Risk-bearing and profit-sharing in an islamic framework:some allocational considerations
The paper demonstrates that the existing institutional framework, based as it is on capitalistic principles, restricts the choice of risk- taking only to the owners of capital. Viewed thus, this framework is quite deficient insofar as efficient allocation of resources is concerned. It is argued that any restructuring of the existing system (based on Islamic principles) must address itself to the provision of universal accessibility to risk income. It is then that an efficient and egalitarian system of risk allocatoin would emerge. Mobilization of resources of any scarce factor, such as the readiness to undertake risks, obviously is an advantage. This ultimately explains why distributional effects are expected from profit-sharing. It is discussed that, within the framework of an enterprise. a sys tem of risk-bearing and profit-sharing by workers can be devised. It is argued that the fundamental basis of profit-sharing implies workers’ foregoing part of their wages. In this paper the workers are shown to forego part of their wages in the sense that, from relatively secure income, they are acquiring a claim to share in the uncertain future profits of the firm. In so doing, they only undertake an additional risk if the participation is arranged for a future time period. This in this case of ex-ante participation (under uncertainty) can they expect the ex-post income advantages. Should they decide to abstain from such an arrangement no uncertainty with respect to wages arises. Finally, the paper emphasized the importance of risk allocation and productive efficiency and showed that profit-dependent wages tend to produce a less inefficient risk allocation than fixed wages.