The Economic System 45
Governance
In addition to the above, there are other individual and collective behav-
ioral rules and norms that strengthen the governance structure of the state
and fi rms, including transparency, accountability, voice, and representation.
Nevertheless, the three basic institutions—property rights, contracts, and
trust—give a fl avor of the strength of governance in Islam. The rule of Law
governs the behavior of state rulers no less stringently than those of indi-
viduals. As Anderson and Coulson (1958) observe: “Islam is the direct rule
of God. His Law, the Shari’ah, is the sole criterion of behavior,” and “the
authority of the temporal ruler is both derived and defi ned by this law.”
Under the rule of Law, “the ruler is by no means a free agent in the determi-
nation of the public interest,” and the decisions that the ruler makes “must
not be arbitrary, but rather the result of conscientious reasoning on the basis
of the general principles of the Shari’ah as enunciated in the authoritative
texts.” These legal experts also assert that, based on their consideration
of Islamic legal texts, the command of observing contracts and covenants
faithfully “apply to the ruler acting in a public capacity” just as severely
as to individuals. “Indeed, when considerations of expediency and public
interests are taken into account, they apply even with greater force to the
actions of the ruler.” Therefore, a breach of faith on the part of a ruler is
more heinous in its nature and serious in its consequence than that of indi-
viduals. Importantly, they observe:
... just as the ruler has no special prerogative or exemptions as
regards the substantive law, so he has none regarding the applica-
tion of the law through the courts. Ideally, the jurisdiction of the
Qa–di (the judge), the only person qualifi ed to apply the Shari’ah,
is comprehensive and exclusive. The principle that no one can be
judge in his own cause is fi rmly established in the legal texts, and
when personally involved, the ruler should submit to the jurisdic-
tion of the ordinary Qa–di’s courts.... [T]he ruler that breaks faith
cannot shelter behind any claim of sovereignty from the dictates of
the law which brooks no such plea.
The same principles of governance under which a ruler or a state should
function apply also to fi rms. Iqbal and Mirakhor (2005) argue that within
the Islamic framework a fi rm can be viewed as a “nexus of contracts” whose
objective is to minimize transaction costs and maximize profi ts and returns
to investors subject to constraints that these objectives do not violate the
property rights of any party, whether it interacts with the fi rm directly or
indirectly. In pursuit of these goals, the fi rm honors all implicit or explicit
contractual obligations. As can be discerned from the discussions on con-
tracts and trust, it is incumbent on individuals to preserve the sanctity of
implicit contractual obligations no less than those of explicit contracts. By
the same token, fi rms have to preserve the sanctity of implicit and explicit