T he issue of limited liability under Shariah was first addressed in English by Muhammad Nujatullah Siddiqi in his pioneering book, Partnership and Profit-Sharing in Islamic Law, published by the Islamic Foundation in 1985. He concludes that where a Musharakah or Mudarabah enterprise has expanded through invested capital, the partners are only liable to the extent of their investments. Where, however, the enterprise has expanded through conventional borrowing, then the liability of partners may exceed their initial investment. Clearly much has happened in Islamic finance since 1985. The Fiqh Academy of the OIC ruled that it was legitimate for Muslims to invest in equities, and not simply businesses run on a partnership basis, provided the business activity was consistent with Shariah law, and sectoral and financial screens applied. This is an implicit recognition of the legitimacy of investment in joint stock companies, all of which are organized on the basis of limited liability. Applying financial screens should prevent Muslims getting involved in excessively indebted businesses. Hence their personal assets are less likely to be at risk in any case, as less indebted businesses are unlikely to be forced into bankruptcy. In such circumstances the issue of limited liability is much less likely to arise.
PROFESSOR RODNEY WILSON O n the question, it is my view that limitation of liability is acceptable from a Shariah point of view, provided that it is agreed by the contracting parties at the beginning of the contract by virtue of a private arrangement between the parties. Mohamed Ridza Managing Partner Mohamed Ridza & Co
T he concept of “limited liability” has now become the norm in large-scale enterprises of trade and industry throughout the modern world, including Muslim countries. Although it is a new concept and there is no mention of it in the original sources of Islamic fiqh, the Shariah viewpoint can be sought based on ijtihad or qias. The question of “limited liability” is closely related to the concept of juridical personality of the modern corporate bodies. Based on this concept, a joint-stock company in itself enjoys the separate entity status, as distinguished from sole proprietorships. The basic question is whether the concept of a “juridical person” is acceptable in Shariah or not. Once the concept of “juridical person” is accepted, we will have to accept the concept of “limited liability,” based on the logical result of the former concept. Islamic Finance News
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