and make promises to them. But Satan promises
them nothing but deceit.
“As for My servants no authority shalt thou have over them.” Enough is thy Lord
for a Disposer of affairs (15:63-65).

In Islam, the devil is “the Whisperer.” He can put suggestions into our hearts, but if we
choose to follow him, that choice is ours, not his. Therefore, we have full responsibility
for our actions.

Adam and his wife are invited to dwell “in the garden and eat of the bountiful things
therein” as they will but warned not to approach the tree, not of knowledge, but of “harm
and transgression” (2:35). When Adam and Eve listen to Satan and eat from the tree, they
are evicted from the Garden (2:36, 7:21-22). The Qur’an does not dump the blame on on
the woman. Adam and Eve share the responsibility. Both ask for mercy (7:23) and God
turns in mercy towards them (7:37-38).

The biggest difference between Islam and the Judeo-Christian tradition is that, in Islam,
there is no original sin. All this is preamble, a microcosm of our life on earth, but made
simple. There is only one rule for Adam and Eve, stay away from the tree of harm and
transgression. While our lives are more complicated, the principle is the same. The rules
that govern our lives are also designed to keep us from harm and transgression.1


We see from the Qur’anic narration of the story of Adam that life on earth is not a
punishment, but a trial. Man is not a being born into a state of sin punished by
consignment to a world in which toil is misery, but a rational, volitional being placed on a
stage in which he has blessed with the opportunity to demonstrate his moral worth. 2
Reward or punishment, whichever he may deserve, will come as the consequence of his
own choices, not as an inherited punishment for the acts of his ancestors. “Every soul
shall have a taste of death: and We test you by evil and by good by way of trial: to Us
must ye return” (21:35)

This is the Qur’an’s answer to the problem of evil: evil, like good, in this life is a test.
God knows what is the best way to test us, whether we will be faithful, not to abandon
hope in bad times and not to become arrogant in the good times, but to remain true at all


Now when trouble touches man he cries to Us; but when We bestow a favor upon
him as from Ourselves he says “This has been given to me because of a certain
knowledge (I have)!” Nay but this is but a trial but most of them understand not

When we suffer in this world we say “Why is God punishing us?” and when something
good happens we think we are so great, but God says we are wrong on both counts, the
bad and the good are both tests.

The call to prayer is a call to success, falâh. Falâh means success both in this life and the
next. In their prayers of supplication, Muslims routinely pray for “the good in this life
and the next.” The Qur’an never argues against self-interest, rather it takes it for granted
that man seeks his self-interest and seeks to explain to man what is in his true self-

There are men who say: “Our Lord! give us (thy bounties) in this world!” but
they will have no portion in the hereafter.
And there are men who say: “Our Lord! give us good in this world and good in
the Hereafter and defend us from the torment on the fire!”
To these will be allotted what they have earned and God is quick in account

The merit of a man is not measured by the amount of his wealth (nor his poverty, for that
matter) but by how he acquired whatever wealth he has and what he shall do with it now
that he has it.

Property is a necessity for man to fulfill his calling as khalîfah. The freedom of action by
which we are tested is hampered by the absence of property. You are not as free, in the
sense that you are not as empowered, if you have no property. Property is an extension of
the self that leverages our freedom of choice and therefore provides the best opportunity
for testing our morality.

Historically, Islam has been favorable to the merchant, beginning with the Prophet
Muhammad (peace be upon him), who was a merchant, and his wife Khadijah (may God
be pleased with her) who was also a merchant. Indeed, she was the wealthier of the two,
and he worked for her before their marriage. It was, in fact, because she was so impressed
by his strong business ethics that she proposed marriage to him, fifteen years before he
received the call to prophethood. Although she was fifteen years his senior he admired
her character so much that he accepted her proposal.3

Property is strongly protected in Islamic law. The punishment for theft is very severe. In
his farewell pilgrimage the Prophet said to the assembled pilgrims: “O Men, your lives
and your property shall be inviolate until you meet your Lord. The safety of your lives
and of your property shall be as inviolate as this holy day and holy month” (Haykal,
1976, p. 486).


O Men. Harken well to my words. Learn that every Muslim is a brother to every
Muslim and that Muslims constitute one brotherhood. Nothing shall be legitimate
to a Muslim which belongs to a fellow Muslim unless it was given freely and
willingly. Do not therefore, do injustice to your own selves (Haykal 1976, p.


The Qur’an holds contracts in very high regard. It has already been noted at this
conference (Khawaja 2004) that the Qur’an even uses contract as a metaphor for our
relationship with God, referring to the great bargain man obtains in entering a contract
with God which will render him a huge profit.4

The Qur’an contains some details of contract law. This is further testimony to the
importance of contracts as, contrary to what you may have heard, the Qur’an contains
few laws and little legal detail. The legal structure of Islamic law comes from the legal
precedents of the early community and from the jurisprudential analyses of the legal
scholars through a process called ijtihâd. This word comes from the same root as jihâd,
which means “struggle” in general, and ijtihâd means the struggle of the individual
scholar to understand the law.

In Islam, the law is analogous to the “natural law” of the physical sciences, something to
be discovered rather than invented.5 The natural law is whatever it is, whatever God has
ordained it to be, and the physicists’ theories are their articulation of their understanding
of that law. So in Islam, the word sharî`ah, which is usually translated as Islamic law,
literally means “the path to the well.” Like the path to the well, like the natural laws of
physics, Islamic law is whatever it is, and like the map to the path to the well, like the
theories of the physicists, the struggle of the scholars to understand, is the jurisprudence
of Islam, called the fiqh. The books of jurisprudence written by these scholars contain
their conclusions as to God wants us to do, after looking at the Qur’an, the practice of the
Prophet, after considering what is equitable, what is in the public interest, etc.

The overall view of human relations in Islam is contractual. Within the broad scope of the
law as to what is permitted and what is prohibited, all else is determined by contract
among ourselves, by mutual agreement.

The adoption of democratic formalisms that has been properly urged upon Muslims will
not relieve the Muslim world of its economic stagnation if it is not accompanied by a
return of the civil society institutions that were prevalent in the Muslim world during its
glory era from the seventh to the sixteenth centuries when Islam was the preeminent
civilization from Spain to India. In that era economic infrastructure was generally built
not by the state, but by civil society institutions like the awqâf (charitable endowments).
The economic recovery of the Muslim world will require free markets, just government,
and a well-defined and protected system of private property.


Today we speak of “globalism” but in the Muslim era trade was international and a
Muslim could travel from one end of the Muslim world to the other without a passport. A
non-Muslim only needed a letter of introduction to travel freely throughout that period.

Of course, Islamic society, despite its wonderful dynamism, was not utopia. The Muslims
had to contend with the same problems we have to contend with of overweening
government. Government would perpetually exceed its allotted boundaries. The scholars
were often the brakes on that government. The scholars in those days were completely
independent of the government. The founders of all four Sunni6 schools of Islam were
persecuted for refusing to be co-opted by the government. Ibn Malik rejected the Caliph’s
proposal to use his political power to give Malik’s magnum opus a privileged status
among the books of law. Abu Hanifa was imprisoned for refusing to accept a judgeship.
Ibn Hanbal was tortured for refusing to endorse the state-sanctioned doctrine.

Early on the Muslim governments began to insist that the scholars were no longer
qualified to engage in this process of ijtihâd, independent critical thinking, and should
simply blindly imitate the decisions of previous scholars. This process of blind imitation
was called taqlîd, and gradually, after many centuries, as later generations of scholars
without the intellect or the courage of the early schools caved in to the pressure, accepted
government positions, and unsurprisingly rubber-stamped the government’s decisions. It
is to this that I attribute the Muslim civilizations gradual decline over the centuries to its
present unenviable state.

Despite these problems, Muslim society remained remarkably vibrant for a long time
because of its liberality. For example, in the matter of religious tolerance, the Qur’an
explicitly commands that religious minorities, particularly the Jews and Christians (5:43),
have their own legal systems under Islamic law. For example, Christians, who needed
wine in their sacraments, were exempt from the absolute prohibition on wine applicable
to all Muslims.

Thus, there was a pluralism hardwired into the system in the concept of the protected
minority, the dhimmi. The dhimmi was not really an equal citizen in the sense that all
American citizens are equal. Yet too much should not be made of this. Non-Muslims
sometimes reached ranks equivalent to prime minister. While a non-Muslim could not
become Caliph, naturalized Americans cannot become President. A dhimmi paid a special
tax in lieu of military service, but that tax was much smaller than the tax Lincoln imposed
on persons seeking exemption from service in the Civil War.

Most important to a minority living in a given society is to be free to practice their
religion, to earn their living, and to relate to their families unimpeded. For the most part
of Muslim history, this is what religious minorities were allowed to do. In the West,
Spain is often put forth as a romanticized example of a glorious period of tolerance, and
certainly it was compared to what was happening elsewhere in Europe, but it was similar
to what was the practice throughout the Muslim world. When the Reconquista occurred
and the Jews and Muslims were driven out of Spain, the Jews as well as the Muslims
sought refuge in the Muslim world.


The limits to contract under Islamic law, it appears to me, are: that contracts must be
voluntary; they must be entered into by informed consent; they must be among real
persons; they must not impose costs on persons who have not entered the contract; and no
agreement to commit an unconscionable act is binding.

How does commerce today differ from the heyday of Muslim civilization? In most
respects they are remarkably similar. The hawala, a kind of bank permitting remote
payments, was the beginning of modern credit. Instead of carrying heavy and easily
stolen gold, Medieval Muslims used paper checks to make payments in international
trade. When the Crusaders invaded the Muslim lands they quickly learned of Muslim
innovations in credit transfer and the Knights Templar emulated many of the ideas,
introducing them into Europe.

There are two issues that stand out as differences: ribâ (usually translated as usury) and
the status of fictitious persons (corporations). Most Muslim scholars throughout history
have interpreted any form of interest on a loan as ribâ. I disagree with this interpretation.
I have argued elsewhere that ribâ means any unconscionable overcharging (whether on
an interest rate or a spot price), and charging a market rate of interest does not constitute
ribâ. (See Ahmad 1996 for a full discussion.)

The idea of a corporation as a fictitious legal person was not part of medieval Muslim
law. They did have various kinds of organizations. Business partnerships, for example,
existed and were similar to the limited partnerships in American law. There were also
trusts of various kinds, for example a trust for the property of an orphan. I have already
mentioned the charitable trusts that played an important part in the development of
hospitals, clinics, roads, irrigation systems, and schools. People would write a charter for
an endowment, donate assets dedicated for a specific purpose, and appoint its initial
board. These organizations were perpetual, but they were considered to be property, not
legal persons. Orphans’ trust funds were the property of the orphans and endowments
were the property of the people who set them up. It is people who have freedom of
choice; it is people who are the khalifah; it is people who are held responsible for their
actions. Corporations have no consciences.

The problems of corporations are well dealt with by public choice theory. The bigger an
organization becomes, the more divorced the interest of the various stakeholders become
from one another. In a one-man operation, labor, management, and the owner is the same
person. It is simply impossible for the worker to slack off on management or for
management to cheat the owner, or for the owner to be oblivious to the working
conditions. In a small family enterprise such things become theoretically possible, but
remain unlikely because the common interests of the family are strong, the individuals
engaged in the enterprise are too intimate with one another to allow things to go beyond
certain limits. When you get to organizations the size of Enron the problem becomes

enormous, and thus we have developed complex rule of business ethics, rules of
governance and accounting in an effort to develop transparency and accountability. Such
rules did not develop in the Muslim world because the state-imposed protections given to
fictitious corporations were not there. The fact that some individual or individuals must
retain personal responsibility for the actions of an organization put a natural limit on the
size of commercial enterprises.

Thus if modern state-protected forms of corporate organization (fictitious persons) are to
exist in the Muslim world, then safeguards that attempt to deal (however imperfectly)
with the problems such institutions generate will have to be developed. The existence of
corporations certainly leverages the productivity of commerce, the problems of
corporations (limited liability, for example), which after all are artificial creations of the
state, must be addressed. For example, limited liability is a privilege given to
corporations that seems to violate the spirit of individual responsibility that we associate
with true free enterprise.

When the colonial powers conquered the Muslim world they dismantled the civil society
institutions and turned their functions over to the state. The state was the only corporate
entity they permitted in the Muslim world, yet, because of its monopoly on the use of
force, the state is the corporation most susceptible to the abuses engendered by the public
choice dilemma. Add to this the view that the cultural bias that sees a corporation as the
private property of its founder or CO, and you can understand why the Muslim world is
plagued with dictators. We must find a way to overcome that cultural attitude but it is
naive in the extreme to think it can be overcome by turning on some light switch. Ellen
Klein’s (2004) observation about teaching democracy in Bosnia can be applied to
teaching good corporate governance in the Muslim world in general: “It’s a messy and
painful process like any birth.” As recent events have demonstrated, the idea that one can
march an army into a country and, within months, set up a healthy democracy is a fantasy
divorced from the real world.

I think the most effective way to deal with these issues is to “plant seeds” among the
intellectuals of the society to explain the need for these institutional issues to be
addressed and to tie them to the principles and precedents of that culture and especially
the Muslim religion, to let them evolve a spontaneous order that accommodates these
ideas and accept that fact that it may take a while and there may be many wrong turns and
failed experiments en route. It took Britain a long time to establish a liberal democracy
and even building on the shoulders of the British, America had to go through the Articles
of Confederation before writing the Constitution, and then have a civil war before giving
the vote to black men, decades more before giving the vote to women, and more decades
before giving it to 18 year olds. (Iran is the only country that gives the vote to 16 year



Is there a role for religion and spirituality in a global and postmodern business world?
When Muhammad was a young man, before he had received the call to Prophethood, he
co-founded a group called the “League of Ethical Businessmen,” intended to encourage
the merchants of Mecca to be honest in their dealings and to share with the poor a part of
their wealth. His efforts there may have added to his personal reputation for honesty and
generosity, but whatever influence the league may have had on others, it pales against the
influence Muhammad has had on history as a prophet. In his book, The One Hundred
Most Influential Men in History
, Michael Hart rated Muhammad at the top of the list, not
for founding the League of Ethical Businessmen, but for establishing a religion that that
to one degree or another impacts the lives of 1.3 billion people in many ways, including
their business ethics.

If there were no role for religion and spirituality in the modern world, it would be
because other forces have squeezed them out, either assuming their role or making
fulfillment of their purpose impossible. Have institutional safeguards and state regulation
made ethical self-regulation obsolete? Hardly. Enron is only the tip of an ugly iceberg.

Have the scale and competitiveness of global markets today made it impossible for
religion to fulfill its role in inspiring good business ethics? On the contrary, unless people
have faith in markets they will either collapse or be made impossible by popular pressure
and/or political interference. Consider the hope that market interventionists have placed
in environmental issues. The same people who once openly pushed socialism have in the
face of that ideology’s undeniable failure sought to bring it back by calling it
environmental protection. These people are called “watermelons,” green on the outside
and red on the inside. Human actors who voluntarily embrace their appointment as God’s
stewards on earth will avoid the actions that make them vulnerable to such predators.

In the first few hundred years of Islamic history, Muslim legal scholars developed a
sophisticated and detailed commercial law in which all agreements are by voluntary,
informed consent within the limits of the law. The general limits put on commercial
activity by the Qur’an are of four kinds: the prohibition of theft, of fraud, of taking unfair
advantage, and of engaging in a generally prohibited activity. Thus, as extramarital sex is
prohibited, so is prostitution, which is only a commercial example of a prohibited act.
The act is prohibited because of its social and personal consequences, not because it is

Theft, being an example of the initiation of coercion is not a free market activity.
Similarly, few would argue that fraud is admissible in a free market. An agreement made
without the informed consent of both parties is no agreement at all, and the attempt of
one party to impose it on another is just a variation on theft.

While we may call on the state to enforce violations of these standards, the fact is that a
society in which we had to call on the state in every case would be a dysfunctional
society. Only where the strength of moral imperatives make the need for coercive
enforcement the exception rather than the rule can economy be expected to flourish. If we
had to sue to enforce every clause of every contract we entered into, commerce would

grind to a halt. This self-enforcement is the hallmark of the religious society, by which I
mean a society of religious people, those people for whom the enforcer is not Hobbes’
Leviathan but Divinity.

The prohibition on unfair advantage is more controversial. What constitutes an unfair
advantage? A contract between A and B, the enforcement of which you might favor if
you were A, but would oppose if you were B, would be a contract that fails the fairness
test. A boatman who sees a man drowning offers him a ride to the shore not for his usual
fare of $2 but in exchange for all his worldly goods is clearly at an unfair advantage.
Because it is more difficult to obtain a general consensus on this, it is even less desirable
to rely on litigation here. Legal determination of fairness is possible, but the efficiency of
the market will be severely impaired by frequent resorts to the courts to make such
determinations. A willingness on the part of the people not impose contracts on others
that they would deem unfair if imposed upon them is a spiritual issue best enforced by a
sound conscience.

Because the above issue is controversial among market liberals, I want to make the point
very clear. I am not claiming that the moral duty to help others is enforceable by the state.
In any case that is a different issue from the question of the enforceability of an unfair
contract. Denying the enforcement of a contract between a drowning man and the
boatman who demands all the wealth of Fortune’s victim is not a violation of market
principles, but rather recognition that there is no market in the hypothetical example.
Markets regulate prices better than the state can, but only where they exist, that is, where
there is competition. Had six boatmen been present near the drowning man, the price they
would have asked would have been reasonable. The boatman in my example can be
unreasonable only because of the absence of a market. Thus, we have identified at least
three cases where overcharging is possible: by coercion, by fraud, and by the absence of a

The category of generally prohibited activities is the most controversial. Conservatives
may have no problem with general principle, but may disagree as to which activity
should be prohibited, depending on their own choice of religion or moral code. Most
Christians would seek to prohibit polygyny (marriage to multiple wives) but allow liquor
sales, while most Muslims would hold the opposite view. Libertarians would oppose state
intervention prohibiting any such activity, leaving it to individual conscience. This is the
area where religion and spirituality must fill the gap that market regulation in a free
society cannot fill. In addition to avoiding force, fraud, and unfairness, the religious
businessman will not engage in pandering. If market research shows that the four most
profitable enterprises in a potential market are, in order of decreasing profitability:
recreational drugs, gambling, prostitution, and health-care, he will choose health-care. He
will not make the excuse that since his customer has voluntarily chosen a course harmful
to the self, his pandering has no moral significance.