3(d) Capital as a Factor of Production

The Islamic economic system must be free of interest. But capital is not costless in Islam despite the fact that interest is prohibited. The cost of capital can be expressed in terms of opportunity cost in an Islamic framework. Therefore, the rate of return in a particular economic enterprise can be used as one of the allocative devices for capital. Islam does recognize the share of capital – a share which is variable. Thus, it is because of the presence of the element of profit that capital can grow even in the interest-free economy of Islam. Various injunctions of the Qur’an go to prove that Islam can bring about a compromise between two opposites of capital creation: reduced current consumption and increased future consumption, thereby allowing capital to play its true role in the productive process as Islamic economy is essentially equity-based rather than loan-based. The ideal alternative to interest is profit and loss sharing. In Islam profit is distributed according to the condition agreed upon but the loss is to be borne by the financier.