Company Law

The Company and Islamic Law

Islamic law makes no provision for the incorporation of a business entity. There is no concept of a company possessing legal personality[1]. The first joint stock company in Islamic history was created in 1851 in the Ottoman Empire based on European law [2].

National Law

In the twentieth century the national laws in Arab states and in other jurisdictions (most consequentially Malaysia) where Islamic finance and banking have developed and grown have adopted the corporate legal form making it possible for business entities to possess legal personality, to own property and so forth. For example the Special Purpose Vehicle that comprises an element in some structured Islamic financial investments is such an entity; it functions as a trust holding investors’ money.

While national law is obviously highly salient to commerce and finance (even that seeking to comply with Islamic law), UK Islamic Finance Law deals only with those legal forms and structures endemic to Islamic law itself, as distinguished from the national laws of those civil and common law jurisdictions populated by Muslim majorities (and sometimes minorities where allowances are made for Islamic law)  in the contemporary world.

The Centrality of the Partnership

In England conducting business for profit in a partnership has a history of centuries, long predating the Partnership Act of 1890. The partnership in Islamic law is central to the conduct of business for profit in Islamic law as well. The Islamic Law of Partnership deals not only with the contractual creation of partnerships and fiduciary duties but also with partnership termination/dissolution and the liquidation of a partnership’s assets.

Comparison of the Legal Identity of a Company and the Trust

The trust at Islamic law like a company may own and develop property, and the trustee may make investment and planning decisions regarding its assets. However the closest analogy to the modern trust in Islamic law is a charitable institution not a business conducted for profit [3].

Limited Liability

‘Limited liability is widely used in Islamic finance. For example, institutions offering Islamic financial services tend to be shareholder-owned companies with limited liability.’[4] The doctrinal basis for this position, while novel, appears to be uncontroversial in practise, rooted as it is in a 1992 International Islamic Fiqh Academy ruling, which emphasises that for limited liability to be accepted there must be informed consent on the part of  company clientele.[5]

Mejelle, 10th Book, Preface-Definitions and Chapters I-VII, see also Chapter VIII re other partnerships not discussed here.

[1] Timur Kuran, “The Absence of the Corporation in Islamic Law: Origins and Persistence” The American Journal of Comparative Law, Vol. 53, No. 4 (Fall, 2005), 785-834, at 797 – 798, 816-819, 831-834;

[2] Timur Kuran, The Long Divergence: 
How Islamic Law Held Back the Middle East
 (Princeton University Press 2010) at 97-142.

[3] Dinshah Fardunji Mulla, Principles of Mahomedan Law (Thacker and Company, Bombay India, 1907), chapter IX regarding the charitable endowment, or trust (waqf).

[4] Frank E. Vogel and Samuel L. Hayes, III, Islamic Law and Finance (Kluwer Law International, London, 1998), 18

[5] op cit.