Islamic Banking and Finance: Factors of Production - Kickoffall Info Hub

Kickoffall Info Hub

Read Learn Grow

Tuesday, July 16, 2019

Islamic Banking and Finance: Factors of Production

‘Factors of production’ is an economic term which describes the inputs that are used to produce goods or services to make an economic benefit.
Understanding the differences between the views of capitalist and Islamic financial systems regarding factors of production will help to understand the basic differences between the two systems.

Factors of production in Capitalist View
According to Capitalistic economics, these factors of production are four:
1. Capital: Generally Capital is a term for financial assets but as an economic term 'Capital' refers to "the produced means of production" which means a commodity which has already undergone a process of human production for being used as a means of production such as machinery, tools, etc.  Even though money is used for purchasing capital goods; money is not considered a factor of production as the money itself has no direct role in the production process.
The capital may be either purchased using equity or debt; hence, in the capitalist system, the compensation of the capital factor is either ‘interest’ for loans or ‘profit’ for equity funds.  
2. Labour: Labour is the human input into the production process. The compensation of the labor factor is ‘wage’.
3. Land: the land is defined as ‘‘natural resources’.  As a factor of production, Land has a broad definition with various forms such as agricultural land, commercial real estate, and the resources available in the land, natural resources, such as oil and gold and cultivation in the land. The compensation of the land factor is ‘rent’.
4. Entrepreneurship:  The entrepreneur brings together the other three factors, exploits them and bears the risk of profit and loss in production. The compensation of the entrepreneurship factor is ‘profit or losses.

The Islamic View
1. Capital: In Islamic economics, the 'Capital' cannot be purchased with an interest-based loan, instead, whoever invest money in the business for the purpose of facilitating the act of production are considered as the partners of the business. So, the compensation for the capital factor in Islam is ‘profit or loss’; not interest. Islamic finance doesn’t consider ‘entrepreneurship’ as a separate factor of production as everyone involved in the business have to bear the risk, hence, both capital and entrepreneurship have been merged into a single factor as the 'Entrepreneurial Factor of Production' (EFP).
2. Land: In Islamic view also, the compensation of the land factor is ‘rent’.
3. Labor: the compensation of the land factor is ‘wage’.
As both land and labour are not dependent upon the profitability of the production process and their compensations are fixed; both factors have been merged under ‘Hired Factors of Production’ (HFP).

No comments:

Post a Comment