326 AN INTRODUCTION TO ISLAMIC FINANCE
The second issue is how to draw a line of distinction between a stake-
holder and a non - stakeholder. The existence of a stakeholder entity and its
rights is easy to recognize, but questions still remain as to who really quali-
fi es as an actual stakeholder. The third issue deals with the stakeholders’
right to infl uence management decision - making or to participate in the gov-
ernance of the fi rm. Questions arise as to why stakeholders should be given
such a right and why managers should have a fi duciary duty to protect the
rights of non - investor or non - owner stakeholders if such stakeholders have
protected their rights, through bargaining, within the terms of the contracts.
While there appears to be a consensus on identifying the rights of non -
owner stakeholders and an implicit agreement to protect these rights, there
is still a debate on why such stakeholders should participate in the control
and management processes of a fi rm. So far, discussions of the stakeholder
model have not been able to articulate a convincing argument on either
theoretical, moral, or legal grounds to recognize an active role for the stake-
holders in the management and control of a fi rm.
In considering the Islamic view of the role of stakeholders, it is noted
that two fundamental concepts of the Islamic economic system pertaining
to property rights and contracts govern the economic and social behavior
of individuals, society and state. These two principles also dictate the objec-
tive function of the economic agents, including legal entities such as fi rms.
A fi rm in the Islamic economic system can be viewed as a nexus of contracts
whose objective is to minimize transaction costs with a view to maximizing
profi ts and returns to investors, subject to the condition 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 its obli-
gations on explicit and implicit contracts without impinging on the social
order. This defi nition incorporates the stakeholders’ role in its view of the
fi rm and supports recognition and protection of their rights.
Property Rights and Governance
The design of the governance system in Islam can be best understood in light
of the principles governing the rights of the individual, society, and state; the
laws governing property ownership; and the framework of contracts. Islam’s
recognition and protection of rights is not limited to human beings only, but
encompasses all forms of life as well as the environment. Each element of cre-
ation has been endowed with certain rights and each is obligated to respect
and honor the rights of others. These rights are bundled with the responsi-
bilities for which humans are held accountable.^6 The Shari’ah offers a com-
prehensive framework to identify, recognize, respect and protect the rights
of every individual, community, society and the state. Islamic scholars and
jurists have defi ned and codifi ed detailed principles identifying these rights.^7
The term “right” (haq) denotes something that can be justly claimed, or
the interests and claims that people may have been granted by the Shari’ah.
The majority of Shari’ah scholars and jurists hold that similar to a physical