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What is Capital?
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Importance of Capital
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Capital Formation
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Reward for Capital
What is Capital?:
Capital is the
third factor of production. It is that wealth which assists in the
production of further wealth. It is “produced means of production”
or in other words “man-made instrument of production”. It includes
all those goods which are produced not for consumption but for use
in future production. Machines, tools and instruments, transport
equipment’s, irrigation projects like canals and dams, stocks of
raw materials, cash invested in business, etc. are some of the
examples of capital. Thus capital is the wealth which man acquires
by his own labour and then uses it for producing more wealth.
The above mentioned
meaning of capital distinguish it both from land and labour
because both land and labour are not produced factors but are
gifted by nature. Therefore, land and labour are called primary or
original factors of production whereas capital is man-made or
produced factor of production.
Capital is
generally classified into fixed capital and working capital. Fixed
capital comprises durable-use produce goods which are used in
production again and again till they wear out. Plant and
machinery, tools and instruments, tractors and trucks, etc. are
examples of fixed capital. Working capital comprises single-use
producer goods like raw materials which are used up on a single
act of use.
Fixed capital does
not mean fixed in location. It is called so because money spent
upon durable-use goods like plant and machinery becomes ‘fixed’
for a long period whereas money spent on raw materials is released
as soon as goods manufactured with these raw materials are sold in
the market.
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II- Importance of Capital :
Capital plays a
vital role in production as production without capital would be
very hard to achieve. If man does not use tools and machines in
farming, mining and manufacturing sectors and works with his own
hands, productivity would be very low. So man has been using some
sort of tools and equipment’s to assist him in his work of
production. Even primitive man made use of bow and arrow for
hunting and fishing-net for catching fish. With the growth of
science and technology, man has invented heavy and complex
machines to assist him in every field of production such as
agriculture, mining, manufacturing, transportation, communication,
etc. In the modern age production without aid of capital can
hardly be achieved. Economic development of the countries like
USA, Japan, Germany, France, UK, is largely due to extensive use
of capital.
Capital occupies a
pivotal position in the process of economic development as well as
in creation of employment opportunities. Besides escalating
production, employment is also enhanced when capital goods like
plant and machinery are produced and when these goods are used for
further production.
Thus capital is
indeed like blood in human body which runs into the veins of
industry and keeps it going. Because of vital role of capital in
production, Islam has given much importance to capital. Al-Qur’an,
the revealed book of Islam, in the following verses talks of the
use of cattle wealth as capital goods of production :
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And the cattle hath He created, whence ye have warm
clothing and uses, and whereof ye eat…….. And they bear your loads
for you unto a land ye could not reach save with great trouble to
yourselves……… And horses and mules and asses that ye may ride
them……….
-(16:5-8)
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And Lo! in the cattle there is a lesson for you. We
give you to drink of that which is in their bellies…….. pure milk
palatable to the drinkers.
-(16:66)
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And Allah hath given you in your houses an abode,
and hath given (also), of the hides of cattle, tent-houses which
ye find light (to carry) on the day of migration and on the day of
pitching camp; and of their wool and their fur and their heir,
caparison and comfort for a while.
-(16:80)
Thus in the above
mentioned verses, the Holy Qur’an has referred to various uses of
cattle and horses as factors of production such as in
transportation, in production of milk, wool, fur, hides for
tent-houses, and so on.
Umar a great
companion of the Prophet and second right guided caliph of Islam
used to impress upon some of the recipients of state allowances
and stipends that they should purchase goats or other cattle so
that they could increase their capital and leave after them for
their children something to fall back upon.
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III- Capital Formation:
Capital formation means increasing the stock of real capital in
the country. It involves production of more capital goods,
encouraging savings and investments, etc. In modern economics,
capital formation is encouraged through many fiscal and financial
measures such as rebates and exemptions from taxes, high dividends
on investments, attractive rates of interest and above all
protection of capital. Islam believes in all such measures except
interest on investments as interest is prohibited. Islam in fact,
took measures for capital formation in Islamic state much earlier
such as condemnation of hoarding of wealth, tax exemption on
productive goods and avoidance of extravagant spending. Some of
the steps taken by Islam in ensuring capital formation are that :
1. Zakat has been
imposed on hoarded wealth in the form of gold and silver, bank
deposits, cash, etc. If this wealth is put into productive
channels, its Zakat would be paid out of its income and thus the
wealth would grow despite Zakat. But if the wealth is kept hoarded
and idle, the regular payment of Zakat out of it every year would
reduce it and ultimately diminish it. That is why Prophet Muhammad
asked the guardian of the wealth of orphans to put their wealth in
business that Zakat should not consume it. Thus Zakat forces a
hoarder of wealth to bring it out of idle channels and to invest
it in production. This helps in capital formation.
2.
Wealth employed in production has been exempted
from Zakat. For example agricultural land is exempt from Zakat;
cattle employed in farming are exempt; horses used for riding,
transport and jihad are exempt; plant and machinery used in
factories and farms for production of goods are exempt; tools and
instruments used by a professional or an artisan are exempt, and
so on. Thus exemption of capital goods from Zakat Tax is a great
fiscal measure which helps capital formation in an Islamic
society. And don’t forget that this measure was taken by Islam
some fourteen centuries ago when there was no concept of fiscal
incentives for capital formation.
3.
Those who dispose of their capital assets like
house or land have been enjoined upon by the Prophet (PBUH) to
re-invest the cash in the purchase of some other land or house.
The Prophet is reported to have said: “God may not bless the price
of that land and that house which is not again re-invested in land
or a house”.
4.
Squandering of wealth on extravagant spending has
been strictly prohibited. Spending on luxuries is strongly
forbidden and ostentatious living has been discouraged. The Qur’an
says:
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Eat and drink, but be not prodigal. Lo! He
(Allah) loveth not the prodigals.
-(7:31)
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……….. and squander not (thy wealth) in
wantonness. Lo! the squanderers were ever brothers of the
devil……..
-(17:26-27)
Since moderation in
expenditure and simple living is the golden rule of Islam, so
wastage of wealth stops and wealth starts flowing into productive
channels. This also helps in capital formation.
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IV- Reward for Capital:
We have already
studied that land receives its reward in the form of rent and
labour receives reward in the form of wages. Third factor of
production i.e. capital receives its reward in capitalist
economies in the form of interest. But Islam has prohibited
interest on capital. It has, however, tied the concept of reward
on capital with the responsibility to risk loss.
In Islamic economy,
there is no doubt that savings are encouraged but those who save
can neither keep their savings in a bank or financial institution
to earn interest nor lend it to a business exterprise on the basis
of interest. The saver can either invest his capital as a sole
proprietor and do the business, or he can invest in a Mudarabah or
a Musharika. In Mudarabah, one person provides capital, the other
labour and both share in profit in stipulated proportions, but in
case the business results in loss the whole of loss in borne by
the capitalist. In Musharika or Shirkat, all the partners put up
their capital and do the business in partnership sharing profits
and losses in agreed proportions.
However, when
capital is not in the shape of money, rather it is in the shape of
building, factory, plant or machinery, it can be leased on the
basis of fixed rent.
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