Qirad

The qirad was one of the basic financial instruments of the medieval Islamic world. It was an arrangement between one or more investors and an agent where the investors entrusted capital to an agent who then traded with it in hopes of making profit. Both parties then received a previously settled portion of the profit, though the agent was not liable for any losses.

Origins and history

Although the qirad is never mentioned the Qur'an, many Islamic traditions attribute its origin to the Prophet Muhammad and his companions. These traditions describe Muhammad and his companions either using the qirad or endorsing the institution [ Avram Udovitch, "Partnership and Profit in Medieval Islam", (Princeton University Press, 1970) p. 170 ] It is likely that the qirad originated in the Arabian peninsula with the pre-Islamic Arabian caravan trade and later became one of the most widespread tools of commercial activity. Many will notice that the qirad is almost identical to the institution of the commenda later used in western Europe, though whether the qirad transformed into the commenda, or the two institutions evolved independently cannot be stated with certainty. [ Robert H. Hillman, "Limited Liability in Historical Perspective", (Washington and Lee Law Review, Spring 1997)]

Legal technicalities

Though there existed several different major schools of Islamic law, the basic legalities of the qirad were rather uniform throughout the schools.

Dinars and dirhams, as well as gold, silver, and copper coins in circulation were allowed to be invested. However, goods such as barley were restricted from the qirad because the possible fluctuations in their value in the free market. [ Udovitch op cit pp. 177-181]

The agent was allowed to take the investment and split up his investments in any way as well as invest in anything he wanted. [ Malik ibn Anas, al-Muwatta', 280-282 (Kegan Paul International, 1989) ] In this way, many of the third parties involved in the qirad were actually unaware of their involvement which allowed the agent to trade more freely and without liability. [ Hillman op cit ]

Although the fractional split in profit was agreed on beforehand, the investor could not stipulate a specific sum of the money from the profit, or that a certain profit be made. In this way, the qirad remained a complete risk on the investor and did not infringe on the free market economy. [ Udovitch op cit, pp. 190-193 ] , [ Malik op cit ]

Notes