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The divergence of the economic fortunes of Hindus and Muslims in British India: a comparative institutional analysis

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The divergence of the economic fortunes of Hindus and Muslims in British India: a comparative institutional analysis

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Content THE DIVERGENCE OF THE ECONOMIC FORTUNES
OF HINDUS AND MUSLIMS IN BRITISH INDIA:
A COMPARATIVE INSTITUTIONAL ANALYSIS

by

Anantdeep Singh

____________________________________________________________________

A Dissertation Presented to the
FACULTY OF THE GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
DOCTOR OF PHILOSOPHY
(POLITICAL ECONOMY AND PUBLIC POLICY)

December 2008

Copyright 2008 Anantdeep Singh

ii
Acknowledgements

I am indebted to many for the assistance they have given me in completion of this
dissertation. I would like to acknowledge my gratitude to the Institute for Economic
Research on Civilizations for a granting me the position of Research Assistant from
June of 2006 to June of 2007 which was financed by a grant from the Templeton
Foundation and Metanexus Institute. I would also like to thank my committee
members, Dr. Timur Kuran, Dr. Jeffrey Nugent, and Dr. Daniel Klerman for their
valuable feedback and insights. I would like to thank my parents, Gurdip Singh and
Ravinder Kaur Singh, for seeing the best in me. Finally, I would like to thank my
wonderful brother, Pavit Singh, for all encouragement he has given me and the faith
and confidence he has always placed in me.

iii
Table of Contents

Acknowledgements

ii
List of Tables

iv
List of Figures

vii
Abstract

viii
Chapter 1: An Introduction to the Literature of Indian
Underdevelopment

1
Chapter 2: The Underdevelopment of India’s Muslim Minority

19
Chapter 3: A Comparative Analysis of the Hindu Joint Family and
the Islamic Partnership

43
Chapter 4: The Impact of Hindu and Islamic Inheritance Systems on
Capital Accumulation in Families

64
Chapter 5: The Rise of Hindu Business Families and the Role Played
by Capital and the Managing Agency System

97
Chapter 6: Methodology and Data Analysis

146

Chapter 7: Conclusions

180
Bibliography 189

iv
List of Tables

Table 4.1: Order of Priority of Male Agnatic Heirs in Hanafi Law 72
Table 4.2: Quranic Heirs and Their Respective Shares

75
Table 4.3: Capital Fragmentation in a Muslim Family

85
Table 4.4: Probability of Capital Fragmentation in a Hindu Family
with P
S
= .1

85
Table 4.5: Probability of Capital Fragmentation in a Hindu Family
with P
S
= .5

86
Table 4.6: Probability of Capital Fragmentation in a Hindu Family
with P
S
= .99

86

Table 4.7: Expected values of capital stock by G
3
for both Hindu and
Muslim families.

87
Table 5.1: Number of Functioning Joint Stock Companies

103
Table 5.2: Number of Joint Stock Companies in Operation

109
Table 5.3: List of Business Houses from Various Sources

117
Table 5.4: Background of Pakistan’s 12 Largest Business Houses

119
Table 5.5: Proportion of Industrial Investment in Pakistan circa 1960

120
Table 6.1: Classification of Industries into Categories as per
Investor’s India Yearbook and Bombay Law Reporter

148
Table 6.2a: Frequency Table of Industries in Court Cases from
1900-1947

151
Table 6.2b: Frequency Table of Institutions in Court Cases from
1900-1947
152

v
Table 6.3: Frequency Count of Religion versus Industry

154
Table 6.4: Institutions Used by Hindus and Muslims, 1900-1947

156
Table 6.5: Frequencies of Industry and Institution in High Court
Data

157
Table 6.6a: Corporation Use by Religion and Date

159
Table 6.6b: Hypothesis Test by Confidence Interval for Hindu and
Muslims

159
Table 6.7: Number of Hindus and Muslims in Board of Director
Positions, 1920

160
Table 6.8: Number of Hindus and Muslims in Board of Director
Positions, 1940

161
Table 6.9: Number of Hindus and Muslims in Board of Director
Positions by Year

163
Table 6.10a: ANOVA Comparing Region of Company to Proportion
of Muslim Directors

165

Table 6.10b: Regional Differences in Percentage of Muslim
Directors

165
Table 6.11a: ANOVA Comparing Industry to Proportion of Muslim
Directors

167
Table 6.11b: Least Significant Difference Comparison of Industries’
Percentage of Muslim Directors

168
Table 6.12a: Number of Heterodox and Orthodox Muslims in Board
of Director Positions, 1920

170
Table 6.12b: Number of Heterodox and Orthodox Muslims in Board
of Director Positions by Year

171

vi
Table 6.13: Frequency Counts of Heterodox Muslims versus
Orthodox Muslims in Industry, 1900-1947

172
Table 6.14a: Institutions Used by Heterodox Muslims and Orthodox
Muslims, 1900-1923

174
Table 6.14b: Institutions Used by Heterodox Muslims and Orthodox
Muslims, 1924-1947

175
Table 6.15a: Corporation Use by Religion and Date

177
Table 6.15b: Hypothesis Test by Confidence Interval for Heterodox
and Orthodox Muslims

177

vii
List of Figures

Figure 6.2a

151
Figure 6.2b

153
Figure 6.3

154
Figure 6.4

156
Figure 6.5

157
Figure 6.7 160
Figure 6.8

162
Figure 6.9 163

Figure 6.12a 170

Figure 6.12b 171

Figure 6.13

173
Figure 6.14a 174

Figure 6.14b 176

viii
Abstract

This work suggests that the underdevelopment of South Asia’s Muslims vis-à-vis
Hindus of the region stems from differences in the commercial institutions and
inheritance laws of the two communities. First, the Hindu joint family was a durable
institution that could branch out into long term business ventures. Islamic
partnerships were not durable and could not carry into long term business ventures.
Because of this difference, Hindus enjoyed a competitive advantage in the adoption
of joint stock companies. Second, whereas Hindu inheritance law tended to
accumulate capital over time, Islamic inheritance law tended to fragment capital over
time. This gave Hindus more access to capital vis-à-vis Muslims in India’s capital-
scarce economy. As a consequence, India’s Hindus came to dominate South Asia’s
industry, marginalizing its Muslims.

1
Chapter 1: Introduction to the Literature of Indian
Underdevelopment

The search for the causes of South Asia’s economic underdevelopment has
evoked a variety of explanations since at least the early

nineteenth century. These
explanations can be classified into two broad categories: those which claim that
British imperialism prevented India’s development (often termed as the “exploitation
thesis”, “drain theory” or “classical thesis”), and those that consider conditions
endemic to India, such as the caste system, geography, the indigenous ethical
systems, to have blocked India’s industrialization (Morris 1968, 3). Much of the
material written on this issue focuses on the economic history of the period from
1800 to 1947. This period also saw the ascendancy and the subsequent the decline of
British hegemony over India.
1

The “classical thesis” holds that the British hindered India’s industrial
development during this period (Kumar 1972, 64-65). Exponents of the “classical
thesis” have written on the lopsided trade relationship between Britain and India, and
on the deindustrialization of various Indian industries including silk, salt, and

1
The terms “India” and “South Asia” will be used interchangeably throughout this work unless
otherwise specified.

2
handicrafts.
2
This view remains popular with Indian historians today (Roy 2002,
124-125). Writers who are not sympathetic to the “classical thesis” have written on
causes inherent within India including the caste system, the value system embodied
by Hinduism, and the political conditions in pre-British India. For clarity, the
explanations of India’s underdevelopment will be placed into the following
categories: (i) Classical Thesis; (ii) Marxist Thesis; (iii) Incompatibility of Hinduism
and Capitalism Thesis; (iv) Endemic Conditions of India Thesis and (v) Hindu
Equilibrium Thesis. While an extensive critique of these explanations is beyond the
scope of this chapter, a brief survey of these explanations follows.

The “Classical Thesis” and Its Proponents
The “classical thesis” was first espoused by the historian Alexander Dow in
the early 1770s and it was given a theoretical form in 1783 by Edmund Burke. The
first Indian writer to address this issue was Ram Mohan Roy in 1830. Much of
Roy’s analysis focused on the transfer of capital from India to the West by
Europeans who temporarily resided in India. Roy’s solution was a relatively simple
one: invite the Europeans to settle permanently in the country. Indian periodicals of
the mid nineteenth century such as Sambad Prabhakar and Somprakas also devoted
arguments to British exploitation of the Indian economy. Articles discussed how

2
This chapter classifies arguments of proponents of dependency theory such as Frank (1975) or the
world-systems approach such as Wallerstein (1986) under the category of the “classical thesis”
because such arguments assume Western or British exploitation to be the root cause of Indian
underdevelopment.

3
British policies hindered the development of industry in India. They also claimed
that the wages of European employees were remitted abroad (Roy 1987, 42-44).
Dadabhai Naoroji’s Poverty of India, published in 1876, shifted the focus
from the remittances earned by British officials in India and instead used statistical
analysis to show how India’s export surplus was a source of impoverishment.
Naoroji defined the concept of drain as an export surplus for which there was no
corresponding entry on the debit side in the form of import of merchandise or
securities. Rather than benefiting from an export surplus, India was impoverished
every year throughout the nineteenth century. India’s export surplus was cancelled
out by four sources: (i) payment of interest on foreign borrowings; (ii) service
charges such as freight and banking; (iii) remittances of British nationals living in
India; and (iv) foreign obligations of the government of India (Chaudhuri 1968, 39).
The amount drained out of India from 1835 to 1872 was estimated to be
approximately 0.5 billion English pounds (Roy 1987, 45).
A work in the periodical Samajik Prabhandha written by Bhudev
Mukhopahay in 1892 argued that while British rule in India had positive effects in
areas such as agriculture, the national per capita income failed to increase because
Indian industry suffered from foreign competition and from the drain of wealth to
Britain. Mukhopahay estimated that approximately one-fourth the revenue collected
by British authorities was submitted back to Britain, along with the salaries of some

4
80,000 European soldiers and professionals. The amount of drain varied but for
1892 it was estimated to be Rs. 300 million (Roy 1987, 45).
R.C. Dutt in Economic History of India alleged that the Indian debt from
1862 to 1901 stood at 200 million pounds and remittances were in the amount of 16
million pounds per annum. The salaries of European officers were 10 million
pounds. About one-half of the revenue collected by the British in India, or 22
million pounds, was sent to Britain. Also, the British East India Company sent a
total of 32 million pounds to its shareholders in England from 1793 to 1838 (Roy
1987, 45).
Among the most vociferous critics of British rule in India was Jawaharlal
Nehru. Before the arrival of the British, India was “as advanced industrially,
commercially, and financially as any country” (Nehru [1946] 1991, 284) and well on
its path to industrialization. Nehru viewed British rule as having multiple effects: the
impoverishment of India through looting, the industrialization of Britain via loot
acquired in India, and that India “became progressively ruralized” (Nehru [1946]
1991, 284) as a result of its arrested industrialization. Going further, Nehru asserts
that British wealth and industrialization stemmed directly from the British plunder of
India, especially the rapacious plunder of Bengal: “the Bengal plunder began to
arrive in London, and the effect appears to have been instantaneous, for all
authorities believe that the ‘industrial revolution began with the year 1770…’ ”
(Nehru [1946] 1991, 297-298). Indian manufacturers were crushed via various

5
policies and taxes while Britain slammed shut its doors on finished Indian goods.
The Indian artisan class was led to mass poverty while the economy was transformed
into an agrarian one (Nehru [1946] 1991, 298-302).
The role played by the British in India’s deindustrialization during the
nineteenth century continued to receive attention after India’s independence. Some
studies by Indian scholars have attempted to assess the impact British policies on the
entire Indian subcontinent (Bagchi 1976a; 1976c; 1982; Dutt 1992, 146-150;
Eswaran and Kotwal 1994). Other studies discussed the impact of colonialism on
specific areas or groups within India. Bagchi (1976b) describes in great detail how
British economic policies were conducive to the deindustrialization of Bihar in
northeastern India, while Ram (1972) and Specker (1987) discuss the negative
impact of British economic policies on the economic development of southern India.
Guha (1976) links the growth of the opium industry with the underdevelopment of
Assam.
Scholars who are sympathetic the “classical thesis” have also utilized variants
of dependency theory to assert that India’s incorporation into the global capitalist
economy helped bring about its underdevelopment (Baran 1978, 277-283; Frank
1975, 22; Robinson 1979, 104). Athar Ali (1975, 386-388) asserts that the Mughal,
Ottoman, and Safavid empires suffered simultaneous declines because European
demand for Asian goods led to inflation and constrained the financial capacities of

6
the ruling elites of these empires.
3
Perlin (1983) asserts that capitalism in pre-British
India was well developed and suggests that the British underdeveloped the country.
4

Wallerstein (1986) suggests that before 1750, India was outside the framework of the
European-dominated capitalist world economy. The period 1750-1850 saw both the
incorporation of India into the world capitalist system and its subsequent dependence
upon the Western world.
Recent works continue to assess the impact of the British on India’s
economy. Harnetty (1991) discusses the decline of the Indian handloom industry in
the face of British competition. Shah Mohammed and Williamson (2004) argue that
improvements in transportation technology in the nineteenth century decreased the
price of British products vis-à-vis Indian products and this furthered India’s
deindustrialization. Pardesi (2007, 216-217) suggests that Mughal India was not
only self-sufficient but also the ultimate destination for much of the New World’s
gold and silver. India’s decline can only be properly understood in light of the rise
of British and American power. Nayyar (2006) has suggested that globalization
occurred during two periods: 1870-1914 and after 1950. Both periods of
globalization hindered economic growth in the underdeveloped world and may be

3
Athar Ali is unclear as to why producers of the Mughal, Safavid, and Ottoman empires could not
have matched European demand for their goods by increasing production.
4
Perlin (1983) is not alone in suggesting that pre-British India was at least a par with the Western
world in its level of economic development. Bayly (1989) and Prakash (1998) also suggest that pre-
British India was at a high level of economic development.

7
responsible for much of the economic gap between the developed and
underdeveloped regions of the planet.
Some recent material has also been devoted to determining when India
became underdeveloped vis-à-vis the Western world by examining differences in
wages between the two regions. Parthasarathi (1998) argues that gap in Indian and
British living standards is a recent phenomenon. Real wages in South India and
southern England were more or less equal: they began to diverge only in the late
eighteenth century. Allen (2001) estimates real wages of workers in the Mughal
capital Agra in 1595 and compares them to real wages in 1960. He suggests that real
wages fell by 23.3 percent during this period. In another work, Allen (2007) argues
that while pre-industrial Asia and Europe may not have had dramatically different
standards of living, by the beginning of the nineteenth century a clear difference
between the two regions had emerged. Broadberry and Gupta (2006) suggest that
differences between India and the Western world (especially Britain) began to
emerge as early as the seventeenth century.

8
India’s History Is No History: The Marxist View of Indian Economic
History
Amongst the most famous proponents of the notion that India displayed little
ability to develop on its own is Karl Marx.
5
According to Marx the absence of
property ownership in India prevented the formation of classes. Therefore class
conflict, which was the engine of history in Europe, did not exist in India. Pre-
British India had a stagnant social order characterized by the following
characteristics: (i) a stable equilibrium that showed little movement through the
centuries (external events such as invasions served only to undermine this
equilibrium temporarily); (ii) the absence of class struggle in India stratified the
classes into permanent positions, which prevented the development of social
revolution and technological innovation; and (iii) unlike Europe, where the urban
centers played revolutionary roles, Indian cities did not do so (Naqvi 1972). The
numerous invasions, falls of dynasties, wars, famines, and other traumatic events in
Indian history are not relevant because “Indian society has no history at all” (Marx
1959, 81) until the arrival of the British, who destroyed Indian civilization by
“leveling all that was great and elevated in the native society” (Marx 1959, 81). This
social revolution was brought about by the introduction of new relations between the
classes and particularly the introduction of property rights (Naqvi 1972, 383). By

5
Hegel viewed India’s history as a long episode of stagnation and felt that Hinduism had a stifling
affect on the development of human freedom. Marx’s view of India was shaped by Hegel’s
assessments (Habib 1995, 16-18).

9
destroying the traditional industries and self-supporting villages of the Indian
subcontinent, the British were able to introduce a technological and social revolution
whose scale was unprecedented in previous Indian history.
Irfan Habib (1969) uses the Marxist framework to explain why capitalism did
not develop in pre-British India. According to Habib, capitalism is only possible
with the accumulation of sufficient capital; if per capita income is too low then it is
not possible to accumulate sufficient capital and capitalism cannot emerge (Habib
1969, 34). Much of Habib’s argument is devoted to illustrating how the Mughal
landholding system in India siphoned off revenue away from the countryside and
into the hands of the aristocracy. The aristocracy, instead of using this capital for
investment purposes, was inclined to use the revenue collected from villages for the
purposes of conspicuous consumption, and as a result sufficient capital accumulation
could not occur (Habib 1969, 32-79).

Hinduism and Capitalism: Incompatible?
The proposition that Hinduism stymied industrialization in the subcontinent
has attracted considerable attention. A commonly held view is that Indian values are
by nature “spiritual” while Western values are “material” (Goheen et al. 1958, 1).
India’s “spiritual” values place greater emphasis on reducing desires rather than
bettering one’s lot (Goheen et al. 1958, 3). The impact of Hinduism on economic
development can be seen in from two angles: attitudinal and institutional (Misra

10
1962, 42). The former focuses more on specific beliefs and attitudes imbibed in
Hinduism, while the latter focuses more on the specific institutions of Hindu society.
A significant portion of this literature focuses on the beliefs of reincarnation and
karma. The institutional analysis of Hinduism has been largely limited to
discussions of the caste system.
Amongst the earliest and most influential proponents of the view that the
caste system hindered India’s industrialization has been Max Weber. Weber
believed that South Asia was in its early history at par with Europe in terms of
intellectual development, productivity, and means of social organization (Morris
1967, 589). Weber characterizes the effect of the caste system as “essentially
negative” (Weber 1958, 111). The caste system hindered the development of
capitalism on the following counts: (i) it engendered extreme traditionalism and
hostility to innovation; and (ii) it secluded castes from each other and prevented the
rational organization of labor that is characteristic of capitalism (Weber 1958, 113).
6

Weber’s approach to differs from that of many modern economists in that it
neglects the impact of the caste system on lowering work incentives. K. William
Kapp voices the argument in lines more acceptable to neo-classical economists when
he suggests that the caste system lowers incentive to be productive because “it works
against the emergence of a relationship between individual aptitude, performance

6
Weber has been criticized for neglecting the heterogeneity of Hinduism. Rao (1969) and Uppal
(2001) have both suggested that Hindu scriptures and reform movements within Hinduism need to be
accounted for in order to assess its impact on economic growth.

11
and earnings” (Kapp 1963, 46-47). Status in Hindu society was traditionally linked
with one’s place in the caste hierarchy and a person’s earnings were more likely to
reflect his socioeconomic status than aptitude or performance.
Vikas Misra also argues that the caste system lowered incentives, albeit in
different ways for lower and higher castes. Lower caste Hindus had little incentive
to obtain wealth because they would still be looked down upon by upper caste
Hindus even if the latter were poor. On the other hand, upper castes were generally
forbidden from taking the occupations of the lower castes and this prevented them
from participating in lucrative fields such as trade and commerce. Finally, the joint
family system limited spatial and occupational mobility while further strengthening
the caste system (Misra 1962, 53-56).

Conditions Endemic to India Led to Underdevelopment
Morris D. Morris (1968) traces India’s lack of development to historical
conditions existing in pre-British India. Unlike the Marxist arguments examined
earlier, Morris does not see a causal link between India’s underdevelopment and
class relations. He also rejects the notion that Hinduism and its attitudinal and
institutional factors suppressed growth. Instead, Morris points to a plethora of
geographical, political, and social circumstances as culprits. India was always
fragmented into numerous political units and this led to greater political instability

12
than in Ancient Rome or China.
7
This fragmentation also prevented Indian markets
from effectively integrating into larger markets. Accordingly, it obviated the
emergence of economies of scale. Geographical conditions prevented the growth of
internal trade, led to lower agricultural yields, and made it difficult to obtain the
necessary raw materials for industrialization. Morris stresses that pre-British India
probably had a low per capita income and British rule provided the country with
political stability, standardization, and greater administrative efficiency (Morris
1968, 3-22).
India’s agriculture benefited greatly from British rule: political stability
reduced fluctuations in land usage, leading to greater yields from the land. The new
irrigation schemes introduced by the British made allowed for farming on previously
unused areas. Finally, there was a greater specialization in agriculture and a shift to
crops with greater market value. While British rule had positive impacts in
agriculture, the factors causing a lag in India’s industrialization were not so easy to
overcome.
One major factor in hindering India’s industrialization during British rule was
the low demand for industrial goods. India’s population had risen from 200 million
around 1800 to 417 million in 1947. This enormous growth in population, however,
did not lead to an increased demand for machine production because average per

7
The opposite of this argument has also been suggested by scholars who argue that Mughal Empire
stunted India’s economic growth by siphoning away surplus capital for consumption and failing to
develop basic infrastructure (Jones [1981] 2003, 194-198; 1988, 134-135; Landes 1999, 156-158).

13
capita income was too low. India was also characterized by an unequal distribution
of income. Moreover demand from the wealthier classes was limited to specialty
items which could not be mass produced (Morris 1983, 554-555).
India was hindered not only from the demand side but also from the supply
side of the economy. Skilled labor was expensive and almost all machinery had to
be imported from the West. Since unskilled labor was readily available,
entrepreneurs tapped into it as a source of inputs and neglected mechanization.
Businessmen were reluctant to invest in capital-intensive industries and gave
preference to labor-intensive industries instead (Morris 1983, 555).
Indian businessmen were plagued by much greater levels of uncertainty than
their Western counterparts because there was an unsatisfactory flow of information
about incentive structures, alternative goods, and prices. The mechanisms for
transmitting information about cost of production and level of demand were much
weaker in India than in the West. As a consequence Indian merchants could not
make long term calculations with the same level of certainty that Western merchants
could. In order to buffer themselves from greater uncertainty, the Indian
businessman had to have a stock of ready capital to fall back on. India lacked the
institutions for an effective capital market and much of the country’s capital was
immobile. Investors were thus reluctant to invest in new areas and tended to remain
in traditional ones (Morris 1983, 556).

14
Hindu Equilibrium: Deepak Lal

Deepak Lal ([1988] 2005) suggests that by the third century BC, an economic
and social system had been established that placed India’s economy in a long lasting
equilibrium. Despite numerous attempts to reform it, this equilibrium has changed
little since its establishment.
This equilibrium was able to persist and function within the framework of
four parameters. This first was labor scarcity. Lal argues that until the twentieth
century, India has been a labor-scarce country (Lal [1988] 2005, 383). The caste
system arose as a response to this constraint and allowed for the provision of a steady
supply of labor. The specialization implicit in the caste system made it difficult for
castes to migrate to other regions because a caste that migrated to another region
would find itself in competition from another caste that possessed the same
specialized skills. It is important to note that social ostracism and the emphasis on
ritual purity prevented castes from learning skills from one another (Lal [1988] 2005,
44).
A second parameter mentioned by Lal is political instability. According to
Lal, much of India’s political history has characterized by feuds between local rulers.
This political instability resulted in the rise of autonomous village communities
throughout India. Rulers received regular tribute from these communities and
responded in turn by refraining from the internal affairs of these villages (Lal [1988]
2005, 384-385).

15
Lal also points to the climatic conditions of India as a third parameter
defining the equilibrium (Lal [1988] 2005, 385). The relative unpredictability of
rainfall and monsoons resulted in considerable uncertainty in regards to production
of agricultural output. Individuals with relatively large landholdings were able to
secure themselves against this uncertainty because their landholdings allowed them
to produce and store a surplus supply of food. On the other hand, individuals with
small or no landholdings were unable to do the same. In order to obtain a steady
supply of food, they supplied services to individuals with large landholdings. This
exchange of services for agricultural produce was known as the jajmani system (Lal
[1988] 2005, 56-58).
The final parameter under which this equilibrium operated was an ideological
one. Lal asserts that the general belief system of Hinduism frowns upon commerce
and the pursuit of profit. This belief system influenced the attitudes of the rulers of
India and played a role in hindering any attempts to move away from an agrarian
economy (Lal [1988] 2005, 385).
Three characteristics of this equilibrium are worth noting. The first
characteristic was the stability of agricultural technology. Lal argues that Indian
agricultural patterns and technology have changed little over the last two millennia.
A second characteristic was the stability of population size: until the nineteenth
century, India’s population never exceeded 200 million. A third characteristic was a

16
stable standard of living: India’s per capita income throughout the last two millennia
was approximately US $150 at 1965 prices (Lal [1988] 2005, 36-42).
8

Lal asserts that this equilibrium has persisted for over two millennia because
it provided Indians with a standard of living higher than that of their neighbors. Lal
believes that the equilibrium may be undermined in the near future because many of
the parameters that led to creation of this equilibrium have changed (Lal [1988]
2005, 389).

Conclusion
This chapter provided an overview of the explanations given for India’s
underdevelopment. We have surveyed some of the literature espousing the “classical
thesis” which contends that British policies led to India’s underdevelopment.
Exponents of the “classical thesis” assert that the pre-British was India was an
economically developed society and the British deliberately brought about its
underdevelopment. But they fail to explain why a well developed society such as
pre-British India was unable to resist the British in a more effective manner.
Exponents of the “classical thesis” also fail to make note of any positive impact
British policies may have had on India’s economy.
We have also surveyed the traditional Marxist approach to the question of
India’s underdevelopment. The Marxist view assigns a progressive role to the

8
This amount is equivalent to US $796.50 at 2007 prices.

17
British and asserts that they played a progressive role by bringing in bourgeois
institutions such as property rights. The traditional Marxist view believes that
India’s development was dependent one exclusive factor: class struggle and the
subsequent development of property rights. The Marxist view fails to take into
account that property rights need not always be the consequence of a violent class
struggle.
Both the “classical thesis” and the Marxist approach differ from the
arguments of Weber, Misra, and Kapp, in that the latter do not emphasize the role
played by the British but instead stress that India’s economic fortunes were
intertwined with the caste system and the ideology of Hinduism. All three authors
believe that Hinduism and the caste system had a negative impact on India’s
economic development. Kapp and Misra stress that the caste system lowered
incentives while Max Weber believes that the underlying value system of Hinduism
was inimical to growth. Weber, Kapp, and Misra do not take account how the belief
systems of sects within Hinduism differed. They also fail to take note of any
changes they have taken place within Hindu ideology once Hindu thinkers were
exposed to Western thought.
Morris D. Morris rejects the notion that Hinduism hindered India’s economic
growth. He argues that geographical and historical conditions were among the
factors that prevented India’s development. Deepak Lal asserts that geographical
and historical conditions colluded with India’s demographic circumstances to place

18
India’s economy in a long lasting equilibrium. This equilibrium was sustained
within the framework of certain parameters. Lal believes that with a change in these
parameters, India may break out of this equilibrium. While both Morris and Lal
place a heavy emphasis on the role played by geographical and historical conditions
in shaping India’s economic fortunes, they do not explain in sufficient detail the
impact business institutions such as the Hindu joint family have had on India’s
economic development.
In this chapter we have obtained a broad view of the explanations offered for
India’s underdevelopment. In the next chapter we will examine literature dealing
with a specific question within the Indian context: the underdevelopment of India’s
Muslim minority.

19
Chapter 2: The Underdevelopment of India’s Muslim Minority

Introduction
One of the challenges of the social sciences is to explain the rise of the West
(Kuran 2003, 414). A significant body of literature in the social sciences has been
devoted to this question (Greif 2006, 25-26; Harris 2006, 1; Kuran 2003, 414).
1

Some of this literature suggests that the West’s fortunate geographical position gave
it a head start on the path towards industrial development (Diamond 1997; Sachs
2001). Huff ([1993] 2003) and Mokyr (1990) emphasize the role played by Western
science.
2
Putnam (1993) and Fukuyama (1995) argue that trust and social capital
played key roles in the development of the West. Others such as Jones ([1981]
2003), Landes (1999) and Pomeranz (2000) suggest that a confluence of factors such
as geography and history gave the West an advantage over other civilizations.
3

Several works from the school of New Institutional Economics have
attempted to explain the West’s ascendancy by examining the institutions that
permitted economic growth in the Western world.
4
These works assumed that

1
There is also a body of literature that suggests that the West deliberately underdeveloped other
regions of the world. Examples of such literature include Frank (1975) and Wallerstein (2000).
2
Huff ([1993] 2003) suggests that while the Islamic world and China were initially more scientifically
advanced than the West, the legal framework of the West allowed it to create an ethos that was
conducive to the birth of modern science.
3
Landes (1999) places greater emphasis than Jones ([1981] 2003) and Pomeranz (2000) on culture as
a factor in explaining the rise of the West.
4
Examples of this literature include North (1990; 1995), North and Thomas (1973) and North and
Weingast (1989).

20
institutions facilitating economic growth were exogenous and failed to address how
these institutions initially arose (Harris 2006, 1).
Some of the subsequent literature in New Institutional Economics has been
devoted to the examination of specific legal and economic institutions that fostered
economic growth. These works eschew the notion that legal and commercial
institutions were mandated by the state; instead they suggest that a variety of factors
such as pre-existing institutions and historical circumstances affected the
development of legal and economic institutions (Harris 2006, 2).
5

Recent literature in New Institutional Economics has added a comparative
perspective: it seeks to explain why entities such as civilizations or groups embarked
upon one institutional trajectory rather than another (Harris 2006, 2). Such literature
may seek to explain why the corporation arose in the West and not the Islamic world
(Kuran 2005b) or how the differing belief systems of Genoese and Maghribi
merchants caused these groups to develop different sets of institutions for the
enforcement of principal-agent contracts (Greif 1994).
Some of the recent literature in New Institutional Economics has been
devoted to an examination of the relationship between Islamic commercial and legal
institutions and the underdevelopment of the Middle East (Kuran 2001, 2003, 2004a,
2004b, 2005a, 2005b). The present work will build on these earlier analyses of
Islamic institutions and utilize comparative analysis to explain how the differences in

5
Many of these works examine the role of property rights in fostering economic growth. Examples of
such works include Alchian and Demetz (1973), Liebcap (1978; 1989), and Rosenthal (1992).

21
the commercial institutions and inheritance laws of the Hindus and Muslims allowed
the former to adopt the managing agency model and dominate India’s industry, while
the latter were marginalized.
It has been noted that the Hindu joint family (Dutta 1997; Timberg 1969, 8-
10; Tripathi 1990, 194; Tripathi 2004, 113; Verma 1987) and Islamic partnership
(Arasaratnam 1995, 9; Chaudhuri 1985, 210; Clydesdale 2007, 314; Dale 1994, 65-
66, 118; Dasgupta 2001, 112; Levi 2002, 109, 173, 232; Markovits 2000, 156-166;
Subramanian 1996, 25) have been used by South Asians as business entities;
however these institutions have not been compared systematically. The Hindu joint
family has been compared with other family-based business entities. Thus, Dutta
(1997, 13-15) compares the Hindu joint family with Western family firms, the
Chinese jia, and the Korean chaebol. Ghosh (1974) offers a comparative analysis of
the Hindu joint family and the Japanese zaibatsu. The current literature provides us
with analytical comparisons of the Islamic partnership and the modern corporation
(Kuran 2003, 420-421, 427; 2005, 786) and of the Islamic partnership and
partnerships utilized by medieval European merchants such as the commenda
(Çizakça 1996, 12-14; Kuran 2003, 424, 426, 434), societas (Çizakça 1996, 22-23),
and compagnia (Çizakça 1996, 23-24). This work will add to this literature by
providing a detailed comparison of the Hindu joint family and Islamic partnership. It
will also illustrate how the former institution was relatively more conducive than the
latter to adoption of the managing agency model.

22
It is well known that application of the Islamic laws of inheritance has led to
capital fragmentation amongst Muslim families in South Asia (Ahmad 1991, 4; Bose
[1997] 2004, 92; Timberg 1978, 39) and the Middle East (Baer 1962, 79-83;
Doumani 1995, 70-71; Kuran 2003, 428-430; 2004b, 71, 74; Marcus 1989, 209-210;
Meriwether 1999, ch. 4). Previous literature (Bagchi 1985, 26-28; 1999, 50; Leonard
1981, 197) has also noted that inheritance laws of Hinduism encourage capital
accumulation. This work will fill a gap in the literature by providing a comparative
analysis of the dynamic consequences of the application of the inheritance laws of
Hinduism and Islam. Let us turn to the question of the economic underdevelopment
of Indian Muslims.

The Question of Economic Underdevelopment of Indian Muslims
A glance at a listing of India’s fifty largest business groups in 1997 finds that
chairpersons of these groups come from a variety of religious and regional
backgrounds (Tripathi 2004, 340-342).
6
Indian Muslims, who compose more than
12% of the Indian population (Shariff and Azam 2004, vii), have only one
representative on the list. The dearth of prominent Muslim businessmen in India is
not a recent phenomenon. A look at the 80 largest publicly traded companies in
India from 1951 to 1955 shows us that only one of the companies had an Indian

6
The term “business group” is defined as “the companies controlled, directly or indirectly, by a
particular family” (Tripathi 1990, 27).

23
Muslim as a director while 64 companies were headed by Hindus (Ministry of
Finance 1955, xviii-xxi).
7

Muslim under-representation in business was equally conspicuous in British
India. Data collected from the Investor’s India Year-Book series shows that the
Hindu percentage of directors on India’s publicly traded companies increased from
21.64% to 40.05% from 1920 to 1940. The corresponding figures for Muslims show
only a slight increase from 3.71% to 3.96% (Investor’s India Year-Book 1920; 1940).
Thus, while the Hindu proportion almost doubled in twenty years, the increase in the
Muslim proportion was only incremental. The persistence of Muslim under-
representation in India’s commercial life leads us to a question: what is the cause of
this phenomenon?

Economic Underdevelopment of Indian Muslims in a Historical Context
The first Muslims to settle in India were Arab traders who married local
women from the Malabar Coast during the seventh century. The Muslim population
of India grew rapidly and by the thirteenth century Islam had become a major
religion in India (Mistry 2005, 400). Muslims played a very important role in India’s
economy as skilled administrators, skilled craftsmen, and educators (Talha 2000, 15-
18). By the fifteenth century Muslims dominated maritime trade throughout the

7
Jains and Sikhs will be included under the term “Hindu” throughout this work. This is because both
groups use Hindu institutions for business and are governed by Hindu inheritance laws (Cornish
1937, 5).

24
Indian Ocean region (McPherson 1993, 78). The active role played by Indian
Muslims in South Asia’s trade with the Middle East (Pearson 2003, 78-79) and
Southeast Asia (Arasaratnam 1989) has been discussed before.
8
Indian Muslims also
played an active role in South Asia’s overland trade with Central Asia (Levi 2002,
100-106). Despite the decline of the Mughal Empire, Muslim traders continued to
play an important role in trade throughout the Indian Ocean until the nineteenth
century (Risso 1989, 382). Only during the nineteenth century did a gap between the
economic conditions of the Hindus and Muslims emerge (Talha 2000, 23).
Two important points emerge from the above discussion. First, the loss of
political power did not necessarily lead to Muslim economic underdevelopment,
because Muslim traders continued to be very active in the Indian Ocean well after
the demise of the Mughal Empire. Second, we see the emergence of Muslim
economic underdevelopment on a large scale in South Asia during the nineteenth
century and not earlier.
9

8
It would not be an exaggeration to say that Indian Muslims dominated South Asia’s maritime trade.
Persian and Arab traders had to restrict their trading activities to the Arabian Sea in face of
competition from Indian Muslim traders (Pearson 2003, 88-89). The international trade of important
port cities such as Surat was dominated by Muslim merchants during this period (Das Gupta 2001,
318, 333).
9
The underdevelopment of Muslims vis-à-vis Christians and Jews in the Middle East began to emerge
during the late eighteenth century when increasing numbers of members of the latter communities had
access to Western legal and business institutions (Kuran 2004a, 475-476; 2004b, 84-86; 2005a, 610).
While Middle Eastern Muslims were hindered by legal barriers from using Western business
institutions such as the corporation, the commercial institutions and inheritance laws of South Asian
Muslims hampered their transition into the managing agency system.

25
An Institutional Analysis of the Underdevelopment of Indian Muslims
Large-scale industry emerged in India only during the middle of the
nineteenth century. This had two repercussions that are relevant for us:
First, the introduction of large-scale industry in India occurred under the
aegis of the managing agency system.
10
This work posits that it was easier for
Hindus to adopt the managing agency system than it was for Muslims because the
Hindu joint family resembled the managing agency in certain crucial aspects.
11

Second, the introduction of large-scale industry required greater capital
inputs than had been the case previously. Enterprises such as cotton mills or tea
companies required large amounts of capital, ranging from Rs. 300,000 to Rs.
500,000 (Rungta 1970, 327). Capital was scarce (Brimmer 1955, 560, 562; Misra
1999, 68-70) and there were no organized capital markets in India during this period
(Misra 1999, 68). As a result, capital was usually raised by Indian businessmen via
the family or caste networks (Timberg 1969, 12, 81). This work also posits that
Hindus had easier access to capital vis-à-vis Muslims because the inheritance laws of
the former allowed for capital accumulation within families, whereas the inheritance
laws of the latter led to capital fragmentation.
12

The Muslims of India were thus disadvantaged vis-à-vis Hindus on two
points: first, it was more difficult to transition from the Islamic partnership to the

10
This will be discussed in greater depth in Chapter 5.
11
This will be discussed in greater depth in Chapter 3.
12
This will be discussed in greater detail in Chapter 4.

26
managing agency than it was from the Hindu joint family. Second, Muslims had
greater difficulty acquiring capital than did Hindus, because Islamic inheritance laws
led to capital fragmentation, while Hindu inheritance laws led to capital
accumulation.
13
We have noted how Islamic partnerships and inheritance laws may
have played a role in the underdevelopment of Indian Muslims; let us take a brief
look at how Islamic institutions brought about the underdevelopment of the Middle
East.

Islam and the Underdevelopment of the Middle East
Kuran (2004b, 71) suggests that the economic underdevelopment of the
Middle East can be traced to three institutions: 1) the Islamic law of inheritance; 2)
the strict individualism in Islamic law; and 3) the Islamic trust, or waqf.
14
We will
briefly discuss how each of these institutions contributed to the underdevelopment of
the Middle East, and paying special attention to how they limited prospects for
further institutional innovation in the region. Let us begin with the Islamic laws of
inheritance.
The application of the Islamic laws of inheritance constrained development in
two ways: First, they led to frequent estate fragmentation (Baer 1962, 79-83;

13
Hindus and Muslims have historically used different business institutions and inheritance laws, but
these differences led to Muslim economic underdevelopment only after the introduction of large scale
industry in the middle of the nineteenth century and not earlier.
14
Kuran does not imply that Islam necessarily brings about economic underdevelopment or is
incompatible with growth (Kuran 2004b, 72); instead he suggests that the abovementioned Islamic
institutions have resulted in the Middle East’s economic underdevelopment.

27
Doumani 1995, 70-71; Kuran 2003, 428-430; 2004b, 71, 74; Marcus 1989, 209-210;
Meriwether 1999, ch. 4) and families were rarely able to retain wealth for more than
two generations (Kuran 2003, 429).
15
Second, the application of Islamic inheritance
laws limited the both the size and duration of Islamic partnerships (Kuran 2003,
424).
16
An important consequence of this was that Islamic partnerships were smaller
than their European counterparts, and unlike the latter, they did not have to find
solutions for problems of coordination and liability facing larger partnerships. This
placed a limit on the extent of organizational innovation in Islamic partnerships
(Kuran 2003, 435; 2004b, 79; 2005b 816-817, 831-832).
17
Let us now turn to the
second cause of the Middle East’s underdevelopment: the waqf or “Islamic trust.”
The waqf or “Islamic trust” was an unincorporated trust dedicated to
providing social services. The functions of the waqf were fixed for perpetuity and
could only be changed with considerable difficulty (Kuran 2001, 842, 2004b, 81).
18

This led to the underdevelopment of the Middle East in two ways: First, it led to a
suboptimal allocation of resources: the waqfs were devoted to fulfilling functions
that had been decided centuries ago and meet present needs. Second, the failure to

15
We will see how waqfs were used to circumvent Islamic laws of inheritance in Chapter 4.
16
The reasons for this are discussed in greater detail in Chapter 3.
17
The difference in the histories of the two most popular forms of partnerships in the medieval
Western and Islamic worlds is instructive. The mudaraba spread from the Middle East to much of
Eurasia and was also adopted by other groups such as Armenians, Malays, Russians, and Turks
(Çizakça 1996, 18-21). Despite the wide dispersion of the mudaraba and its extensive use in the
Middle East for more than a millennium, it went through little structural evolution. We have alluded
above to the role played by Islamic inheritance laws in limiting the size and scope of Islamic
partnerships. On the other hand, the commenda was faced issues dealing with economies of scale and
eventually spawned more complex organizational forms (Kuran 2003, 421).
18
The waqf is discussed in greater depth in Chapter 4.

28
transform the waqf into a self-governing institution hindered the development of civil
society in the Middle East (2004b, 81-82; 2005b, 832). This failure stemmed from
the fact that Islamic law only recognizes natural persons and does not grant legal
personhood to other entities (Kuran, 2005b).
19

The reluctance of Islamic law to grant legal personhood to institutions
hindered the development of the Middle East in other ways as well. First, it
prevented the development of the business corporation (Kuran 2003, 436; 2004b, 73;
2005b). The role played by corporations in the economic development of the West is
well known and does not need to be repeated here. Second, the region’s
businessmen continued to rely heavily on short-lived partnerships and did not engage
in institutional innovations necessary for long-lived enterprises. Third, the absence
of legal personhood prevented Middle Eastern merchants from developing long-lived
associations that would further their interests. Instead, merchants often formed
temporary associations for ad hoc purposes (Kuran 2005b, 831-833).
We have seen how certain Islamic commercial and legal institutions brought
about the structural stagnation of the Middle East. In the following chapters we will
examine how the Islamic partnership and inheritance laws engendered the
underdevelopment of Indian Muslims. Before we do so, let us take a closer look at
other explanations of the economic underdevelopment of Indian Muslims.

19
For a fuller discussion of this see Kuran (2005b, 793-797).

29
Previous Explanations of Muslim Economic Underdevelopment
The question of Muslim economic underdevelopment in the Indian context
was discussed as early as 1870 in The Indian Musalmans by W.W. Hunter. Since
then, a variety of explanations have been advanced as explanations of Muslim
underperformance in South Asia’s economy. For clarity, these explanations have
classified into the following categories: (i) Incompatibility of Islam and Capitalism
Thesis; (ii) Muslim Cultural Insularity Thesis; (iii) Indolent Muslim Elite Thesis,
(iv) British Hostility Thesis, and (v) Hindu Advantage Thesis. It is not within the
scope of this paper to examine the entire corpus of literature on this subject.
However, a brief discussion of the literature on this subject will give the reader a
purview of the main arguments put forth.
20

The Weberian Thesis on Incompatibility of Islam and Capitalism
According to Max Weber the necessary conditions for the emergence of
capitalism are rational law, capitalist modes of ownership, and asceticism (Turner
1974, 232). Capitalism can only arise when there is a confluence of these factors in
a given society, and this confluence did not occur in Islamic societies. A key
characteristic of Islam is that it is “a religion of the warrior class” (Weber 1968,
262). In such a religion the spoils of war figure prominently as a source of incentive,
which were seen as a sign of piety. This had two effects: it engendered a “feudal”

20
We will also examine arguments put forth by Max Weber, Bernard Lewis and others who discuss
Islam in general; these arguments may be applied to the Muslims of South Asia.

30
ethic in the Islamic world (Weber 1968, 262) and led to an emphasis on conspicuous
consumption (Weber 1968, 263).
21

A key distinction in Weber’s sociology of law is between rational and
irrational legal systems. The latter are not built on general principles. Consequently
they judge cases according to personal or arbitrary factors, while the former operate
on following general principles of the law (Turner 1974, 235). Weber viewed the
sharia as a substantive and rational law because its source was derived from divine
revelation instead of worldly needs and was made rigid after the first three centuries
of Islam. He saw it as a procrustean legal system that could not meet worldly
requirements. Legal ruses knows as hiyal were invented to circumvent the more
procrustean elements of the sharia (Turner 1974, 236). Weber saw the law as it was
administered by the qadi as being both arbitrary and personal: qadis did not decide
law cases according to specific logical rules but rather on the basis of the peculiar
circumstances of the case (Turner 1974, 236-237). Thus, in both theory and practice,
Islamic law failed to establish a systematic legal tradition: on the theoretical plane
the sharia’s origin and history prevented it from becoming systematic and on the
practical plane the arbitrariness of the qadi’s decision-making process hindered
systematization of the legal system. Weber felt that the lack of development of a
rational and predictable legal system in the Islamic world precluded the genesis of
capitalism (Turner 1974, 1996; Crone 1999; Schluchter 1999).

21
Weber does not define the term “feudal ethic” in his writings on Islam.

31
Variants of the Incompatibility of Islam and Capitalism Thesis
Max Weber was not the only major thinker to propose that Islam and
capitalism are inherently incompatible. Some of the earlier proponents of this
argument also include Lord Cromer and Ernest Renan, both of whom suggested that
the fatalistic teachings of Islam made the religion a barrier to economic growth
(Kuran 2004c, 129). Shortly after World War II, Daniel Lerner asserted that
Muslims must choose between their faith and modernization: they cannot have both
(Lerner 1958, 105).
Numerous statistical studies have recently been conducted to measure the
impact of Islam on economic growth; there is disagreement, however, in regards to
whether the effect of Islam on economic growth has been negative or neutral.
22
A
statistical analysis of the impact of religious beliefs and practices on economic
behavior by Barro and McCleary (2006, 69-70) finds that adherence to Islam has a
negative impact on economic growth; the same study suggests that adherence to
other religions such as Hinduism and Judaism did not have a statistically significant
impact on economic performance (Barro and McCleary 2006, 67-68). A previous
study by Barro and McCleary (2003, Table 4) that focused on high-income countries
also found that Islam has a negative impact on economic growth. Other recent
studies also argue that values fostered by Islam are not conducive towards the

22
There is no recent statistical study suggesting that Islam has had a positive effect on economic
growth; much of the current debate focuses on whether the impact of Islam on economic growth is
negative or neutral.

32
development of market economies (Guiso et al. 2003, 228; Voigt, 2005). Others
such as Pryor (2007) and Noland (2005) argue that no clear relationship exists
between Islam and economic growth: they argue that we can only conclude that
Islam’s effect on economic growth is neutral.

Critique of the Incompatibility of Islam and Capitalism Thesis
Max Weber and others who assert that Islam and capitalism are incompatible
have not taken into account the example set by the personal life of the Prophet or
many of the central teachings of Islam. The Prophet himself was a merchant and
considered trade to be superior to other occupations (Akbar 1993, 139). The
language used by the Prophet is couched in commercial terms because the residents
of both Mecca and Medina were men of trade (Rodinson [1966] 2007, 117).
Commentaries on the life and sayings of the Prophet known as Hadiths discuss
numerous commercial topics including usury, buying, selling, mutual agency, and
delivery (Haffar 1975, 17). Rather than promoting a feudal ethic, Islam’s central
teachings accept commerce as a way of life and appear to point in the direction of a
commercial ethic.
Weber’s argument that the structure of Islamic law obviated the development
of large scale commerce is brought into question by the existence of Muslim
commercial networks. If anything, Muslim commercial networks during the 8
th
to
eleventh centuries served to bring non-Muslims into the orbit of Islam. Muslim

33
identity carried positive externalities during this period in the commercial world: it
gave easier access to other Muslim merchants, use of Islamic commercial law, and a
symbolic sense of belonging to a larger community (Risso 1989, 386-387). The
success of Muslim traders in successfully establishing colonies and gaining converts
in regions geographically far from the Middle East such as India (Abu-Lughod 1989,
270), China (Abu-Lughod 1989, 337), and Southeast Asia (Arasarsatnam 1989, 20)
illustrates the relative strength of the Islamic commercial network vis-à-vis these
regions. Furthermore, an examination of the sharia by itself does not lead to the
conclusion that it was anti-commercial. Muslim merchants have been willing to
bypass the teachings of the sharia when necessary (Hoodbhoy 1991, 127).

Islamic Cultural Insularity Thesis
In both The Muslim Discovery of Europe ([1982] 2001) and What Went
Wrong? (2002), Bernard Lewis argues that various historical circumstances
prevented Muslims from actively borrowing from Western civilization. Lewis
makes the argument that Muslims failed to learn from the West until the West had
gained an insurmountable advantage. Muslim insularity created a mental framework
that prevented absorption of Western philosophy and science, while the West was
able to both observe and learn from the world of Islam. According to Muslims, the
Islamic state was the only legitimate state and the ummah was the only community
with access to the truth. Muslims were generally discouraged from traveling or

34
settling in non-Muslim regions (Lewis [1982] 2001, 61). Lewis mentions that other
non-Western peoples had an advantage vis-à-vis Muslims in learning from the
Western world because the former were not hindered by the same kind of insularity.
David Landes in The Wealth and Poverty of Nations (1999, 410-412) argues
along similar lines: distrust of Western ideas has hindered the development of the
Islamic world. Landes differs from Lewis in that the former asserts that other factors
such as an emphasis on conspicuous consumption and discrimination against women
will continue to engender underdevelopment in the Islamic world.
More recently, Charles Murray (2003, 399-401) has asserted that Islam
fosters a fatalistic and anti-scientific attitude in its adherents. Murray goes on to
assert that the Islamic world failed to develop due to its hostility towards science.
Griffin (1999, 138) makes an argument similar to Murray’s: the victory of theology
over science precluded the further development of the Islamic world.
Kazem Alamdari (2004) asserts that the respective cultural heritages of the
Islamic and Western world shaped their destinies. The Persian heritage of Islamic
civilization led to the union of church and state and this inhibited the development of
the Middle East. On the other hand, the Greco-Roman heritage encouraged the
separation of church and state as well the economic development of the Western
world.

35
Critique of the Islamic Cultural Insularity Thesis
Lewis ([1982] 2001; 2002) and Landes (1999) do not bring any empirical
evidence showing that other non-Western societies had a more receptive attitude
towards Western ideas.
23
While it is certainly true that Islam has had a longer
history of conflict with the West than other non-Western societies, it cannot be
inferred that members of these societies were more willing than the Muslims to learn
from the West. Lewis and Landes also ignore the possibility that Islam’s prolonged
conflict and geographical proximity to the West allowed for more interactions
between Muslims and Westerners and both factors could have contributed to a
greater exchange of ideas between Muslims and Westerners.
Neither Murray (2003) nor Griffin (1999) explains why Islam fosters an anti-
scientific attitude in its adherents; the persecution of scientists in the Islamic world
does not necessarily imply that the Islamic religion is hostile to scientific endeavor.
While Murray claims that the efflorescence of scientific activity in the Islamic world
during the eleventh and twelfth centuries was possible because the Islamic clergy
tolerated such activity during this period, he provides no explanation for what caused
a change in the policies of the Islamic clergy.

23
Landes (1999, 472) claims that the Japanese were willing to learn Western science and industrial
techniques after World War II. But he gives no explanation as to why the Japanese were more willing
than Muslims or other non-Western peoples to learn from the West. Tripathi (1997) rejects the notion
that Japanese culture was more conducive to industrialization than were other Asian cultures; instead
he suggests that the development of national markets and infrastructure under the Tokugawa regime
paved the way for Japan’s industrialization.

36
Alamdari (2004) assumes that both the Western and Islamic world’s fates
were determined by their different cultural heritages; however he fails to take into
account that the Islamic world was as much an heir of the Greco-Roman cultural
heritage as the Western world.

South Asian Variants of the Islamic Insularity Thesis
The notion that Muslims were unwilling to learn from the British has found
many proponents in South Asia. Sekh Mondal argues that Muslim economic
underdevelopment may be explained is due to the fact that Indian Muslims are a
“traditional-bound and conservative community” (Mondal 1992, 111). Saleem Khan
asserts that Muslim economic underdevelopment may be due to the self-imposed
isolation of the Muslims after the decline of the Mughal Empire (Khan 1989, 76).
An argument along similar lines is put forth by Kochhar who argues that while
Hindus welcomed British rule, Muslims were humiliated by their defeat and were
unwilling to take advantage of the opportunities offered by the British (Kochhar
1992, 2609).

37
Critique of South Asian Variants of the Islamic Insularity Thesis
The above arguments do not provide a causal mechanism for why this
particular response took place. It is unclear why Muslims responded to British
ascendancy by turning their backs on Western culture. Second, these arguments
assert that Muslim economic underdevelopment is a result of the alleged Muslim
cultural insularity; however, these arguments do not explain why Muslim cultural
insularity may instead have been a product of economic underdevelopment.

Indolent Elite Thesis
Kibria (2001) puts forth the argument that the Muslim elite shirked on its
responsibility to uplift the Muslims of South Asia. He asserts while Muslim artisans
had considerable technical skills, “nobody took any steps to mobilize creative talent
for the benefit of the Muslim community” (Kibria 2001, 21). Kibria asserts that
because the Muslim elite derived its income from landowning, it frowned upon
business activities (Kibria 2001, 29). An argument along similar lines is presented
by Mushirul Haq (1989) who asserts that the Muslim leadership actively worked to
prevent the promotion of Western education among Muslims. By doing so, the
Muslim elite jeopardized the economic future of the Muslims of the Indian
subcontinent (Haq 1989, 60-63).

38
Critique of Indolent Elite Thesis
The arguments presented by both Kibria (2001) and Haq (1989, 60-63)
presuppose that the economic well being of the Muslims of South Asia was
dependent upon the attitudes and behavior of the Muslim elite. Kibria does not
mention the factors which led to the development of an indolent Muslim elite.
Second, Kibria does not clarify why the general Muslim population was willing to
follow the lead of the elite in regards to crucial issues such as the learning of the
English language. Furthermore, there is reason to be skeptical that regardless of
regional, sectarian, or cultural differences, the vast majority of Muslims of India
were willing to follow the example of the landowning elite based in northern India.

British Hostility Thesis
There is a body of literature that suggests that the underdevelopment of
Islamic societies is a consequence of Western imperialism (Alnasrawi 1991; Amin,
1978; Ayubi 1993; Frank 1998; Islamo ğlu-Inan 1987; Owen, 1981). Many South
Asian scholars have suggested that the economic underdevelopment of the region’s
Muslims was a result of British hostility. Muniruddin Chughtai (1974) argues that
British policy deliberately favored Hindus over Muslims. The British appropriated
Muslim lands, preferred Hindus over Muslims for civil service positions, and
replaced Persian with English as the official language (Chughtai 1974, 243-249).
Ahmad (1991) suggests that the British weakened Muslim landowning class by

39
establishing a system of land tenure in which landowners were forced to pay the
government fixed rent while leasing the land out to the highest bidder. Hindu
middlemen worked between the tenants and landowners, and extracted much of the
surplus away from the Muslim landowners (Ahmad 1991, 9). Ahmad also asserts
that the introduction of English in 1864 as the legal language of British India had
deleterious effects on the Muslim intelligentsia (Ahmad 1991, 12).

Critique of British Hostility Thesis
Both Ahmad (1991) and Chughtai (1974) assume British preference for
Hindus over Muslims but no clear reasons are given for the motivation behind the
alleged British bias. Chughtai’s assertion that Muslims lost their share of public
sector jobs to Hindus (Chughtai 1974, 245) does not explain Muslim
underperformance in the private sector. Similarly, Ahmad’s assertion that British
policy hurt Muslim landowners does not explain Muslim under-representation in
other areas such as commerce and industry.
Both writers also allege that the replacement of Persian by English as the
official language of British India played a role in leading to Muslim economic
underdevelopment. However, Persian was used as frequently by Hindus as it was by
Muslims (Kochhar 1992, 2612). Thus the cost of switching from Persian to English
was borne equally by Hindus and Muslims.

40
Hindu Advantage Thesis
Arnold Toynbee in his A Study of History (1963) asserts that during the
nineteenth century the Hindus and Muslims responded differently to the British
conquest of South Asia. Toynbee asserts that while the Muslims of the region were
demoralized by their defeat at the hands of the British, the Hindus took advantage of
the economic opportunities that British rule brought to India (Toynbee 1963, 200-
203). Toynbee claims that the different responses of Hindus and Muslims to the
British conquest can be explained by the respective historical role played by both
communities in Muhgal India. While Muslims were the ruling class of India, they
employed Hindus of the Brahmin caste as officials and administrators in order to
make Muslim hegemony more acceptable to the indigenous Hindu population. The
Brahmins were later able to obtain positions in the British bureaucracy due to their
previous success as administrators for the various Muslim regimes that ruled India.

Critique of Hindu Advantage Thesis
Toynbee’s argument that the Brahmins long history of service of to Muslim
rulers as administrators and ministers allowed them to leapfrog into a similar
position during British rule is questionable due to many different reasons. Little
account is taken by Toynbee of the fact that the vast majority of top administrative
positions under the Mughals were occupied by Muslims. The Hindu share of in the

41
prestigious office of mansabdar may have been as little as 15% (Spear 1970, 8).
24

The judicial branch was almost entirely dominated by Muslims (Spear 1970, 11).
If access to positions of administration in the Mughal regime was the key
factor in determining who obtained economic and political status in British India,
then the Muslims of India would have been in a more advantageous position than the
Hindus. Toynbee also fails to explain the commercial ascendancy of the British. He
asserts that British economic activity opened up new opportunities for members of
Hindu business castes (Toynbee 1963, 200) but fails to explain why only Hindu
merchants took advantage of these opportunities.

Conclusion
We have examined a variety of theses dealing with the question of Muslim
economic underdevelopment. The notion that Islam and capitalism are incompatible
has been examined; we have seen that the teachings of the Islamic faith are not
necessarily inimical to development of capitalism. The success of Muslim
merchants in establishing merchant networks that spanned much of the Indian Ocean
from the seventh to the nineteenth centuries also undercuts the contention that Islam
precludes economic development. While Bernard Lewis and others have asserted
that cultural insularity hindered the development of the Islamic world, they have
failed to show that Muslims were more insular than other non-Western peoples. The

24
Mansabdars performed a variety of administrative duties for the Mughal Empire and were also
responsible for its defense (Spear 1970, 11).

42
arguments of Kibria and Haq asserting that Muslim elites were unresponsive or were
solely exploitative do not explain why only Muslim elites exhibited such behavior or
how such elite acquired their position in the Muslim community. We also looked at
the argument that the British favored the Hindus over the Muslims and have seen
that while this argument may have weight explaining Muslim under-performance in
the public sector, it fails to explain why Muslims had such a small share of the
private sector. Arnold Toynbee’s assertion that the respective positions of the
Hindus and Muslims in the administration of the Mughal Empire shaped the
economic fortunes of the two communities was examined and we noted it does not
stand up to closer empirical scrutiny. We now turn to an examination of the business
institutions and inheritance laws of Hindus and Muslims in order to shed light on the
question of Muslim economic underdevelopment.

43
Chapter 3: A Comparative Analysis of the Hindu Joint Family and
the Islamic Partnership

The Hindu joint family (Dutta 1997; Timberg 1969, 8-10; Tripathi 1990, 194;
Tripathi 2004, 113; Verma 1987) and the Islamic partnership (Arasaratnam 1995, 9;
Chaudhuri 1985, 210; Clydesdale 2007, 314; Dale 1994, 65-66, 118; Dasgupta 2001,
112; Levi 2002, 109, 173, 232; Markovits 2000, 156-166; Subramanian 1996, 25)
have both been used as business entities by South Asian businessmen.
1
While
previous literature discusses the use of both institutions by merchants in South Asia,
the institutions have not been compared systematically. The Hindu joint family and
Islamic partnership differ in important aspects such as profit sharing, distribution of
liability, formation, and durability.
2
A closer glance at both institutions is valuable
for three reasons. First, we gain insight into the nature of institutions which were

1
The literature on the use of Islamic partnerships by South Asian merchants focuses almost
exclusively on the mudaraba (commenda.), which was often utilized for long distance trade.
However, our discussion will include other forms of Islamic partnerships such as the ‘inan and
mufawada even though their use is less well documented.
2
Our focus in this chapter is on the Mitakshara branch of Hindu law. All references to Hindu law in
this chapter refer to the Mitakshara unless stated otherwise. Our discussion of Islamic partnerships is
limited to rules stipulated by the Hanafi school of Islamic law. This is because the vast majority of
South Asian Muslims adhered to Hanafi school of Islamic law (Carroll 1983, 630 n.2). Three Muslim
merchant castes (Khojas, Bohras, and Memons) were governed by Hindu laws and were familiar with
the Hindu joint family (Cornish 1937, 5). We will refer to members of these three castes as
“heterodox Muslims.”

44
utilized by Hindu and Muslim merchants to conduct business in South Asia.
3

Second, by examining the characteristics of both institutions in greater detail, we can
assess their respective strengths and weaknesses. Finally, we also can see why
certain characteristics of the Hindu joint family allowed many Hindu families to
make the transition to the managing agency model, while Muslims using Islamic
partnerships faced greater hurdles in doing so.
4

Formation and Duration of Hindu Joint Family Business
The Hindu joint family exists as a result of sapinda bonds between its
members (Gopal [1958] 1964, 526). Sapinda bonds are formed as a result of birth,
adoption, or marriage and are necessary for the existence of the joint family.
5
There
is no limit to the number of coparceners, who are “heirs inheriting an undivided

3
Disputes between merchants were not resolved at Mughal courts because the Mughals did not have a
legal framework for dealing issues that affected business and contract law was non-existent.
Merchants were generally reluctant to turn to government authorities to help resolve their disputes and
resorted to the use of caste assemblies (panchayats) (Tripathi 2004, 22-23). While caste assemblies
were effective in resolving disputes between merchants of the same caste, they could not be used for
resolving disputes when merchants belonged to different communities. In such cases, other prominent
merchants of an area mediated a settlement between both parties (Das Gupta 2001, 99-100). The
commercially active region of Gujarat was unique in that assemblies based on occupation (mahajan)
cut across caste and religious lines and adjudicated disputes between members of the same profession.
Merchants and bankers possessed their own distinct mahajans (Pearson 1972, 121). In Gujarat,
mahajans dealt only with commercial matters; panchayats were used for adjudication of social and
religious matters (Alpers 1976, 28). Unfortunatley, the literature on interdenominational mahajans
does not indicate whether Hindu or Islamic laws were applied.
4
There was some overlap between Hindus and Muslims in regards to the use of their respective
business institutions. Hindu merchants such as the Sindhis were familiar with and utilized Islamic
partnerships such as the mudaraba (Markovits 159, 2000) while heterodox Muslims were familiar
with the Hindu joint family. The mudaraba was first introduced to India via trade with Jewish
merchants from Cairo (Harris 2006, 16). For a discussion of the trade between Indian and Jewish
merchants see Chakravati (2000) and Goitein (1954;1980).
5
Sapinda bonds are discussed in greater detail in Chapter 4.

45
interest in an estate”
6
that may be included in a Hindu joint family business (Gopal
[1958] 1964, 526).

The Hindu joint family business is an appendage of the Hindu
joint family and is governed by the same set of rules that apply to other assets held
jointly by members of the Hindu joint family (Gopal [1958] 1964, 554). There is
also no limitation on the duration of a Hindu joint family business: its existence is
not contingent upon the life of a particular member of the joint family and it may
continue to exist indefinitely (Gopal [1958] 1964, 526).
7
A Hindu joint family may
only cease to exist if it is partitioned, or if it there are no living members who may
add new members to it (Gopal [1958] 1964, 526-527).

Participants in the Hindu Joint Family Business
All coparceners, including minors, are members of the Hindu joint family
business. Females and males who are not coparceners have the same rights to the
Hindu joint family business as they do to other property of a Hindu joint family

6
See The Reader’s Digest Great Encyclopedic Dictionary, s.v. “coparcener”.
7
The Hindu joint family business is not a firm because its members are included due to ties of
sapinda. On the other hand a firm is “a collection of persons who have entered into a partnership for
the purposes of sharing the profits of a business carried on by all or any of them” (Gopal [1958] 1964,
554).

46
(Gopal [1958] 1964, 554-555). Outsiders may be brought into the Hindu joint family
business via a separate partnership agreement (Gopal [1958] 1964, 556).
8

The shares of the coparceners in a Hindu joint family business are not fixed
proportions. Instead, the share of each coparcener is contingent upon the total
number of coparceners and may thus fluctuate according to births, deaths, and
partitions (Gopal [1958] 1964, 554).

Powers and Responsibilities of the Karta
The Hindu joint family business is headed by the “karta” or eldest adult male
coparcener. The karta has the considerable authority to make decisions for the
benefit of the Hindu joint family business. He has the power to do the following:
borrow money, pledge family property and credit, authorize the means of raising
additional capital for the family business, sue to enforce contracts, and alienate
portions of family property (Cornish 1937, 45-46).
The karta does not need explicit approval from other members of the joint
family for taking any of the abovementioned actions. The other members of the
Hindu joint family business are not entitled to demand accounts from the karta and
may not hold him liable for gross negligence or mismanagement (Gopal [1958]

8
Outsiders may form a partnership with the Hindu joint family. The literature is unclear about what
sort of partnership law was used to govern these partnerships. Hindu merchants belonging to Sind
seem to have used partnerships based on Islamic commercial law (Markovits 2000, 157). Since
Hindu merchants could use either a Hindu joint family or a partnership to conduct business they
possessed a greater menu of choices than Muslim merchants who could only choose amongst the
various types of partnerships permitted under Islamic law.

47
1964, 557). Hindu law assumes that other members of the joint family give implicit
approval to the karta’s actions unless one of them specifically calls for a partition
(Cowell 1895, 10).
However, the karta uses family funds to participate in business activities
outside of the family’s ancestral business, he must obtain approval of other members
of the Hindu joint family (Gopal [1958] 1964, 557).
9
For example, the karta of a
Hindu joint family engaged in the retail of clothing may not use the family’s funds to
start a dairy plant without the approval of other members of the joint family.
The karta and other members of a Hindu joint family business also have the
right to alienate family funds for “family necessity” (Cornish 1937, 47-48; Cowell
1895, 10). This will be discussed in greater depth further below.
The karta may also assign duties and tasks to other members of the joint
family. He may voluntarily relinquish his position and appoint a junior member of
the joint family to this position (Gopal [1958] 1964, 555).

Joint Consumption
The profits from a Hindu joint family business become jointly held property
of the family (Cornish 1937, 41) and may be consumed by other members of the
family. Hindu law does not have formal rules in regards to dealing with members

9
This is congruent with the ideology espoused by the caste system: individuals are discouraged from
leaving their ancestral vocations.

48
who engage in free riding. We will discuss the use of various mechanisms by which
free riders are punished later in this chapter.

Liability and Debts
The liability of the karta is unlimited. The liability of other coparceners is
limited to the size of their share in the family business (Anant and Mitra 1998, 5).
The karta is responsible for his share of the joint family business but property held
by him individually may be taken in order to cover his liability. The son and
grandson of the karta may also be held liable for both business and personal debts
not paid by the karta during his lifetime. Some exceptions apply to this rule. Firstly,
a son of the karta who partitions away his share of the joint family property before
the liability was incurred will not be responsible for this liability. Secondly, if the
karta accumulates debts as a result of expenditure on vices or acts considered
immoral by Hinduism, such as gambling, then his sons will not incur liability
(Cornish 1937, 51-57; Cowell 1895, 25-31;Gopal [1958] 1964, 548-555).
Coparceners who are not descendants of the karta are responsible for debts
contracted by the karta for running the joint family business. However, they are not
responsible for personal debts of the karta. The liability of other coparceners in the
Hindu joint family business is limited to their share of business and does not extend
to their separately held property (Gopal [1958] 1964, 555).

49
Use of Business Assets for “Family Necessity”
Assets of the joint family may be used by members for purposes of “family
necessity.” The term “family necessity” encompasses avoidance of calamities
affecting the whole family, unavoidable duties, and actions necessary to support the
family (Cornish 1937, 46). Some examples of this include use of funds for the
dowry for marriage female members of the family, legal defense of a family
member, and performance of funeral rites for a family member (Cornish 1937, 48).
There is no clear demarcation in Hindu law between the assets of the family’s
business and other assets held jointly by the family (Gopal [1958] 1964, 555).
Furthermore, there are no formal rules in Hindu law to prevent members of the joint
family from exploiting the family business’ funds for personal purposes. We will
discuss the means by which the Hindu joint family prevents misuse of business’
funds further below.
Having examined some of the key characteristics of the Hindu joint business,
we now turn to Islamic partnerships.

Formation of Islamic Partnerships
Our discussion will focus on the mudaraba and the two commercial
partnerships recognized by Hanafi law: the ‘inan, and the mufawada. Hanafi law
places the mudaraba in a special category but for purposes of simplicity we treat it as

50
an Islamic partnership.
10
Due to limitations of space and scope we cannot discuss
special cases in Islamic commercial law such as credit purchase (istidana) or discuss
the differences between mandated and un-mandated mudarabas.
11

Islamic partnerships are the result of contracts between two or more parties.
Their scope and duration is constrained by the contracts which bring about their
existence. Islamic partnerships do not have legal personality (Kuran 2003, 422;
Nyazee 1999, 77) and their life span does not exceed that of any of their members
(Kuran 2003, 432; Udovitch 1970, 117, 248).
12

A key difference between the mufawada and ‘inan involves the scope and
nature of capital invested. A mufawada partnership requires that all of the available
capital (including personal assets) of the partners be involved in the partnership
whereas the ‘inan requires that partners involve only a portion of their available
capital in the partnership (Nyazee 1999, 100; Udovitch 1970, 41-42, 120). There are
no rules that explicitly state what proportion of his personal assets an investor must
place in a mudaraba.

10
The mudaraba may have developed in pre-Islamic Arabia for facilitating caravan trade. Udovitch
(1970, 171-172) suggests that it spread throughout the Middle East, North Africa, and Southern
Europe as a result of Arab conquests. Udovitch (1962; 1970, 171-172) also argues that the mudaraba
was the antecedent of the Italian commenda while Pryor (1977) argues that Roman and Byzantine
commercial institutions were the commenda’s antecedents. Çizakça (1996, 10-12) provides a fuller
discussion of the relationship between the mudaraba and the commenda.
11
For a fuller treatment of such material see Udovitch (1970) and Nyazee (1999).
12
Islamic inheritance law requires that that the deceased partner’s share be divided among his heirs
and makes them stakeholders in the partnership; any of them may choose to take his share out and
dissolve the partnership (Kuran 2003, 432).

51
Participants
A mufawada partnership may only be formed by individuals who are of an
equal standing in both social and economic terms. A mufawada partnership is
predicated on existence of mutual agency and mutual surety. Thus partners may act
as agents for one another other and may also provide surety for other partners.
Slaves and minors are not permitted from participating in mufawada partnerships
because they do not possess freedom of action and cannot provide surety for other
partners (Udovitch 1970, 45). The requirement that mufawada partnerships be
formed on the basis on social equality prevents the formation of such partnerships
between Muslim and non-Muslims, or members of different genders (Udovitch 1970,
46-48). Change in the economic or social status of one of the partners results in a
dissolution of the mufawada partnership (Udovitch 1970, 118).
In contrast to a mufawada partnership, an ‘inan partnership does not require
equality of social or economic standing of the partners. Any individual of adult age
with requisite faculties may form an ‘inan partnership with another such individual.
Hence, an ‘inan partnership may be formed between a Muslim and non-Muslim
(Udovitch 1970, 125-126). An ‘inan partnership rests on the assumption that
partners provide mutual agency for each other; however they do not provide mutual
surety for one another. Thus partners may act on behalf of one another but one
partner may not be held responsible for the actions of the other partner (Nyazee
1999, 109).

52
A mudaraba involves the participation of an investor and an agent. The
participation of multiple investors and agents is also permissible within a mudaraba
(Udovitch 1970, 194). Agents are given considerable freedom in a mudaraba
agreement, however investors may place restrictions on agents in regards to method,
object, and location of trade. It is understood that restrictions placed on the activities
of the agent must be both useful and beneficial to the performance of the
mudaraba.
13
When the investor’s stipulated restrictions are not useful or beneficial
to the mudaraba, these restrictions may be overridden (Udovitch 1970, 210-213).
Unlike the mufawada partnership, Muslims and non-Muslims may jointly participate
in a mudaraba (Udovitch 1970, 227-228).
14

Investment of Capital
In a mufawada partnership, all partners must invest equal amounts of capital.
Partners must also include all of their eligible capital for investment in a mufawada
partnership. Cash that is readily available for investment is considered eligible
capital, whereas goods, merchandise, and cash that is not immediately available are
not considered eligible capital. The equality of eligible capital for the partnership
must be maintained throughout the duration of a mufawada partnership. If one of the
partners obtains cash via other sources such as inheritance or gifts and upsets the

13
This means that stipulations must be in line with the primary goal of achieving a profit.
14
Islamic legal literature stresses that in interdenominational mudarabas the agent be a Muslim. This
is to prevent non-Muslim agents from using a Muslim’s capital to engage in activities that are
forbidden to Muslims such as dealing in wine (Udovitch 1970, 228).

53
condition of equality, then the mufawada partnership will no longer be valid (Nyazee
1999, 166-167).
15
‘Inan partnerships are similar to mufawada partnerships in that
only readily available cash is considered eligible capital, while goods, merchandise,
and cash that is not immediately available may not be used as a source of investment.
However ‘inan partnerships differ from mufawada partnerships because partners in
an ‘inan partnership do not need to invest equal amounts of capital (Udovitch 1970,
127-128).
Neither an ‘inan nor a mufawada has a legal personality: assets and wealth
may not belong to the partnership itself; instead they are held jointly by the partners
involved (Nyazee 1999, 77).
A mudaraba is similar to both the mufawada and ‘inan in that only readily
available cash may be used for investment (Udovitch 1970, 127-128). Goods,
merchandise, and capital not immediately available may not be used as investment
(Udovitch 1970, 180). For a mudaraba to be considered valid, the capital invested
must be in possession of the agent. This transfer of capital to the agent serves two
functions in a mudaraba: it assures the anonymity of the investor in relation to third
parties, and it gives the agent autonomy in utilizing the capital. The transfer of
capital to the agent does not imply a transfer of ownership of the capital nor is this
transfer sufficient to put the mudaraba into effect. The mudaraba is only effective
once an agent engages in the initial act of trading (Udovitch 1970, 189-190).

15
This means that the mufawada partnership will be transformed into an ‘inan partnership.

54
Profit Sharing
Profits and losses must be shared equally among the investors in a mufawada
partnership (Udovitch 1970, 48). On the other hand, there is considerable flexibility
in regards to sharing of profits and losses in an ‘inan partnership. The partners may
agree to an equal distribution of investment and profit, or an unequal distribution of
either or both profit and investment (Udovitch 1970, 119-120). Thus, in an ‘inan
partnership, one party could invest one-fifth of the capital but reap three-fifths of the
profits. In a mudaraba, the investor and agent may agree upon any proportional
division of profits. If the division of profits is not based on proportions or is
equivocal for any reason, then the mudaraba is no longer valid (Udovitch 1970, 190-
192).
16

Liability
In all Islamic partnerships liability is unlimited (Nyazee 1999, 81; Udovitch
1970, 41). The personal assets of partners may be used by creditors and others to
pay off debts or liability. In an ‘inan partnership liability is several but not joint
(Nyazee, 1999, 87; Udovitch 1970, 135). The claims of third parties are directed
only against the partner responsible for the particular transaction; similarly
individual partners may press claims against third parties on their own behalf but not
on behalf of the partnership. This is not true for a mufawada partnership where third

16
Markovits (2000, 156-166) provides detailed examples of how Indian merchants from Sind
(predominantly Hindus) effectively exploited the mudaraba’s flexibility in regards to profit sharing.

55
parties may make claims against either of partners. Conversely, any of the partners
regardless of their involvement in a transaction, may make claims against third
parties. In a mufawada partnership, liability of the partners is both several and joint
(Nyazee 1999, 87; Udovitch 1970, 100). Thus a third party may make claims against
individual partners or against all the partners collectively. In a mudaraba, agents act
on behalf of the investor and are not liable for normal business losses. Agents are
not held liable except in cases of gross negligence (Udovitch 1970, 239-240).

Usage of Personal and Business Assets
In both the ‘inan and mufawada partnerships a distinction is made between
the financial obligations of the partners in their personal and commercial spheres.
Financial obligations stemming from the personal affairs of one of the partners are
his exclusive responsibility and not binding upon the other partner in both the
mufawada partnership (Udovitch 1970, 166-117) and the ‘inan partnership
(Udovitch 1970, 134-135).
17

17
In some cases an exception to this is made in mufawada partnerships.

56
Participation
Hindu joint families and Islamic partnerships differ in regarding rules for
participation. Islamic partnerships allow for considerable leeway in regards to their
composition. For example, an ‘inan partnership or mudaraba may be agreed to by
two individuals, regardless of their social or economic status.
18
A mufawada
partnership differs from an ‘inan partnership and a mudaraba by requiring that the
partners be of an equal social and economic standing; however individuals of equal
standing, including two slaves may form such a partnership. On the other hand, in
Hindu joint families participation in business is restricted to the adult male
coparceners of the family. Outsiders and female members of the family may not
participate in the family’s business activities.
19
It is safe to say that Islamic
partnerships are considerably more flexible in allowing individuals from a variety of
backgrounds to participate in them than is the Hindu joint family. It is also
important to note that the individuals participating in an Islamic partnership need not
be related to each other via familial ties, whereas this is not generally the case for
Hindu joint families.

18
There are a few exceptions. Male apostates from Islam may not participate in either the ‘inan or the
mudaraba.
19
As mentioned above outsiders may form partnerships with Hindu joint families.

57
Proportion of Shares
The share of particular coparceners in Hindu joint families is not fixed and is
contingent upon the number of coparceners. Events such as births, deaths, and
partitions may cause the size of a coparcener’s share to fluctuate over time. In
Islamic partnerships the shares are predetermined by contracts and may not vary.
This may be particularly relevant for third parties such as creditors dealing with a
partnership: they can determine exact share of a partner in an Islamic partnership.
Since the shares of particular coparcener are only determined during a partition,
neither third parties nor members of the Hindu joint family may know the share of
each particular coparcener.

Profit Sharing
Islamic partnerships are more flexible than Hindu joint families in regards to
profit sharing: in the ‘inan, mufawada, and mudaraba, the partners may
predetermine the ratio of profit division as per their specific requirements. The
profits of the Hindu joint family are held jointly by the members of the family and
individuals are not assigned specific portions of the profits. Since profits from a
joint family business are not assigned but instead held collectively, members of the
joint family may have a disincentive to work, and an incentive to consume as great a
portion of the profits as they can.

58
Two informal mechanisms are utilized by the Hindu joint family to constrain
such behavior. The reputation of an individual who repeatedly participates in free-
riding may be affected and as a consequence this particular individual may find his
social and business prospects outside of the family to be limited. The success of this
method of checking free-riding activity is contingent upon how much value a
particular individual places upon his reputation and may not be effective in checking
the exploitative behavior of individuals who have little inclination to maintaining a
sound reputation. Hindu joint families can also check free-riding behavior by
partitioning out to an uncooperative individual his respective share of the joint
property and thus remove him from the joint family (Dutta 1997, 93-96). The
partitioning out of an individual’s share of the joint family property has two costs
attached to it: a.) it decreases the overall stock of the family’s capital stock and thus
may affect its business activities; and b.) partitions hurt the business and social
reputation of the both the individual involved and his family (Dutta 1997, 97).
Hence, the ability to check free-riding behavior through utilization of this second
informal mechanism is dependant upon the family’s willingness to incur the
economic and social costs to partitioning out a free-riding individual’s share of
family’s capital stock.

59
Liability and Personal Assets
The Hindu joint family and Islamic partnership also differ in regards to their
treatment of liability. The liability of the karta is unlimited and hence extends to his
share of separate property. The debts and liability incurred by the karta may be
passed on to his son and grandson, but not to other coparceners in the family. The
liability of other coparceners is limited to their share in joint family business and
does not extend to their separate property. The Hindu joint family as an entity is not
shielded from liability because creditors may take the shares of individual
coparceners that are used for the joint family business. However the personal assets
of the coparceners are shielded since liability is limited to their share of the Hindu
joint family business.
20

In all Islamic partnerships, liability is unlimited but only the partner
participating in a particular transaction is held liable. Given that liability is unlimited
in Islamic partnerships, the personal assets of an individual partner are not shielded
from liability.
21
This increases the cost of setting up new business ventures via an
Islamic partnership because partners have to not only the risk the capital invested in
the venture, but they also risk their personal assets. On the other hand, in the Hindu
joint family, the coparceners’ are not subject to the same kind of risk because their
personal property is protected from creditors. This allows the Hindu joint family to

20
The sole exception is the karta. While his share of the Hindu joint family business may be taken by
creditors his personal assets receive no protection.
21
The assets of an individual partner are protected from the creditors of his other partners (Kuran
2005, 787).

60
invest its capital in a variety of different business ventures without having to risk the
personal assets of each of the coparceners. Thus the level of risk incurred for each of
the participants (except the karta) in a Hindu joint family business would be less
than risk incurred for each partner in an Islamic partnership.
22

Usage of Personal and Business Assets
The partners have rights to the partnership’s funds provided that these are
used for attaining profit. Unlike a Hindu joint family, partners in all three of forms
of the Islamic partnerships discussed here may not appropriate the other partner’s
funds for personal usage. The assets of the partnership and of individual partners are
shielded from use by other partners. This differs from Hindu joint families where the
jointly held assets of the family business may be used for personal purposes by the
individual members of the family. The assets of a Hindu joint family as an entity are
not shielded from usage by members of the joint family.
23
On the other hand, the
personal assets of individual coparceners that are held as separate property may not

22
The limitation of liability in regards to the personal assets of the owners is a characteristic that the
Hindu joint family shares with the modern corporation. However, in the corporation the personal
assets of all the owners are protected, whereas in the Hindu joint family this is not the case with the
assets of the karta. The protection of personal assets of owners is considered to be one of the most
advantageous attributes of the modern corporation (Lamoreaux and Rosenthal 2004, 7-11).
23
The Hindu joint family and Islamic partnership both lack legal personhood and thus cannot provide
entity shielding (limited liability for the firm itself). This allows creditors of individual partners or
coparceners to take assets of the partnership or joint family business. For a discussion of the
importance of shielding the business entity’s assets from the owner’s personal creditors see Kraakman
et al. (2006).

61
be used by other coparceners.
24
A consequence of this is that the Hindu joint family
is more vulnerable than the Islamic partnership to the liquidity crises on the part of
its participants: any financially squeezed coparcener can use up the Hindu joint
family’s funds whereas in an Islamic partnership active partners may do so while
sleeping (or silent) partners are denied this right.
25

Formation and Durability
A key point of difference between both institutions lies in how they are
formed: an Islamic partnership is brought about by a contract between two parties
and its duration and scope are limited by this contract. A new partnership contract
would be needed to expand into areas of business not stipulated by the original
contract. Furthermore, the life span of the partnership may not exceed that of any of
its members. Since the death of any partner causes the partnership to dissolve, the
inclusion of a new partner increases the chances of partnership’s dissolution. This
places a cost on increasing the size of the partnership by introducing new members
(Kuran 2003, 421-423).
Since the Hindu joint family is not brought about by a specific contract or
agreement between its members, it differs from an Islamic partnership in that its
scope and duration are not contractually bound. As mentioned above there is

24
We will see in Chapter 4 that joint property can become separate property if a coparcener calls for a
partition of the estate.
25
For more on active and sleeping partners in Islamic partnerships, see Udovitch (1970, 192-194).

62
considerable difficulty in dissolving a Hindu joint family. A Hindu joint family may
outlive its particular members and expand its activities into other areas of business.
Hindu joint families also differ from Islamic partnerships in that the inclusion of
additional individuals into the Hindu joint family does not necessarily lead to its
dissolution. New members may be absorbed into the previous business or have a
new branch of the family business set up for them without partitioning from the
Hindu joint family.
26

Conclusion
From the brief discussion above, we can see that the Hindu joint family
possesses two characteristics in common with modern corporations that are not
possessed by Islamic partnerships. First, the Hindu joint family is a durable
institution. Its existence is not contingent upon the existence of any particular
member and it may only dissolved under special circumstances. Islamic partnerships
do not possess a similar sort of durability: their life span is contingent upon the
existence of each member of the partnership, and the partnership may be dissolved
relatively easily.
A second similarity between the Hindu joint family and the modern
corporation is that both may branch out their business activities into new areas. On

26
However, the inclusion of new members into the Hindu joint family business increases monitoring
costs and may encourage partitions.

63
the other hand, in order for an Islamic partnership to deal with businesses that are not
stipulated in the contract, a new partnership would have to be formed.
These two differences acquire crucial importance because an individual using
the Hindu joint family for business would have the experience and the skill set
required for operating in an institution that is durable and can branch out into
different types of businesses.
27
On the other hand, an individual using only Islamic
partnerships would not have the skill set or the experience acquired working in a
durable institution that may branch out into different areas of business.
Islamic partnerships are considerably more flexible than Hindu joint families
in regards to key issues such as profit sharing and inclusion of individuals who are
not related by familial bonds. Islamic partnerships also acknowledge a distinction
between the personal and business affairs of the partners involved; one partner may
not use the funds of the other partner for his personal affairs. On the other hand, the
assets of the Hindu joint family business may be used by the members of the joint
family in order to meet non-business expenses of the family.
28
These advantages
may explain the success of Muslim traders in establishing themselves across the
Indian Ocean but the Islamic partnership’s lack of durability and the inability to
establish numerous branches hindered Muslim transition into managing agencies.

27
The case studies presented in both Chapters 4 and 5 provide examples of this.
28
Members of the Hindu joint family would have a disincentive to use their separately held property
for non-business needs if they can tap into jointly held property.

64
Chapter 4: The Impact of Hindu and Islamic Inheritance Systems
on Capital Accumulation in Families

It has been acknowledged that the inheritance laws of Hinduism allowed for
wealth to be held collectively by a joint family for long durations and encouraged
capital accumulation (Bagchi 1985, 26-28; 1999, 50; Leonard 1981, 197).
1
As a
consequence, wealthy Hindu families could hold on to and augment their stock of
capital over the course of many generations. The inheritance laws of Islam differ
from those of Hinduism in that they do not encourage capital accumulation; instead
over time capital becomes fragmented in Muslim societies and families (Ahmad
1991, 4; Bose [1997] 2004, 92; Timberg 1978, 39).
2
While individual Muslim
aristocrats and merchants in India may have amassed large fortunes, Islamic

1
Hindu inheritance law is divided into two branches: the Mitakshara and Dayabagha. We concern
ourselves with the former because it used throughout South Asia, while the latter is restricted to the
province of Bengal. All references to Hindu law in this section imply the Mitakshara unless specified
otherwise.
2
Sunni Muslim jurisprudence has four branches: the Hanafi, Hanbali, Shafi, and Maliki. We will
discuss only the Hanafi inheritance law, since it applies to the majority of Muslims of South Asia
(Carroll 1983, 630 n.2; Carroll 1995, 25-26). The majority of Shia Muslims of South Asia follow
Ithna Ashari law of inheritance (Carroll 1985). Three Muslim castes (whom we shall refer to as
“heterodox Muslims”) were governed by Hindu inheritance law. These are the Khojas, Memons,and
Borahs(Cornish 1937, 5). The Muslims of Punjab are not governed by Hanafi law but by traditional
inheritance law (Rankin 1939, 108).

65
inheritance codes prevented their families from retaining this wealth over a period of
many generations.
3

This difference between Hindu and Islamic legal systems would acquire great
significance because capital markets were underdeveloped in colonial India, and
one’s family and community often became the sole means of raising capital in order
to enter industry (Bagchi 1999, 50-51; Timberg 1969, 39). Hindus from wealthy
castes such as the Marwaris (Timberg 1978, 81) and Nattukottai Chettiars (Rudner
1989, 422-424) were able to tap into their familial and communal networks and
could raise capital with relative ease, whereas Muslims were not able to do so (Talha
2000, 88; Timberg 1969, 75).
4
We will now examine the Hindu and Muslim
inheritance codes in greater detail in order to get a deeper understanding of the
process by which wealthy Hindu families were able to accumulate capital while the

3
Two mechanisms used by South Asian Muslims to avoid the application of inheritance to their estate
include donation of the estate as a gift to a particular member of the family (this practice was known
as hiba-bi’l-‘iwad) and setting up a waqf-alal-awlad (Carroll, 2001.) We will briefly discuss both
mechanisms and their limitations in this chapter.
4
Familial and communal networks were used by Hindus from merchant castes and heterodox
Muslims to gain access to cheap credit. Marwari businessmen often provided credit to distant
relatives to help them set up businesses (Timberg 1978, 102). Merchants from the Nattukottai
Chettiar caste lent each other capital at interest rates lower than those charged to non-Chettiars
(Rudner 1989, 433-435). Communal banks have also been used by Khojas in order to obtain credit at
lower interest rates than would have been possible via money lenders or other banks (Papanek 1962,
267).

66
capital of their Muslim counterparts dissipated.
5
In order to do so must the nature of
the Hindu joint family must be investigated.

The Hindu Joint Family
A Hindu joint family consists of the male ancestor with his lineal
descendants in the male line, along with the unmarried daughters, wives, and widows
of the ancestor and his descendants. The existence of this male ancestor is not
necessary: the joint family may be composed solely of his descendants. The tie
binding members of the joint family is known as the sapinda, which may arise as a
result of birth, adoption, or marriage. Sapinda relationships are necessary for the
formation of the joint family. There is no limit to the size of a joint family. This
number of members may change due to births, adoptions, marriages, deaths,
partitions, and severance of ties. A Hindu joint family continues to exist indefinitely,
unless it is partitioned, or if it has no living members who can add another member
to it (Gopal [1958] 1964, 526-527).
Property in Hindu joint families is classified into two broad categories: joint
property and separate property. Joint property is held collectively by the family. It
is divided into two categories: ancestral property and non-ancestral property.

5
The Mitakshara is more conducive to capital accumulation than the Dayabagha (Bagchi 1985, 26-
28). This may help in explaining why Bengalis played a small role in India’s industrialization
(Rungta 1970, 164) despite the fact that the province of Bengal had exposure to Western business
methods as early as the 1820s through partnerships between Indian and British businessmen (Tripathi
2004, 62-63).

67
Ancestral property can only be obtained by two means: inheritance and partition,
while property gained through other means is not considered ancestral. Therefore,
the profits from a business owned by the joint family would not be considered
ancestral property since they were not obtained via inheritance or partition.
Ancestral property is further divided into two sub-categories: unobstructed heritage
and obstructed heritage. The male members of the family acquire rights to the
former by virtue of birth, while rights to the latter are acquired by male members as a
result of the death of the last male owner. An example of obstructed heritage would
be the individual property of a sonless uncle. This property may go to his nephews
provided that he does not have a son. The presence of a son would “obstruct” the
passage of this property to his nephews (Cornish 1937, 36-39; Gopalakrishnan 1959,
88-91).
Separate property refers to property that is held exclusively by a particular
individual. Other members of the joint family do not have rights to this property.
Separate property has a tendency to become joint property over time: unless the
possessor of separate property disposes of it as such upon his death, it will enter the
common pool and be classified as joint property (Cornish 1937, 36).
How is the distinction between joint and separate property made? Two
principles play roles. The first is the “presumption of joint-ness”. Property is
assumed to be joint property, unless explicitly stated otherwise. Property acquired
by members of the joint family and gifts given by strangers to members of the joint

68
family are assumed to be joint family property. The second principle involves the
source of origin of the funds for acquiring assets. If joint family funds were used to
acquire particular assets, then those assets are included in joint family property. On
the other hand, if the funds used to acquire assets have their origin in separate
property then those assets will not automatically become joint family property
(Cornish 1937, 40-41). Thus it can be seen that wealth tends remain in the common
pool unless other forces act upon it.
An example of an event that would lead to the dilution of the common pool is
the partitioning of the joint family. Partitions typically occur during three occasions:
the male head of the family can call for partitioning of the joint family property; one
of the sons may request it; and after the death of the father (Cowell 1895, 41-42).
6

In the event of a partition, brothers must receive equal shares (Cornish 1937, 63-64).
7

It is very important to note that partitions are frowned upon by the general society
and a family’s reputation may suffer as a result of a partition. The act of partitioning
is usually viewed as a sign of weakness and may limit the family’s social and
business options (Dutta 1997, 97).
The male descendants up to the fourth generation of a Hindu joint family are
considered coparceners. While male descendants acquire the title of coparcener
upon birth, they cannot receive their respective shares until the partitioning of joint

6
The son may only request a partition during the father’s lifetime if there is no chance of the father
having any more sons.
7
Adopted and illegitimate sons constitute an exception to this rule.

69
family property. The share of each coparcener is not constant. It may change with
the birth or death of other male coparceners. Coparceners hold the property
collectively with other members of the joint family until a partition occurs (Cowell
1895, 8; Gopal [1958] 1964, 527-528). Members of the joint family who are not
coparceners have the right to maintenance but do not have shares in joint family
property. During a partition property is divided per stripes and not per capita
(Cornish 1937, 66; Cowell 1895, 8).
8

Female members of the joint family are not coparceners. In the event the
female member of a joint family has no sons or brothers, she is granted the right to
maintenance. Widows are encouraged by Hindu law to live very frugally. While the
right to maintenance is not a fixed share, it is assumed that the female members will
be granted enough property to allow them to live within reasonable means. Classical
Hindu law discouraged women from owning property and only grudgingly conceded
a separate form of property for the maintenance of women (Gopalakrishnan 1959,
100).
9

8
In a per capita partition, the property would be divided evenly per eligible male member of the
family. This means that each of the grandsons of a deceased karta whose father is also deceased are
eligible to receive the same share as the sons of the abovementioned karta. In a per stripes partition,
the grandsons would receive collectively the amount which their father would have received had he
been alive. Furthermore, the deceased father’s inheritance would be equally divided amongst the
grandsons of the karta had he been alive.
9
In certain cases, the mother is entitled to a share in the Mitakshara doctrine.

70
Capital Accumulation in Hindu Families
What makes the Hindu joint family an effective vehicle for the accumulation
of capital? Two fundamental characteristics of Hindu joint families that have been
discussed above are highly conducive to capital accumulation. For one thing, joint
family property can be held collectively for an indefinite period until a partition
occurs. Since a joint family does not have to divide its capital with the passing of
every generation, the pool of capital can grow indefinitely. For another, a joint
family is not limited in terms of the number of members that are included in it. This
characteristic allows joint families to expand through marriages, births, and
adoptions.
The ability of the joint family to accumulate capital is buttressed by some
important aspects of Hindu inheritance law. First, Hindu inheritance law encourages
separate property to become joint property. In the process, the pool of jointly held
property grows over time. Second, Hindu inheritance law grants coparceners
inchoate titles to joint property until a partition occurs. Coparceners may not use
substantial portions of joint property without the approval of other members of the
family. This places a check on an individual coparcener’s tendency to abuse family
property, because his rights to its disposal are limited. Third, since partitions occur
per stripes and not per capita, tendencies for excessive fragmentation of capital are
discouraged. The underlying logic is as follows: in per stripes division, the number
of fragments into which capital is partitioned is limited to the number of sons the

71
karta has. In a per capita partition of capital, however, the number of fragments into
which capital is partitioned can increase because grandsons of the karta whose father
is deceased will also each receive a share. Therefore, the fragmentation in a per
capita partition is likely to be greater than in a per stripes partition. Finally, by
limiting the share of non-coparceners to maintenance, Hindu inheritance law places
limits on the number of eligible heirs.

The Islamic Inheritance System
The inheritance system of pre-Islamic Arabia sought to keep property within
the hands of the tribe and conferred rights of inheritance exclusively to male agnatic
relatives of the deceased individual. Islamic jurisprudence brought radical changes
to traditional inheritance laws and established rights of inheritance for females and
others who were ignored in the inheritance laws of pre-Islamic Arabia. The Islamic
inheritance system has two broad categories of heirs: male agnates (‘asaba) who
were legal heirs under the previous tribal laws and the new heirs (ahl al-fara’id). A
significant portion of the complexities of Islamic inheritance laws can be said to stem
from attempts to reconcile the claims of members of these two categories (Coulson
1971, 29-30). The second category is further divided into three sub-categories:
Quranic heirs, agnatic co-sharers, and female agnatic heirs (Carroll 1983, 630).

72
Male agnatic heirs may have either a germane or consanguine relationship via
the father (Carroll 1983, 630). Table 4.1 illustrates the rankings of categories of
male agnatic heirs.

Table 4.1
Order of Priority of Male Agnatic Heirs in Hanafi Law (Carroll 1983, 631)

Category Order of Ranking
Descendants Son, son’s son etc. ad infinitum

Ascendants Father, father’s father etc. ad infinitum

Brother and his
male issue
Germane brother, consanguine brother, germane brother’s
son, consanguine brother’s son, ad infinitum

Paternal uncle
and his male
issue
Germane paternal uncle, consanguine paternal uncle, germane
paternal uncle’s son, consanguine paternal uncle’s son, ad
infinitum

Paternal great
uncle and his
male issue

Father’s germane paternal uncle, father’s consanguine
paternal uncle, father’s germane paternal uncle’s son ad
infinitum

Other male
relatives
…

Quranic heirs include the mother, grandmother, husband, wife, daughter,
son’s daughter, uterine brother, germane, consanguine, and uterine sisters. It is
important to note that 8 of the 10 Quranic heirs are women. The agnatic co-sharer is
a female Quranic heir who is brought into this new category by virtue of the fact that

73
she and a male agnate are related to the propositus in the same manner.
10
Once a
female has been converted into an agnatic co-sharer, she ceases to be a Quranic heir.
Female agnatic heirs include the germane and consanguine sisters. The agnatic sister
only becomes a female agnatic heir if she has no brother and a female agnatic
descendant is present as a Quranic heir.
Hanafi law distributes according to the following six steps:
(1) Identification of the highest ranking male agnatic heir.
(2) Identification of agnatic co-sharers.
(3) Identification of female agnatic heirs.
(4) Identification of Quranic heirs. Those members who fall into the
abovementioned three catgories may not be counted as Quranic heirs.
Certain Quranic heirs may be excluded by the presence of other relatives.
For example, the presence of a mother may exclude the grandmother as a
Quranic heir. Similarly, the presence of an uncle who is an agnatic heir
may exclude his niece as a Quranic heir. However, the husband, wife,
mother, father, and daughter may never be excluded from a share of the
inheritance even though they may take their share as agnatic co-sharers or
as male agnates.

10
Propositus is defined as “the person from whom a line of descent is reckoned” (The Reader’s
Digest Great Encyclopedic Dictionary, s.v. “propositus”).

74
(5) Determination of shares of the Quranic heirs. Fractions of the share are
assigned to each of the Quranic heirs. The remainder is assigned to
members of categories (1), (2) and (3) as listed above.
(6) Distribution of the appropriate amounts to the four categories of heirs.
(6a) If the fraction of shares of Quranic heirs equals one or more: the
amount is distributed in proportion to the Quranic hiers and nothing
remains for members of the other categories.
(6b) If the fraction of shares assigned to Quranic heirs is less than one:
the residual amount goes to male agnatic heirs, agnatic co-sharers,
and female agnatic heirs respectively. If there are no agnatic heirs
then the amounts are increased in proportion to their original
entitlements. If there is are neither agnatic heirs nor Quranic heirs
who are related to the propositus via blood, the residual amount may
be distributed to distant kindred. If there are no agnatic heirs,
Quranic heirs, or distant kindred, the proportions are divided
between the spouse relict and the State (Carroll 1983, 638-640).
Table 4.2 provides a simplified version of the respective shares of relatives under
Hanafi law. (For the sake of brevity the numerous rules regarding exclusion of
Quranic heirs and the alteration of shares of Quranic heirs have not been included in
the table).

75

Table 4.2
Quranic Heirs and Their Respective Shares (Carroll 1983, 636-637)

Relation to Propositus Basic Quranic Share Revised Quranic Share
Grandfather 1/6 1/6 + share as male agnate
Grandmother 1/6 N/A
Father 1/6 Ranges from 0 to 1/6
Mother 1/6 Ranges from 0 to 1/3
Husband 1/4 1/2
Wife 1/8 1/4
Daughter Ranges from 1/2 to 2/3 Takes Share with Son
Son’s Daughter Ranges from 1/2 to 2/3 Ranges from 0 to 1/6
Germane Sister Ranges from 1/2 to 2/3 None
Consanguine Sister Ranges from 1/2 to 2/3 Ranges from 0 to 1/6
Uterine Brother/Sister Ranges from 1/6 to 1/3 N/A

We can see from the foregoing table that the application of Islamic inheritance laws
could potentially divide an estate among a large number of heirs. Another potential
consequence of Islamic inheritance laws is that the size of the estate can dwindle into
small portions. We will see further in this chapter how the application of Islamic
inheritance laws over the course of many generations can severely fragment an
estate.

Capital Fragmentation and Islamic Inheritance Laws
The effect of Islamic inheritance law in encouraging fragmentation of estates
has been discussed before (Ahmad 1991; Bose [1997] 2004, 92; Timberg 1978,

76
39).
11
It would be wise to briefly discuss how the Islamic inheritance system
enforced the tendency towards fragmentation of capital. First, Islamic inheritance
system enforced division of the estate upon the death of the propositus. The
propositus’ ability to make adjustments in the distribution of his estate through a will
was limited: he could not bequeath more than a third of his estate through
testamentary dispensation without the consent of his heirs.
12
This prevented Islamic
estates from existing for long durations and limits their life expectancy to that of the
propositus. Second, the Islamic inheritance system greatly increased the number of
eligible heirs. While the pre-Islamic inheritance codes of Arabia limited shares to
male agnates, Islamic jurisprudence increased the number of heirs by including
others, especially females. Both the abovementioned factors create a pronounced
tendency in the Islamic inheritance system towards estate fragmentation.

Mechanisms for Circumventing Islamic Laws of Succession
South Asian Muslims attempted to bypass Islamic inheritance laws and
prevent fragmentation of their estates through donation the estate via the hiba-bi’l-

11
The application of Islamic law also led to estate fragmentation among the Muslims of the Middle
East. For a discussion of some of the consequences of this see Baer (1962, 79-83), Doumani (1995,
70-71), Marcus (1989, 209-210), and Meriwether (1999, ch. 4). A variety of methods (such as the
marriage of two heirs of the same estate) were utilized to circumvent the application of the laws of
inheritance (Baer 1962, 115-116; 163-166; Meriwether 1999, ch.4; Mundy 1988, 49-65; Powers 1990,
19-27). The establishment of a waqf was another means by which Muslims of the Middle East
circumvented the application of the laws of inheritance (Barnes 1987, 16; Kuran 2001; 2003, 430;
2004b, 75).
12
Sunni and Shia laws of succession differ in that in the former, a propositus may not use
testamentary dispensation to benefit one of the intestate heirs, whereas this is not the case with the
latter.

77
‘iwad or establishment of a waqf-alal-awlad. We will discuss the hiba-bi’l-‘iwad
first. Since the practice of hiba-bi’l-‘iwad in South Asia differed significantly from
what the term implies in classical Islamic law, it would be wise to discuss the
meaning of the term in the context of classical Islamic law.
13
The hiba-bi’l-‘iwad
refers to a transaction composed of the exchange of two separate gifts. The gifts do
not need to be of equal value; often the second gift (‘iwad) is a token item such as a
bangle or prayer rug, and is worth only fraction of the original gift. The significance
of the second gift (‘iwad) cannot be underestimated. In classical Islamic law, the
giving of a gift (hiba) from one party to another may be revocable, but when a return
gift (‘iwad) is accepted by the donor of the first gift the exchange (hiba-bi’l-‘iwad)
becomes irrevocable. The hiba-bi’l-‘iwad differs from another method for exchange
of goods, the hiba-ba-shartul-‘iwad, on two crucial points: in the latter the gifts
exchanged are of equal value and the transaction is treated as a sale.
14
The hiba-ba-
shartul-‘iwad may be revoked because it is treated as a sale in classical Islamic law
(Carroll 2001, 249-250).
The South Asian hiba-bi’l-‘iwad possessed characteristics that allowed it to
become an effective means for the circumventing Islamic laws of succession. It
differed from both the classical hiba-bi’l-‘iwad and the hiba-ba-shartul-‘iwad in that
the original gift does not need to be in possession of the donee for the transaction to

13
We distinguish between hiba-bi’l-‘iwad as it is discussed in classical Islamic legal literature from
the practice of it in South Asia by referring to the latter as “South Asian hiba-bi’l-‘iwad.”
14
However, until the exchange has been completed, the hiba-ba-shartul-‘iwad is governed by rules
applying to gifts (hiba) and not the rules applying to sales.

78
be valid and complete. This protected the donor because he did not have to pass his
property to the donee during his lifetime and thus reduce himself to poverty or
dependence on the donee. However, the South Asian hiba-bi’l-‘iwad (just like its
classical counterpart) required that a gift of token value be given by the donee. The
transfer of the second gift (‘iwad) made the transaction irrevocable.
15
The South
Asian hiba-bi’l-‘iwad was similar to the hiba-ba-shartul-‘iwad in that both were
governed by rules regulating sales but not gifts. Since Hanafi laws restricted the
transfer of property via gift-giving but allowed for it through sales, this made the
South Asian hiba-bi’l-‘iwad an effective mechanism for the transfer of property and
thus avoid the application of the Islamic inheritance laws. The South Asian hiba-
bi’l-‘iwad lost popularity during the late nineteenth century when British-Indian
courts insisted that the donor’s rights over the donated property cease immediately.
The waqf-alal-awlad was utilized by South Asian Muslims during the
nineteenth century in order to circumvent the Islamic laws of inheritance (Bose [1997]
2004, 92; Carroll 2001, 257).
16
Before analyzing this institution it would be wise to

15
Since the South Asian hiba-bi’l-‘iwad allowed for postponement of the delivery of the original gift,
the token gift (‘iwad) was often delivered immediately to make the transaction irrevocable.
16
It has been suggested that the waqf-alal-awlad became popular with members of the Muslim
aristocracy during the nineteenth

century because higher taxes on land and the concept of private
property threatened the Muslim aristocracy’s ownership of its estates (Carroll 2001, 257). However it
is unclear why the introduction of the concept of private property would necessarily lead to estate
fragmentation amongst Muslim families, especially since larger estates may have brought with them
the benefits of economies of scale and greater social prestige. It is also unclear why higher revenue
demands on land would encourage estate fragmentation, since a large estate could meet these
demands more effectively than a small estate. Carroll ignores the possibility that the waqf-alal-awlad
may have gained popularity as a response to the decline in the efficacy of the South Asian hiba-bi’l-
‘iwad as a means of estate preservation during the late nineteenth century.

79
briefly discuss the nature of waqfs in general.
17
A waqf is property of an individual
(known as the waqif) and is dedicated to charitable ventures such as schools or
mosques. The property passes from the ownership of the waqif and is governed by a
manager (mutawalli) who is appointed by the waqif.
18
The profits from the waqf are
given to a beneficiary designated by the waqif.
19
The waqf-alal-awlad gives the not
only the waqif and his family the right to consume profits but extends that right to his
descendants until his line goes extinct (Carroll 2001, 255-257).
The waqf-alal-awlad possessed certain characteristics that made it conducive
to preservation of estates. First, beneficiaries were not allowed to transfer or
partition waqf property. This not only shielded waqfs from Islamic inheritance law,
but also prevented profligate beneficiaries from selling portions of the waqf property.
Second, waqifs were allowed to retain control of the property until their death.
20

17
The waqf emerged in the Islamic world during the eight century and served two functions: it
protected its founder’s immovable goods and provided public goods (Kuran 2001, 844-847). The
waqf drew inspiration from similar institutions used during this period by Romans, Byzantines, Jews
and others. The waqf differs from its Romans and Byzantine predecessors in that the latter always
had to be managed by state or ecclesiastical authorities whereas this was not the case with the former.
The waqf also differs from a similar institution, the Jewish hekdesh, in that the latter discouraged its
founders from accruing any pecuniary benefits (Kuran 2001, 848 n.10). Frye ([1975] 1988, 17) draws
parallels between the waqf and endowments for Zoroastrian fire temples known as ruwanikan difira
and stresses the waqf’s Persian roots. Kozlowski (1995) provides a history of the waqf under the
Mughals. He stresses that unlike the Ottomans and Safavids who used the waqf for a variety of
secular and religious ends, the Mughals’ utilization of the waqf was often limited to granting
endowments to prominent Muslim religious figures. The use of the waqf to preserve familial estates
only gained currency in South Asia during the nineteenth century and evoked controversy among the
Muslim intelligentsia (Kozlowski 1980, 291-296).
18
There may be multiple managers in charge of a waqf.
19
The Hanafi is the only major school of Islamic jurisprudence that allows the waqif to keep these
profits for himself during his lifetime. However both Hanafi and non-Hanafi schools permit the
waqif’s spouse and children to consume profits from the waqf.
20
This could not be done when an estate was given as a gift (hiba). The donor was required to part
with it immediately and would be left destitute.

80
Third, waqifs could choose who the beneficiaries would be. This allowed waqifs to
choose immediate family members as beneficiaries and exclude more distant kin
who may have had a share to the property if Islamic inheritance laws were applied to
property (Carroll 2001, 260-262).
While the waqf-alal-awlad was utilized by the South Asian Muslims for
preservation of their estates, it also prevented their effective utilization. First, since
beneficiaries were bound by terms stipulated in the waqf deed they had to utilize
waqf property as per the original intent of the waqif and could not place the property
or its assets in more profitable ventures. Second, because beneficiaries could not sell
waqf property, the capital invested in this property could not be utilized for other
areas of economic life. Finally, while the number of beneficiaries grew over time,
each beneficiary’s share of (and profit from) waqf property declined. Thus
beneficiaries had little incentive to maintain waqf property which often fell into
misuse (Carroll 2001, 260-262).
21

Thus we can see that two means used by South Asian Muslims to circumvent
Islamic inheritance laws had specific shortcomings that limited their effectiveness.
The South Asian hiba-bi’l-‘iwad lost its efficacy in the nineteenth century, when
British-Indian courts insisted that the donor’s rights upon the gifted property cease
immediately. The waqf-alal-awlad gained popularity among during this period but it
limited the fluidity of capital and prevented its usage for industrial ventures.

21
We observe similar problems with waqfs in the Middle East (Kuran 2001).

81

Frequency of Estate Fragmentation
Hindu and Islamic inheritance codes differ in their treatment of the familial
estate. Under Hindu inheritance laws, a joint family may exist and hold its property
collectively for an indefinite period of time. The Hindu estate is only split during a
partition which is not necessarily concomitant with the death of the patriarch of the
family. Muslim inheritance law calls for division of the estate upon the death of the
propositus, i.e. every generation. Since Muslim estates must be split up every
generation, while Hindus can exercise the option of holding wealth collectively, this
may lead to a greater occurrence of fragmentation of estates amongst Muslims than
amongst Hindus.

Treatment of Individual and Collective Property
Hindu inheritance law recognizes the concept of collectively held property in
a family and encourages the growth of this property. Individually held property has
a tendency to devolve into the pool of joint family property. The Hindu treatment of
property differs from the Islamic treatment in that the latter does not: a) distinguish
between individually and collectively held property; or b) allow for the family estate
to be broken into individual segments held by the various members of the family.

82
Number of Heirs
The Hindu inheritance code limits the shares of the estate to the coparceners
while non-coparceners are granted only enough of the family’s capital for
maintenance purposes only. Joint family divisions occur per stripes and not per
capita. This is an effective means of reducing fragmentation because joint families
may have large numbers of male members when sons and grandsons of coparceners
are taken into account and a per capita division would fragment the estate to a far
greater extent than would a per stripes division.
Islamic inheritance codes differ from Hindu inheritance codes in that the
former introduce a large number of heirs under the category of Quranic heirs. While
females do have the right to maintenance under Hindu codes, Islamic codes grant
certain female members of the family specific shares.
22

Quantifying Consequences of Hindu and Muslim Inheritance Codes
How would Hindu and Muslim families fare under the codes of their
respective religions? Let us assume that we have two families: F
H
and F
M
. Both
start initially with a capital of Rs. 1,000,000. We trace the history of the families’
capital stock over the course of three generations. Since we want to see the impact
of the inheritance codes on the respective families we will work under the following
simplifying assumptions:

22
Unfortunately, there is no study that provides us the average number of heirs in Hindu and Muslim
estates.

83
(1) Both families consist of only one father and his two sons.
(2) In each subsequent generation the family will consist of father and two
sons.
(3) The families do not consume from their capital stock, nor do they
augment it via other means such as business profits.
(4) The families are restricted to operating under the codes of their respective
faiths and may not switch to the other inheritance code.
(5) The Muslim family must split its stock of capital with every subsequent
generation; the Hindu family has the option of splitting or retaining its
capital every generation.
23

(6) When capital is divided it will be divided into two equivalent shares
between both sons.
Let F
H
= Hindu Family
Let F
M
= Muslim Family
Let Κ = Stock of capital.
Let S = Splitting of the estate.
Let R = Retention of the estate
Let P
S
= Probability of splitting the estate per generation. For the Hindu family P
S
:
0 ≤ P
S
≤ 1. For the Muslim family P
S
= 1.

23
We ignore both the waqf-alal-awlad and the hiba-bi’l-‘iwad in this model because the latter had
fallen out of use during the late nineteenth century while the former tended to decrease the fluidity of
capital and hindered its investment in industry.

84
Let G = Generation where G: 0 ≤ G ≤ ∞, where G
0
indicates the initial generation.
To measure the extent of capital fragmentation by the nth generation in the Muslim
family we use the following equation: K
N
= K
0
(½)
N

To measure the extent of capital fragmentation by the nth generation in a Hindu
family we use the following K
N
= K
0
(½)
PsN

Given that 0 ≤ P
S
≤ 1 for F
H,
we can infer that K
N
(½)
PsN
≥ K
N
(½)
N

Furthermore, K
N
(½)
PsN
= K
N
(½)
N
only if the Hindu family’s P
S
=1.
Scenario 1: The history of the capital stock of a Muslim family vis-à-vis the capital
stock of a Hindu family with high incentive to avoid partitioning. P
S
=0.1 over three
generations.
The capital stock of the Muslim family would diminish in a pattern as is illustrated
by Table 4.3. The capital stock of the Hindu family could follow any one of the
patterns with their respective probabilities outlined in Table 4.4. We can also see
from this table that over the course of three generations, the p-value for the Hindu
family’s capital fragmenting to the extent of the Muslim family is only 0.001.

85
Table 4.3
Capital Fragmentation in a Muslim Family

Generation Stock of Capital
G
0
Rs. 1,000,000
G
1
Rs. 500,000
G
2
Rs. 250,000
G
3
Rs. 125,000

Table 4.4
Probability of Capital Fragmentation in a Hindu Family with P
S
= .1

S Probability Stock of Capital by G
3

Split 0 times .729 Rs. 1,000,000
Split 1 times .243 Rs. 500,000
Split 2 times .027 Rs. 250,000
Split 3 times .001 Rs. 125,000

Scenario 2: The history of the capital stock of a Muslim family vis-à-vis the history
of the capital stock of a Hindu family that is indifferent to partitioning the estate.
P
S
= .5 over three generations.
Table 4.3 and Table 4.5 represent the stock of capital for the Muslim and Hindu
families respectively. We can see from Table 4.5 that over the course of three
generations, the p-value for a Hindu family’s fragmenting to the extent of a Muslim
family is 0.125.

86
Table 4.5
Probability of Capital Fragmentation in a Hindu Family with P
S
= .5

S Probability Stock of Capital by G
3

Split 0 times .125 Rs. 1,000,000
Split 1 times .375 Rs. 500,000
Split 2 times .375 Rs. 250,000
Split 3 times .125 Rs. 125,000

Scenario 3: The history of the capital stock of a Muslim family vis-à-vis the history
of the capital stock of a Hindu family with little desire to avoid partitioning. P
S
= .99
over three generations.

We can see from Table 4.6 that over the course of three generations, the p-value for a
Hindu family’s estate fragmenting to the extent of a Muslim family is 0.97.

Table 4.6
Probability of Capital Fragmentation in a Hindu Family with P
S
= .99

S Probability Stock of Capital by G
3

Split 0 times .000001 Rs. 1,000,000
Split 1 times .000297 Rs. 500,000
Split 2 times .029 Rs. 250,000
Split 3 times .97 Rs. 125,000

Analysis
From the above scenarios, we can see that only a Hindu family that
partitioned its estate with the passing of every generation would see its estate

87
fragmented to the same extent as a Muslim family with same initial stock of capital.
On the other hand, as Table 4.7 illustrates, Hindu families with any P
S
value less than
1 would retain a greater stock of capital than Muslim families. We can see from
Tables 4.4, 4.5 and 4.6 that the likelihood of capital retention Hindu families varies
inversely with their respective P
S
values.

Table 4.7
Expected values of capital stock by G
3
for both Hindu and Muslim families.

P
S
of F
H
K of F
H
K of F
M

1.00 Rs. 125,000 Rs. 125,000
.99 Rs. 127,636 Rs. 125,000
.50 Rs. 353,553 Rs. 125,000
.10 Rs. 812,252 Rs. 125,000

How can the P
S
value be determined for a family? Incentives to avoid
partitioning an estate are negatively linked with the P
S
value. These incentives stem
from the following sources: Most families are reluctant to divide assets because by
doing so the family’s reputation in the community will be diminished and such
partitions are seen as an affront to the patriarch (Dutta 1997, 115). Also partitions
decrease in the aggregate the stock of the family’s capital. Factors such as
individualism, envy, greed, and intra-family conflict may encourage the partitioning
of estates. These factors may increase the P
S
value for a family
.
We cannot
determine whether the abovementioned incentives to avoid partitioning estates
swamped the incentives to partition particular estates. However, both set of

88
incentives worked against each other in families and their relative strengths
determined each joint family’s P
S
value.
Irrespective of the incentives Muslim families may have had to prevent
fragmentation of their estates, their legal code did not provide them with the option
of avoiding a partitioning of the estate. As a result, the P
S
value for virtually all
Muslim families was 1. Thus, despite the possible existence of similar incentives to
preserve capital, Hindu and Muslim families had different sets of options available to
them in regards to partitioning of their estate. Hindu law allowed Hindu families to
respond to incentives and retain or partition estates accordingly, while Muslim
families were unable exercise similar options.
24
The history prominent Hindu
families involved in banking in Hyderabad in the eighteenth and nineteenth centuries
offer a case in point: there was very strong incentive to accumulate capital and these
families usually avoided partition for the duration of a century (Leonard 1981, 182;
198).
A look at specific cases can provide us with a more complete picture of how
some wealthy Hindu families were able to successfully retain capital by avoiding
partitioning of their estates. Four case studies of Hindu joint families are discussed
below. These particular case studies were not chosen randomly from the literature
on Hindu joint families but were instead chosen because they reflect successful
utilization of Hindu inheritance law in order to prevent partitioning of family estates

24
We have discussed the hiba-bi’l-‘iwad and waqf-alal-awlad and their limitations.

89
and encourage the accumulation of capital for a considerable duration of time.
While there is no study that provides statistics on how frequently Hindu joint
families were partitioned in the past, these case studies can be utilized to get an idea
of the durations for which Hindu joint families could potentially avoid partitioning
their estates.

Case Studies
25

Case 1: Gopaldas Manohardas
History
The money-lending business of the Gopaldas Manohardas family was
founded sometime in the seventeenth century in northern India. It provided credit
and services such as currency exchange to its clients. The clients of the business
included local landowners and the East India Company. Though the business was
based in Benares, it was able to establish branches in 52 cities throughout India. The
business was partitioned into two branches in 1787 (Chatterjee 1993, 289-290).

25
Money-lending businesses run by the Hindu joint family are often referred to in the literature as
banking firms (Leonard 1982; Chatterjee 1989, 289). These businesses are not “a collection of
persons who have entered into a partnership for the purposes of sharing the profits of a business
carried on by all or any of them” (Gopal [1958] 1964, 554) and hence are not firms. Instead, these
businesses exist as a result of the sapinda bond between their members.

90
Analysis
A significant portion of the success of the family business can be attributed to
the fact that it was able to recruit other male members of the joint family such as
nephews to run its numerous branches while the eldest male of each generation
retained the power to make key decisions. The family was able to use Hindu
inheritance law to hold its wealth jointly until 1787 when it was partitioned into two
branches. While we do not know the exact date of the business’s establishment in
the seventeenth century, it is clear from the brief history above that the members of
this family business were able to hold their wealth jointly for many generations. The
history of Gopaldas Manohardas is not an atypical case; other money-lending
businesses based in northern India during this time period had similar histories.

Case 2: The Travadis
History
The family business of Travadis was founded by Arunji Nathji in the early
eighteenth century. Nathji had access to the Mughal court and started his business
career as a moneylender. He was able to combine business acumen with a shrewd
understanding of political conditions to amass a fortune. Nathji was succeeded by
his son Shrikrishna who successfully established a family network throughout India.
Shrikrishna maintained a cordial relationship with the British provided them with
capital during their military campaigns in India. Before his death in 1822,

91
Shrikrishna appointed his adopted grandson Mani Kisan Dube as head of the
business. Shrikrishna’s relatives disputed the legality of Dube’s claim to leadership
and a crisis of succession eventually led to the collapse of the business (Mehta 1991,
153-168).
Analysis
The history of the Travdis family is interesting because it gives us insight into
causes of both the ascendancy and demise of a family business. The Travadises were
able to use Hindu law to successfully avoid a partitioning of the family fortune when
Arunji Nathji passed away. Shrikrishna’s leadership was not disputed and members
of the joint family cooperated with him in establishing a network of branches
throughout India. However, Shrikrishna’s appointment of Dube as his successor
created resentment that resulted in the demise of the family business. The succession
crisis following Shrikrishna’s death indicates that the head of the family business
could not disregard the wishes of other members of the joint family without
consequence and these members could exercise the option of partitioning the
business when they felt their interests were not properly looked after.

Case 3: The Jhaveris
History
The Jhaveris settled in the region of Gujarat in during the last quarter of the
sixteenth century. Under the dynamic leadership of Shantidas Jhaveri, by the early

92
seventeenth century they had amassed an enviable fortune. The family established
close relations with the Mughal court and served them in two capacities: as jewelers
and moneylenders. The Jhaveris used their wealth and connections with the Mughal
court to acquire political influence in Gujarat. They were able to avoid the
partitioning of their estate until the early nineteenth century (Tripathi 1981, 21-39).
Analysis
The success and prominence of the Jhaveris is due in large part to their ability
to amass capital over the generations via Hindu inheritance law. Despite the fact that
the family business’s leadership changed hands five times during a period of two
centuries, the Jhaveris were able to hold their wealth collectively. What sort of
incentives motivated the Jhaveris to avoid partitioning their estate for such a long
duration? Firstly, by holding wealth collectively the Jhaveris were able to
accumulate sufficient capital stock to be able to make loans to the Mughal Dynasty.
The family acquired considerable political clout and was able to influence some of
the policies of the Mughals. Secondly, by avoiding a partitioning of their estate, the
Jhaveris were able to present a united front to rival merchant families in Gujarat.
Finally, the Jhaveris may have had an extramundane reason for collectively holding
their wealth: the family was known to be very pious and was able to fund the
building of Jain temples due to its wealth.

93
Case 4: The Jagatseths
History
The family business of the Jagatseths was established in Patna in 1652 by
Hiranand Saho. The business began its operations by lending capital to servants of
the East India Company. Saho’s son, Manik Chand, was able to cultivate a close
relationship with the Mughal authorities and established branches in numerous cities
including Dhaka, Calcutta, and Benares. Manik Chand was succeeded in 1714 by
his nephew Fateh Chand who successfully lobbied the Mughals to grant the
Jagatseths a near monopoly over banking and minting in Bengal. The fortunes of the
Jagatseths began to decline during the middle of the nineteenth century, when the
British acquired hegemony over Bengal. The British refused to grant the Jagatseths
monopoly privileges and the their prime position was challenged by other indigenous
moneylenders. The Jagatseth fortune was partitioned in 1822 as a result of a bitter
dispute between two male members of the family (Little 1967, vi-xxii).
Analysis
The Jagatseths offer us excellent illustration of the use of Hindu inheritance
law to retain and accumulate capital. The family was able to hold its wealth
collectively from 1652 to 1822 and avoided partitioning the family business on at
least three occasions. Manik Chand did not have a son but perspicaciously averted
partitioning the family business by passing on leadership to his nephew Fateh Chand.
Both of Fateh Chand’s sons failed to outlive their father and instead of partitioning

94
the firm, the mantle of leadership was passed on to his grandson Khushal Chand.
The family faced another crisis when Khushal Chand died sonless. Instead of
partitioning the estate, the position of leadership was passed on to another male
member of the family, Harakh Chand. It was only sometime after the death of
Harakh Chand that a family dispute between two of his sons led to the partitioning of
the estate. The members of the family could have opted for a partition of the estate
after the death of each head of the family firm. However, they choose to not exercise
this option and guarded their collective interests by bringing in a competent male
member of the extended joint family.

Paucity of Capital Accumulation in Muslim Families
The literature is replete with references to Muslim merchants such as Mirza
Muazzam, Agha Jafar, and Haji Abdul Nabi, who managed to acquire considerable
wealth (Mehta 1991, 33). Muslim merchants, particularly in the western coast of
India, were able to accumulate stocks of capital that were comparable in size to those
of their Hindu colleagues. Some Muslim merchants were able to use their capital to
become moneylenders and successfully competed with Hindu moneylenders.
While Muslim merchants were able to acquire capital with considerable
success, this capital was rarely retained for long durations (Dasgupta 1982, 422).
Some Muslim merchants, such as Haji Zahid Begg of seventeenth century Surat,
were succeeded in business by their sons but even in such cases familial dynasties of

95
durations similar to the Jagatseths or Jhaveris failed to develop. This is
understandable in light of the fact that the Islamic inheritance system made it
difficult to preserve estates over multiple generations. Regardless of the talent
possessed by a particular Muslim merchant, his descendants would have to expend
their energies in rebuilding the capital stock lost by estate fragmentation. This
experience contrasts strongly with the experience of Hindu joint families such as the
Jhaveris who were able to retain their wealth for over two centuries.

Conclusion
Our discussion of Hindu and Islamic inheritance legal systems has helped to
illustrate the impact each of the respective legal systems had on capital stocks within
families. We saw that both Hindu and Muslim legal codes had a different
understanding of the nature of family property: the former acknowledges the
existence joint property and creates a framework for the preservation of this
property, while the latter allows for the fragmentation of this property. A second
crucial difference is that the Hindu inheritance codes attempt to limit the number of
heirs while its Islamic counterpart includes a large number of family members as
eligible heirs. The third and perhaps most crucial difference is that Hindu
inheritance codes gives the option of retaining or partitioning estates while its
Islamic counterpart splits the estate upon the death of the propositus. We then
demonstrated through a model and case studies how this third difference had a

96
dynamic effect: some Hindu families were able to retain large stocks of capital,
while Muslim families experienced fragmentation of their capital stocks. The next
chapter will discuss the significance acquired by differences in the capital stocks of
the respective communities.

97

Chapter 5: The Rise of Hindu Business Families and the Role Played
by Capital and the Managing Agency System

Introduction
In December 1993, there were 297,000 joint stock companies in India. The
combined paid-up capital on these companies was approximately $25 billion. Of
these 297,000 joint stock companies, 294,000 were family run businesses. In
enterprises such as these, business families often retained control of a company while
floating shares in order to attain additional capital. The majority of the remaining
3,000 joint stock companies were foreign or government owned companies (Dutta
1997, 30). From these statistics we can see that the overwhelming majority of Indian
joint stock companies are closely tied to family businesses. The prevalence and
spread of joint stock companies in India does not imply that joint stock companies
have replaced the traditional family centered model of business; instead joint stock
companies have become a useful appendage or extension of the traditional family
business. A close look at the history of the joint stock company in India will
illustrate that the history of this Indian institution is in many ways intertwined with
the history of family businesses in India. The close association between joint stock
companies and family businesses has been discussed many times (Brimmer 1955,
558; Tripathi 1990, 26-27; 2004, 112-133) but little of the existing literature
addresses why Hindus were more successful in adopting this institution than were

98

the Muslims of India. The Hindu merchant castes of India were able to use this
institution to move beyond their traditional niches of banking and retail, and enter
manufacturing.
1
Hindus of non-mercantile backgrounds, such as Brahmins and
landowners, were also able to adopt this institution and move from their traditional
venues into manufacturing. On the other hand, Indian Muslims were not able to
adopt this institution to the same degree and move into new areas such as
manufacturing.
2
Recent data show that Hindus continue to dominate industry and
business in India. A look at India’s fifty largest business houses in 1997 shows that
only one of them had a Muslim as chairman (Tripathi 2004, 340-342).
3
A list of

1
According to the 1931 census, merchant castes made up 2.9% of the Hindu male population (Dutta
1997, 65). Muslims ethnic groups that have active in trade and moneylending in various parts of
India include Arabs and Pathans (Chandavarkar 1983, 796-797). Muslim castes that have been active
as traders and moneylenders in southern India include Labbais, Rawthers, Marakkayars, Kayalars,
Mopillahs, Shaykhs, Navayats, and Daccanis (Mines 1972, 23-37). Muslim castes that have been
active as traders and moneylenders in Western India include Khojas, Bohras, and Memons (Timberg
1969, 106). It is difficult to arrive at an accurate estimate of the percentage of the Muslim population
involved in trade because the data does not distinguish traders and non-traders in Muslim groups such
as Pathans and Mopillahs. While there was some emigration by Indian merchant castes to other
countries during the first half of the twentieth century, we do not have an exact statistic on the size of
the population of Indian merchants living abroad. According to the 1931 census, 2.4 million Indians
lived abroad. The most popular destinations were Sri Lanka and Malaysia, with Indian populations of
773,170 and 624,009 respectively. The vast majority of Indian emigrants to both countries were
Hindus from southern India (Census of India 1931, 71-72) but data on their caste origins is not
available. There was also an Indian population of approximately 75,000 individuals in East Africa in
1931. It is well known that members of merchant castes (both Hindus and Muslims) migrated to East
Africa but exact statistics are not available on the respective size of both communities. Hanna
Papanek (1962, 11) estimates that in 1960 the Khoja population of East Africa was approximately
50,000. Given the relatively small size of the East African Indian population, the effect of out-
migration to this region on the merchant populations appears to have been minimal.
2
References in this chapter to Muslim tepidness in adoption of the joint stock company and entry into
industry do not apply to heterodox Muslims (Khojas, Bohras, and Memons) who used Hindu business
institutions and inheritance laws. We will discuss them in greater detail later in this chapter.
3
Business house is defined as “the companies controlled, directly or indirectly, by a particular family”
(Tripathi 1990, 27).

99

India’s rupee billionaires in 1994 was composed almost entirely of Hindus and
Zoroastrians (Dutta 1997, 64-65).
The adoption of joint stock companies by Hindus was a gradual process and
was intimately tied to the adoption and spread of another business institution, the
managing agency (Brimmer 1955, 561-563; Tripathi 2004, 112-133). Joint stock
companies in India were usually not independent entities but were controlled by
firms known as managing agencies. Managing agencies were firms that vested
control of the joint-stock company with the managing agents, even though managing
agents may have had only a minority interest in the company. Managing agencies
usually did not restrict themselves to managing one joint stock company. Usually
they managed numerous joint stock companies in different industries. The
importance of managing agencies cannot be overestimated because virtually all
major private corporations in India were controlled by managing agencies (Lamb
1955, 110; Tripathi 1981, 46-47).
4
Managing agencies arose in India during the
middle of the nineteenth century due to two conditions: a shortage of capital for
investment, and a dearth of entrepreneurs qualified to run industrial enterprises.
While managing agencies controlled joint stock companies, these agencies were in
turn controlled by business families (Brimmer 1955, 558; Lamb 1955, 102; Tripathi
1981, 43; 1990, 27). Managing agencies became a means by which business
families controlled the joint stock companies of India.

4
Banks and insurance companies are excluded because Indian law prohibited them from entering into
agreements with managing agencies (Brimmer 1955, 564 n.8).

100

In the late nineteenth century, the managing agency model was adopted by
many leading families from Hindu merchant castes who used this institution to enter
the manufacturing sector of the economy. Managing agencies were also adopted
during this period to a lesser extent by some Hindu families from non-mercantile
backgrounds. However, the Muslims of India did not adopt this institution in a
similar manner. A look at the 3,944 domestic managing agencies operating in India
in 1951 reveals that only 43 (1.09% of the total) were managed by Indian Muslims
(Nigam 1957, 104-225).
This chapter will attempt to demonstrate that the Hindu families were able to
adopt the managing agency model successfully and float joint stock companies for
two reasons.
5
First, India’s capital markets were underdeveloped and Hindu
merchant castes were one of very few groups endowed with capital. Families from
the merchant castes floated joint stock companies to raise additional capital in order
to enter manufacturing. The shares for these companies were bought not by the
general Indian public but by members of the same caste as the family floating the
joint stock company. Groups that were not endowed with sufficient capital faced
inordinate difficulties in raising capital and were thus handicapped vis-à-vis Hindu
merchant castes in this respect. Second, Hindu families were able to transition into
the managing agency model and apply it to their own business context because this
model was not alien to them. A traditional Hindu joint family business often

5
Both reasons apply to families of heterodox Muslims as well.

101

functioned as a sort of informal managing agency; it would collectively manage
firms in diverse fields while retaining control of these firms. In many ways the
managing agency was a parallel institution: one managing agency would manage
joint stock companies in diverse fields as well. Hindu families who did not belong to
the merchant castes were also familiar with many aspects of the managing agency
model because the various members of the family worked in different fields but the
family functioned as one unit and often held wealth as a single unit for many
generations. On the other hand, the Muslims of India were subject to the rules of the
Hanafi school of Islamic law and as a consequence Muslim families did not hold
wealth or conduct business as Hindu families did (Ahmad 1991, 4).
6
One of the
consequences of this was that the managing agency model was a more alien
institution to Muslims than it was to Hindus.
The Hindu merchant castes of India had two crucial advantages: their
communities had access to capital in a capital-scarce environment and it was not
difficult for them to grasp the concept of a managing agency. Hindus from non-
mercantile backgrounds may not have had access to the sort of capital that Hindus
from merchant castes had but the model of a managing agency running multiple joint

6
Islamic business institutions and inheritance law tended to be more individualistic than their Hindu
counterparts. The Hindu joint family emphasizes sharing both work and profits collectively, whereas
the Islamic commercial law draws sharper divisions between the two partners involved. Similarly, the
Hindu joint family held wealth collectively, while Islamic inheritance law usually split the wealth
along individual lines. Avner Greif (1994) has suggested that individualistic societies had advantages
vis-à-vis collectivist societies in the development of institutions that were conducive to economic
growth in the long run, but our examination of Hindu and Muslim institutions points in the opposite
direction. For a critique of Greif’s argument, see Edwards and Ogilvie (2008).

102

companies was not entirely alien to them. The Muslims of India were at
disadvantage in both respects: their communities and families generally lacked
capital, and the managing agency was alien institution to them.
We shall see below that joint stock companies were initially introduced in
India in the 1660s but Indian merchants were unwilling to adopt them. Joint stock
companies were reintroduced in India in 1829 but we see a significant increase in
their numbers only in the last two decades of the nineteenth century. A glance at
Table 5.1 illustrates the steady rise in the number of joint stock companies in India
since 1880. The number of registered joint stock companies operating in India was
under 500 in 1880. This number increased steadily and in 1950 over 27,000 joint
stock companies were registered in India (Govt. of India 1955, iv). The consistent
increase in the number of joint stock companies indicates that in the seventy years
between 1880 and 1950, an increasing number of Indians became familiar and
comfortable with this institution.

103

Table 5.1
Number of Registered Joint Stock Companies

Year Number of Joint Stock Companies
1880 Under 500
1890 886
1900 1,340
1910 2,216
1920 3,668
1930 6,919
1940 11,372
1950 27,558

A Brief History of Joint Stock Companies in India
Joint stock companies were first introduced to India in the 1660s by Dutch
and English trading companies. European merchants had initially relied on
individual Indian merchants to provide them with various types of cloth but as the
quantities demanded of cloth increased, lone Indian merchants could not be counted
upon to supply the requisite amounts (Arasaratnam 1966, 85-86).
Individual merchants also competed against each other and offered weavers
higher prices for cloth. This led to an increase in the price of cloth and was reflected
in the rates Indian merchants charged European companies (Brennig 1979, 73). In
order assure a greater and more consistent supply of cloth, Dutch and English
companies began to organize Indian merchants into associations. How were these
associations set up? Typically, a European official brought suppliers together and

104

asked them to join the association. Suppliers were reluctant to join and often only
the threat of losing the business of a European company made them give in.
Shareholders were selected on the basis of their familial and caste backgrounds in
order to ensure effective cooperation. The shareholders were divided into two
categories: head merchants and ordinary merchants. The former provided much of
the capital, while the latter did the physical work such as transportation of the goods.
The size of capital raised by these joint stock companies varied from 10,000 pagodas
to 150,000 pagodas.
7
Share prices could vary from 100 pagodas to 1,000 pagodas
(Arasaratnam 1966, 87).
Indian merchants gained by participating in these joint stock companies in
many ways. Merchants no longer outbid each other to procure the services of
weavers and were able to obtain cloth more cheaply. Members of these joint stock
companies were given special trading privileges in areas controlled by the respective
European powers. European companies could not buy cloth from merchants outside
the joint stock company unless the supply of cloth fell short of what was stipulated in
the initial contract. For their part, European companies benefited in many ways.
They no longer had to advance cash to merchants to purchase cloth; instead they paid
merchants only after an order was fulfilled. Debts owed to the European company
were owed by the joint stock company collectively and not by an individual

7
One pagoda was equivalent to approximately 12 shillings during this time period.

105

merchant. This paved the way for greater accountability.
8
However, associations
were closely monitored by European officials and contracts were renewed annually
(Arasaratnam 1966, 89-90). It is unclear how these joint stock companies kept
accounts and how members borrowed capital from the collective pool.
These joint stock companies differed from modern joint stock companies in
several important ways. The charters of these companies did not allow for a change
of membership. Merchants who were not included in the initial contract could not
buy shares in the company, and merchants within the company could not sell their
shares to outsiders (Arasaratnam 1966, 86). A second crucial difference is that these
companies lacked an independent corporate personality. Contracts with the local
European company had to be renewed annually (Arasaratnam 1966, 89). If a
European company did not renew the contract of the Indian joint stock company X,
then company X no longer existed. Company X did not go to another European
company and strike a new contract. A final and crucial difference is that
shareholders of these joint stock companies were unfamiliar with the notion that a
company could possess a distinct personality.
A joint stock company headed by an Indian merchant named Serapa offers an
example of the latter pattern. This particular company had become heavily indebted
to an English company and was unable to pay its debts. Serapa and two other
merchants offered to pay their proportion of the debt, but the other members refused.

8
This may have also allowed for a greater degree of fraud: no formal mechanism existed to prevent
individual merchants from failing to pay their share of the debt owed by the joint stock company.

106

The English company refused this offer of repayment because it believed that the
entire debt must be paid and not the amount proportioned to individual shareholders.
This joint stock company was eventually dissolved (Arasaratnam 1966, 89-90).
This new business institution was limited to southern India. While members
of many different business castes where involved in these joint stock companies, this
institution did not strike permanent roots among the indigenous merchants of
southern India. By the late eighteenth century, they had all but disappeared from the
region. This institution did not diffuse to other commercially active regions of India
such as Gujarat and Bengal. It is beyond the scope of this to discussion to delve into
the specific reasons for the disappearance of these Indian joint stock companies in
the eighteenth century.
9

Joint stock companies were not promoted again in India by either European
or Indian businessmen until 1829, when Alexander & Co. promoted the Union Bank.
Seven years later, Calcutta Steam Tug Association became the first joint stock
company to be promoted by an Indian (Tripathi 2004, 65). Despite these initial
ventures, joint stock companies did not become popular in India. In 1851, some
twenty-two years after the founding of the Union Bank, only 2 joint stock companies

9
One explanation offered for the decline of these joint stock companies is that factionalism between
merchants of different castes that made up these companies may have prevented these companies
from functioning effectively (Arasaratnam 1966, 90-91). Another explanation suggests that joint
stock companies failed to gain popularity because they lacked mechanisms for resolving conflict
between merchants (Brennig 1979, 92-93). Neither explanation accounts for how these companies
functioned for over a century. It is possible that the business needs of the Indian merchants of
Coromandel were satisfied by the Hindu joint family and they saw little need to adopt an alien
institution.

107

operated in India. On the eve of the Sepoy Mutiny of 1857, 12 joint stock companies
existed in all of India. The Act of 1857 had a mildly stimulating effect and by 1860
this number had climbed to 48.
10
What explains the lack of popularity of joint stock
companies in India during this period?
It was very difficult for joint stock companies to obtain corporate status India
during this period. Only a special Act of the Indian Legislature or the British
Parliament could give this status. Until 1850, corporate status had been given to
only five companies. In legal terms joint stock companies did not have a corporate
personality but were seen as partnerships.
11
The directors and shareholders of the
company were perceived as partners. Joint stock companies could be dissolved as
quickly as partnerships. Since there was little legislation dealing directly with joint
stock companies, the rules of English common law and equity were applied. One of
the implications of the application of English common law was that actions between
partners could not be sustained if the accounts belonged to the firm. This prevented
directors and shareholders from bringing legal action against each other when funds
of the joint stock company were involved. A second implication was that in any
action against a debtor all the partners were plaintiffs; this meant that all the
shareholders of a company had to be present to sue debtors (Rungta 1970, 65). The

10
The Act of 1857 provided was the first Act in passed in India to take comprehensive view of the
joint stock company: rules concerning its formation, existence, and liquidation were stated in the Act
(Rungta 1970, 69).
11
While the unincorporated joint stock company had transferable shares, unlike a corporation it did
not possess a distinct legal personality.

108

application of the rules of equity meant that all partners had to be present if the court
was to settle a dispute of the company. Finally, since liability of every shareholder
was unlimited, particular shareholders could be singled out for paying the company’s
debts (Rungta 1970, 65). The Act of 1850 gave joint stock companies a legal
personality (Govt. of India 1955, i). However, this Act did not limit shareholders
liabilities and it failed to make registration of joint stock companies compulsory.
The Act of 1857 granted limited liability to joint stock companies (Govt. of India
1955, i). This act made registration of companies with over twenty shareholders
compulsory and provided much needed legislation for the birth, regulation, and
liquidation of joint stock companies. The act also legislated that dividends could
only be paid out of profits but did not make any rules for the issuing of a prospectus
(Rungta 1970, 69). A feature of the Act of 1857 is that it failed to provide limited
liability to banks.
12
A separate act was passed in 1860 to that effect (Tripathi 2004,
145).
A look at the number of joint stock companies in operation from 1850 to
1860 in Table 5.2 shows that the biggest increase came after 1857. The number of
joint stock corporations in operation increased from 16 in 1857 to 48 in 1860.

12
India’s experience is not unique in this regard. In Britain banks were not granted limited liability
until an Act was passed in 1858 to the effect (Rabushka 1985, 76).

109

Table 5.2
Number of Joint Stock Companies in Operation at Year’s End (Rungta 1970, 47)

Year Number of Joint Stock Companies
1851 2
1852 4
1853 7
1854 11
1855 11
1856 12
1857 16
1858 22
1859 38
1860 48

The growth in the number of Indian joint stock companies in 1857-1860 is
significantly larger than the period from 1850-1857. It appears that the introduction
of limited liability by the Act of 1857 may have stimulated the progress of joint stock
companies. In absolute terms, however, the number of joint stock companies in the
years immediately after 1857 is still small. It is obvious that the growth of joint
stock companies was not solely obstructed by legal issues; the Act of 1857 removed
legal impediments and yet growth in the number of joint stock companies remained
tepid. We will now examine the other factors which hindered the growth of joint
stock companies during this time.

Obstacles to the Growth of Joint Stock Companies
The slow spread of joint stock companies in India can be understood in light
of the fact that industrial development in India throughout much of the nineteenth

110

century was hindered by two formidable obstacles: a shortage of capital and a dearth
of entrepreneurs willing to enter the industrial sector (Brimmer 1955, 560; 562).
There were no organized capital markets in India during this period (Misra 1999, 68)
and capital was scarce (Brimmer 1955, 562; Misra, 1999, 68-70). Enterprises such
as cotton mills or tea companies required large amounts of capital, ranging from Rs.
300,000 to Rs. 500,000. But these amounts were extremely difficult to obtain
because there were few willing investors (Rungta 1970, 227).
The first joint stock company floated by an Indian in the nineteenth century
offers an example of how small the pool of willing investors was. In 1836 the newly
floated Calcutta Steam Tug Association offered 200 shares at the exorbitant price of
Rs. 1,000 per share. Only 10 shareholders bought the entire 200 shares (Kling 1966,
40). The case of the Calcutta Steam Tug Association was not atypical. The shares
for many joint stock companies during the 1850s and 1860s were sold at rates
ranging from Rs. 2,500 per share to Rs. 5,000 per share (Rungta 1970, 203).
13

Given that the average annual per capita income in India in the mid-nineteenth
century was between Rs. 20 to Rs. 40, investments in such shares were well beyond
the means of the average Indian.
Furthermore, most Indians did not have access to Western style banks.
European-controlled joint stock banks typically served the needs of European

13
No reason is given by Rungta for the exorbitant prices of stock shares. It is possible that stock
shares were expensive because they were not meant for the general public but were instead sold only a
small group of wealthy individuals who knew the founder of the joint stock company.

111

investors. There were no large Indian-run joint stock banks until 1906. While
indigenous bankers had large amounts of capital, the rates of interest charged by
joint stock banks were lower than those provided by indigenous bankers (Bagchi
1970, 233).
Other sources of capital were also lacking. As mentioned earlier, the
incomes of the Indian working classes and peasantry were too low to generate
sufficient capital accumulation. The wealth that existed in rural areas was hoarded
as precious metals and conspicuous consumption was a marked feature of Indian
society, particularly of the aristocracy (Rungta 1970, 54-57). As a consequence, not
much capital could be raised from either the Indian aristocracy or peasantry.
In mid-nineteenth century India, the only indigenous groups which had
sufficient accumulated capital were the merchant castes of India. These groups were
not inclined to investing outside of the traditional venues of banking and retail
(Bagchi 1982, 177; Oonk 2001, 422; Rungta 1970, 56-57; Tripathi 1990, 46).
14
The
merchant castes did their business using the Hindu joint family and did not use joint
stock companies since this institution was associated with industrial ventures
(Timberg 1969, 10).

14
Tripathi argues that lack of education and an exposure to Western ideas were two of the main
reasons why merchants were reluctant to participate in industry (Tripathi 1990, 76). Thus, he ignores
the possibility that before the late nineteenth century, most Indian merchants were still unfamiliar with
how joint stock companies could be used to launch industrial ventures.

112

The Managing Agency as the Solution to the Dearth of Capital
The development of the managing agency offered a solution to the problem
of shortage of capital (Brimmer 1955, 560; Misra 1999, 68-70). A managing agency
is a firm that controls numerous companies through a contract known as the
managing agency contract (Brimmer 1955, 554-555).
15
The managing agency
contract states the rights and obligations of the managing agency firm and the
company it manages (Brimmer 1955, 555).
How did managing agencies operate? Managing agents as promoters
assessed the costs of raw materials, labor, and other inputs necessary for a particular
enterprise. They also assessed the size and potential of the market. Managing agents
would then register the company as a legal entity and select the board of directors.
Initially the agents issued the shares to themselves and their close associates. If the
enterprise showed potential, the agents would issue preference shares and sell these
to the public. The agents would also sell some of the shares held by them to the
public. This allowed the agents to raise capital for the company. Once agents had
recovered their initial investment, they would repeat the process and launch new
enterprises (Brimmer 1955, 561). Managing agents retained their power through
contracts which specified the tenure, payment, and powers given to the agents (Basu
1958, 5-6). These contracts placed very few restrictions on the powers of the

15
A managing agency may take on one of many organizational forms such as a partnership or public
limited company. The companies controlled by it are usually joint stock companies (Brimmer 1955,
554-55).

113

managing agents (Basu 1958, 6) and tenure for managing agents tended to be for
long durations such as two decades (Oonk 2001, 429-430).
British and Indian managing agencies differed in many respects. A British
managing agency tended to be a partnership composed of members who had either
technical skills or financial resources. In many such managing agencies, one or two
of the partners would represent established families to give the joint stock companies
an aura of respectability while others were endowed with technical or managerial
skills. The partners functioned as executives of different departments of the joint
stock company and were rotated on a regular basis. A crucial difference between
Indian and British managing agencies is that in the latter partners were not related
and when partners retired they were not replaced by their sons (Brimmer 1955, 556-
557).
Indian managing agencies, on the other hand, can be seen as extensions of the
joint family. The members of the managing agency were usually members of the
same family and the eldest male had the highest position of authority. A joint family
would launch a joint stock company and the shares would be bought by family
members and individuals belonging to the family’s caste (Tripathi 2004, 112-113).
16

The shareholders would agree to a contract by which the family launching the
venture would maintain control of the joint stock company as managing agents of the

16
Since the shares of a joint stock company were bought by relatives and caste-fellows of the
managing agents, this may have removed conflicts of interests between managing agents and
shareholders.

114

company. This allowed the family to raise capital while still retaining control of the
company (Tripathi 2004, 112-113). Through a managing agency, a single family
could control several different companies. The managing agency firm would use the
first company launched by the family as base, and float other joint companies
throughout different industries. The funds from the older company would be used to
ensure that the original family retained control of the new companies (Tripathi 1990,
26-27). Families divided responsibilities among members according to geographical
considerations or industry (Lamb 1955, 102). If an Indian managing agency needed
to recruit partners from outside its pool of family members, it recruited individuals
from the family’s caste (Brimmer 1955, 558).
We have not yet dealt with the question of how managing agencies addressed
the shortage of capital in India. With respect to the shortage of capital, Indian
managing agencies were better adapted to raising capital in two ways. First,
managing agencies were capable of tapping into capital internally. A managing
agency could transfer capital from one of the joint stock companies under its
management to another without being challenged.
17
This gave managing agents
considerable flexibility in manipulating capital. Given that capital was in short
supply and could not be raised anew for each joint stock company, this proved to be
advantageous. A joint stock company operating by itself might have found itself

17
A managing agency differs from a holding company because the former’s control over joint stock
companies is not due to ownership of a significant portion of shares but is instead derived by the
managing agency contract.

115

hard pressed for capital during difficult times; if the joint stock company was
managed by a managing agency, it would have received capital from one of the other
companies managed by the agency. Managing agents also used capital from one of
their joint stock companies to launch other joint stock companies (Brimmer 1955,
562). Second, managing agencies had access to capital from banks. Indian banks
were often reluctant to lend to joint stock companies that did not have managing
agents because these companies generally had high rates of bankruptcy. Since
managing agency firms had very low rates of failure, banks were more willing to
extend credit if the managing agent of a joint stock company would sign the note of
indebtedness (Brimmer 1955, 562).

Adoption of the Managing Agency System by Hindus
How did joint families come to control the managing agencies of joint stock
companies? The adoption of the management agency model proved beneficial to
Hindus for three reasons. Since the capital market of India remained
underdeveloped, members of Hindu merchant castes could go to their traditional
networks to raise the necessary capital to fund industrial concerns. This gave them a
decided advantage vis-à-vis most of the other groups in India. While it is true that
Hindus from non-mercantile backgrounds generally did not have capital to the same

116

extent as Hindus from business castes, the former followed the same inheritance laws
as the latter. This prevented the rapid dissipation of capital in their families.
18

Secondly, Hindu families used the managing agency agreement to exert tight
control over joint stock companies. Even if a family did not have the majority of
shares in the joint stock company it retained controlled via a managing agency
agreement. We will see numerous examples in the case studies analyzed below.
Finally, a family could economize on capital because it did not have to control a
company through direct investment; it could use capital from other companies under
the control of the family to control the joint stock company. This allowed families to
control large numbers of companies. Families or managing agencies in control of
large numbers of industrial companies are referred to as business houses or business
groups.
A look at the composition of the large business houses of India shows both
the preponderance of Hindu families and the absence of Muslims. Table 5.3 shows
three different lists of large business houses in India. The first list shows the largest
industrial houses in India in 1965 and was compiled by the Monopolies Inquiry
Commission. This list, excluding foreign business houses, shows us only the
domestic business houses. Of the 37 domestic business houses, 34 are controlled by
Hindu business families, two by Zoroastrians, and one by an Iraqi Jew residing in
India (Timberg 1969, 17-20). The second list is derived from The Structure of the

18
For more details on how Hindu inheritance law prevents the dissipation of capital, see Chapter 4 of
this paper.

117

Corporate Private Sector, by R.K. Hazari. Hazari’s list includes business houses of
large, medium, and small sizes, and has been cited in the literature as an accurate
representation of Indian business houses. Hazari’s sample has been adjusted for not
only for size, but also for caste origin, age of business houses, and dispersion of
assets. A closer look at the business houses in Hazari’s sample reveals that all of
them used managing agency contracts to control their joint stock companies.
Hazari’s list includes 20 business houses. 3 of these are controlled by non-Indians, 2
are controlled by Zoroastrians, and the remaining 15 business houses are controlled
by Hindus (Hazari, 1966). The final list in Table 5.3 is from the appendix of
Sharma’s Entrepreneurial Change in Indian Industry which lists India’s 73 largest
business houses in 1969. 15 of the largest industrial houses in this list are controlled
by non-Indians, 3 by Zoroastrians, and the remainder by Hindus (Sharma 1980).

Table 5.3
List of Business Houses from Various Sources

Community Monopolies Inquiry
Commission
R.K. Hazari Sharma
Hindu 34 15 55
Zoroastrian 2 2 3
Muslim 0 0 0
Foreign N/A 3 15

118

The foregoing table provides an overall idea of the composition of business
houses in India. The lion’s share of business houses are controlled by families from
a Hindu background. The absence of Indian Muslims is conspicuous in all three
lists. Before discussing the causes for the absence of Indian Muslims, we will briefly
discuss two small groups who actively participated in industry: the Zoroastrians and
heterodox Muslims.
As can be seen from the above table, the Zoroastrians also possessed some
business houses; this is significant given the small size of the Zoroastrian population
in India. The success of the Zoroastrians has traditionally been attributed in the
literature to their greater degree of “Westernization” (Desai 1968; Guha 1970;
Kennedy 1962; Lamb 1955; White 1979; 1987). It has been argued that Zoroastrians
were quick in adopting business practices of Europeans but the provided reasons are
vague. It is beyond the scope of this chapter to discuss the strengths and weaknesses
of this proposition.
It has been long acknowledged that heterodox Muslims have played a role in
South Asia’s business and industrial life to a far greater proportion than their
proportion in the population would suggest (Altaf 1983, 190-199; Levin 1974, 231;

119

Papanek, G. 1962, 54; Papanek, H. 1972, 25; Talha 2000, 87-88).
19
After the
partition of British India in 1947 and the subsequent exodus of the Hindu merchant
castes from Pakistan, heterodox Muslims played a dominant role in Pakistan’s
industrial life.
20

Table 5.4
Background of Pakistan’s 12 Largest Business Houses (Papanek H. 1972, 27)

Name Community
Dawood Memon
Habib Khoja
Ademjee Memon
Crescent Punjabi
Saigol Punjabi
Valika Bohra
Hyesons N/A
Bawany Memon
Amin Punjabi
Wazirali Punjabi
Fancy Khoja
Colony Punjabi

19
There are exactly four Muslim castes that use the Hindu joint family and are governed by Hindu
inheritance law: Khojas, Bohras, Memons, and Girasias. However, it is only the first three that are
active in business and our discussion is limited to them. While there is some literature on the history
and social institutions of the Khojas and Bohras, there is not much material on the social institutions
and history of the Memon caste. A Soviet scholar has discussed the role of Memon entrepreneurs in
the industrialization of Pakistan (Levin 1974). Engineer (1980) has an excellent discussion of Bohra
history and communal institutions. For a discussion of the history and institutions of the Khojas see
Hanna Papanek (1962) and Rattansi (1987). King (1974) gives insights into Khoja migration to East
Africa. Hickling (1998) discusses the use of Hindu laws of inheritance by Khojas. Lokhandwalla
(1976) discusses why Khojas and Bohras were reluctant to adopt Islamic laws.
20
This is not to suggest that heterodox Muslims did not play an important role in South Asia’s
economy before the formation of Pakistan. Heterodox Muslims competed successfully with Hindu
merchants in areas such as retail of hardware (Talha 2000, 88).

120

Table 5.5
Proportion of Industrial Investment in Pakistan circa 1960 (Papanek G. 1962, 54)

Community Proportion of Industrial
Investment
Proportion of
Population
Memon 27% 0.3%
Bohra 5% 0.04%
Khoja 11% 0.14%
Bengali Muslim 4% 50%
Other Muslim 53% 49.05%

As can be seen from Table 5.4, half of Pakistan’s twelve largest business
houses belonged to families from the heterodox Muslim community. Table 5.5
shows us that despite possessing approximately 0.48% of Pakistan’s population,
about 43% of Pakistan’s industrial investment came from heterodox Muslims. The
preponderance of heterodox Muslims in Pakistan’s industrial life may be attributed
to fact that unlike other Muslims of South Asia, heterodox Muslims use Hindu
business institutions and are governed by Hindu inheritance law (Cornish 1937, 5).
As a result of this they possessed the same advantages possessed by Hindus vis-à-vis
the remainder of the Muslim population. We will compare the economic
performance heterodox Muslims with other South Asian Muslims in greater detail in
the next chapter. We now turn to our discussion of the remainder of the Indian
Muslim population.
The absence of Indian Muslims from the abovementioned tables can be
attributed to two causes: the Muslims of India did not have access to large amounts
of capital and the managing agency model was alien to the Muslim methods of

121

conducting business. Let us begin with the issue of capital. Unlike potential
entrepreneurs from Hindu merchant castes, potential Muslim entrepreneurs could not
turn to their community and raise capital for industrial ventures. Why did Hindu
merchant castes possess capital and not the Muslims? The inheritance laws
Hinduism encourage the accumulation of capital in joint families (Bagchi 1985, 26-
28; 1999, 50; Leonard 1981, 197). Capital is held jointly and is not distributed in
individual shares to the various members of the family when the patriarch passes
away. On the other hand, the inheritance laws of Islam divide capital between
different members of the family, and redistribution of capital tends to divide it into
smaller shares held by individuals. Over the long term, capital dissipates under
Islamic law (Ahmad 1991, 4; Bose [1997] 2004, 92; Timberg 1978, 39). While
individual Muslim merchants may have accumulated wealth, this wealth was not
retained in their families and tended to dissipate. On the other hand Hindu families,
regardless of their caste background tended to retain their wealth. This crucial
difference in Hindu and Islamic inheritance codes acquired great significance in
India since the capital market was underdeveloped. Muslim families and
communities did not find themselves with the requisite capital to start industrial
ventures.
21

This lack of capital hindered attempts by Muslims to set up industrial
ventures. In 1889, Muslim traders established the Koilpatti Mills in southern India.

21
Hindu and Muslim inheritance laws are examined in greater depth in Chapter 4.

122

This mill was persistently handicapped by a lack of adequate financing and was
eventually purchased by a wealthy Hindu family for Rs. 700,000. In 1895, a joint
stock company, the Petai Sugar Refining Co. Ltd. was promoted by Muslim
merchants. The paid up capital for this mill, Rs. 2.4 million, was a substantial
amount. But this mill remained underfinanced throughout its years of operation and
in 1914 it was taken over by Hindu bankers (Tripathi 1984, 228-236).
Muslims were also disadvantaged vis-à-vis Hindus in that the latter’s
experience in joint families was in some ways similar to a managing agency running
joint stock companies (Tripathi 1990, 194; 2004, 113). A Hindu joint family of
landowners could see the different sons manage different portions of the land but the
land was still held and controlled by one central unit. In a similar vein, a Brahmin
joint family might have seen its sons hold jobs in different areas of the civil services
but the wealth was still held and managed by one central unit. Muslims, on the other
hand, were accustomed to a model based not on the joint family but conducted
business in partnerships. Unlike joint families, partnerships dissolved with death of
one of the partners (Kuran 2003, 432) and could not have branches going into
different businesses. The Hindu joint family and the managing agency shared two
attributes: they had an identity that in theory could exist for an infinite period of
time, and both institutions could create new branches to expand to different areas of
the business world. The managing agency could go into another business sphere by
floating a joint stock company; the joint family did this by assigning a new venture

123

to a male member of the family. On the other hand, the Islamic partnership could
not exist indefinitely and a new partnership would have to be created to enter a new
business.
22

A look at case studies involving Muslim businessmen using partnerships can
highlight how specific characteristics of the partnership made it difficult for Muslim
businessmen to transition to the use of managing agencies. Second, these case
studies give us an opportunity to compare the specific characteristics of partnerships
with Hindu joint families. Since there is no study discussing in great detail how
Muslim businessmen used partnerships in India during the late nineteenth and early
twentieth centuries, case studies were constructed on the basis of summaries of
commercial cases from the records of the Bombay High Court. While these records
provided 50 commercial cases in which Muslims used partnerships, in the vast
majority of these cases only very rudimentary information was provided about the
partnerships. The four case studies of partnerships below were constructed on the
basis on four separate commercial cases in which sufficient information was
available about the partnership.
There is a bias in our case studies of partnerships from two counts: First,
these were taken from records of the Bombay High Court and may not adequately
reflect how healthy partnerships functioned. Second, since these case studies were
not selected randomly but instead due to availability of information, we do not

22
The specific differences between the Hindu joint family and Islamic partnership are discussed in
Chapter 3.

124

necessarily get a fair sample of out of the commercial cases. Despite these two
important biases, we will use the case studies to get insight into these partnerships.

Case Studies
Case Study 1: Partnership of Esmailji and Mohamedali:
23

A partnership composed of two partners Esmailji and Mohamedali sold
umbrellas. The partnership had a considerable rate of return: profits of over Rs.
30,000 were grossed annually on an investment of approximately Rs. 70,000.
24

After the death of Mohamedali in 1896, his heirs called for dissolution of the
partnership to obtain their respective shares of Mohamedali’s estate. After acquiring
a loan from Mohamedali’s family, Esmailji pleaded with the deceased’s family to
continue running the business. However, disputes in regards to Mahomedali’s estate
led to the dissolution of the partnership in 1900.
Analysis: We can draw some important lessons from the brief history the
partnership between Esmailji and Mohamedali. First, this partnership was not
durable. The duration of this partnership was limited to life of one of the partners
involved. (The death of Mohamedali would have led to the immediate dissolution of
the partnership, but Esmailji was able to side-step normal procedure and kept the
partnership running through a special agreement with Mohamedali’s heirs. This
appears to have been an exception to the usual procedure). Islamic inheritance laws

23
Hasanali Mahomedali v. Esmailji Sulemanji, 9 Bombay Law Reporter (hereafter BLR) 606 (1907)
24
The records do not mention when Mohamedali and Sulemanji initiated the partnership.

125

also played a role in facilitating the dissolution of this partnership. Mohammedali’s
death caused all his of heirs to become stakeholders in the partnership and not all of
them had an interest in tying up their share of the estate in the partnership. If Hindu
inheritance laws had been applied in place of Islamic inheritance laws, then members
of the joint family would have had the option of avoiding partitioning the estate and
the business would have continued for a greater duration. Second, even though this
partnership had impressive profit margins, it was not able to expand into other areas
of business. Both Esmailji and Mohamedali restricted the partnership’s activities to
the retailing of umbrellas and did not seek to enter into other areas of business (such
as the manufacture of umbrellas) or set up new venues for the retail of umbrellas on
a larger scale. This may be because the expansion of the partnership into new areas
of business would have required the inclusion of other individuals as partners. These
new partnerships could be just as easily dissolved as the original partnership and
would thus have limited durability. On the other hand, a Hindu joint family would
not have needed separate agreements in order to include new members and branch
out into other areas of business: other relatives such as the karta’s sons could have
been assigned to manage new branches of the business.
We can also see from the history of this partnership the difficulties
Mohamedali and Esmailji could have faced if they attempted to transition into the
use of managing agencies. Even though both businessmen were familiar with the
workings of a partnership, we can safely assume that they were unfamiliar with the

126

dynamics involved in managing numerous branches from a centrally controlled unit
as is the case in the Hindu joint family or a managing agency. Secondly, while both
Mohamedali and Esmailji may have acquired a particular skill set to work with a
non-durable institution such as a partnership, they would have had to acquire
considerably different set of skills in order to work in durable institutions such as a
Hindu joint family or a managing agency.

Case Study 2: Partnership of Najoo Khan and Ali Ebrahim:
25

A partnership was formed between Najoo Khan and Ali Ebrahim in 1916. It
was agreed that Ali Ebrahim would transport goods from Aden and sell them in
Somalia. Ebrahim would then use the capital from the sale of goods to buy a variety
of local agricultural products, which would then be sold in Aden for a profit. Najoo
Khan agreed to provide the initial capital for the partnership while Ebrahim would
provide the labor; the partners agreed to split the profits and losses equally. Najoo
Khan dissolved the partnership towards the end of 1917 because he felt that he was
not getting a sufficient return on the capital he had invested.
Analysis: One of the advantages of partnerships is that they allow for
considerable flexibility in many important aspects such as distribution of profits and
the proportion of labor and capital to be provided by the partners. In the case of the
partnership between Najoo Khan and Ali Ebrahim, this flexibility allowed both

25
A.K. Najoo Khan v. Ali Ebrahim Noor, 27 BLR 746 (1924)

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partners to reach agreement such that each could contribute to the partnership
according to his resources: the former was able to provide capital, while the latter
provided labor, and profits were distributed equally.
In addition to flexibility, the partnership also had some advantages over a
Hindu joint family business. First, the partnership allowed two unrelated individuals
to conduct business with one another for a period of about a year; in a Hindu joint
family the inclusion of an outsider into the family would have been considerably
more difficult. Second, instead of restricting itself to one good or ancestral goods as
would have been the case in a Hindu joint family, the partnership dealt in a variety of
goods.
We can also see from this case study why it would have difficult for a
businessman like Najoo Khan to transition partnerships to managing agencies. Since
the partnership was not durable, Najoo Khan had to cultivate a different skill set and
outlook in order to be a successful partner than he would have needed if operated via
a managing agency or Hindu joint family. Najoo Khan had no difficulty in
dissolving the partnership due to an alleged lack of profits. Instead of acquiring new
skills and implementing new ideas that may have allowed the partnership to survive
in difficult circumstances, Najoo Khan dissolved a business venture that did not give
him immediate profits. As a businessman who operated via partnerships, Najoo
Khan needed to have the ability to be able to discern when it would be appropriate to
dissolve an unprofitable business. Najoo Khan also needed the requisite skills to

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negotiate and work out temporary agreements with partners (such as Ali Ebrahim)
who were not related to him via ties of kinship. Finally, since partnerships tended to
be relatively short durations, Najoo Khan needed to be good judge of short term
economic conditions in order to ascertain the likelihood of the partnership’s success.
Had Najoo Khan operated this business utilizing either a Hindu joint family
or a managing agency, he would have needed a different set of skills. Under both the
Hindu joint family and managing agency, it would have been much harder for him to
dissolve his business. If Najoo Khan had attempted to dissolve the family’s ancestral
business merely because it did not make profits in a particular year he would in all
likelihood have faced resistance from coparceners.
26
Instead, Najoo Khan would
have had to work with other coparceners and channel the family’s resources in a
more effective manner in order to generate profits for the business. Similarly, if
Najoo Khan had operated this business as a managing agent, then the shareholders of
the company would have placed greater pressure on him to make the business
succeed.
Thus under both the Hindu joint family and managing agency, Najoo Khan
would need to have the ability to manage the business effectively even during
unprofitable years. He would also have needed a much deeper understanding of long
term economic circumstances. Finally, since both the managing agency and Hindu

26
While coparceners must accept the decision of the karta, unhappy coparceners can always threaten
to partition off their respective share of the business or even be uncooperative in operating the
business.

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joint family are composed of a central unit with numerous branches, Najoo Khan
would need to acquire the management techniques necessary to coordinate the
relationship between the branches and the central unit.

Case Study 3: Partnership of A. Haji Dossal & Sons and the family of Haji
Hamad:
27

In 1902 a partnership firm called A. Haji Dossal & Sons acquired a business
in arms and ammunition that was run by Haji Hamad and his relatives. A. Haji
Dossal & Sons set up a new partnership and hired relatives of Haji Hamad to help
run the business. In 1907 Haji Hamad’s relatives were made partners in the
business, and in 1912 the partnership agreement was renewed to give them a greater
share of the profits. The partnership was dissolved in 1922. The reasons for the
dissolution of the partnership are unclear, but disputes in regards to profit sharing
between relatives of Haji Hamad and original partners of A. Haji Dossal & Sons may
have precipitated the breakup.
Analysis: The firm of A. Haji Dossal & Sons was able to enter and
successfully participate in the arms and ammunitions industry for twenty years. Two
characteristics of partnerships gave A. Haji Dossal some flexibility. First, he was
able to incorporate into his business outsiders (members of Haji Hamad’s family)
with the requisite skills, second he could periodically negotiate profit sharing

27
Suleman v. Haji Abdul Latif, 32 BLR 1152 (1930)

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agreements that ensured that members of Haji Hamad’s family would have a vested
interest in the firm’s success.
28

We can also note one major drawback of partnerships from this case study:
First, the partnership was very easy to dissolve. When members of Haji Hamad’s
sought to dissolve the partnership, no mechanism existed within the partnership to
prevent them from doing so. Had this been a Hindu joint family business, it is likely
that social pressures and a desire to have access to the pool of jointly held property
would have worked against its partition.

Case Study 4: Partnership of Dwarka Nath, Rahim Baksh and others:
29

Four individuals, Dwarka Nath Sarkar, Gagan Chandra Biswas, Rahim
Baksh, and Jugole Kishore Dubey, formed a partnership in November of 1903 in the
construction industry.
30
A few weeks after the formation of the partnership, they
contracted with the Secretary of State of India for construction of a bridge. One of
the partners, Rahim Baksh died before the bridge could be completed. The
partnership had to dissolve upon completion of the project.

28
It is likely that disputes over profit sharing led to the eventual dissolution of this partnership.
However, we must stress that the partnership’s flexibility in regards to profit sharing allowed it to
function effectively for twenty years.
29
Rai Dwarka Nath Sarkar Bahadur v. Haji Mahomed Akbar, 17 BLR 5 (1914)
30
This partnership involved three Hindus and one Muslim (Rahim Baksh). As we discussed in
Chapter 3, Hindu businessmen could use the Hindu joint family and partnerships, while Muslim
merchants tended to rely exclusively on partnerships.

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Analysis: The brief case study above offers a strong example of how
ephemeral partnerships can be. The death of one of the partners caused life span of
the partnership to be very short duration (under one year), and its activities were
limited to one project. The example also shows that the involvement of a greater
number of individuals in a partnership increases the chances for its dissolution.
Finally, we can also discern the difficulties businessmen who are familiar with only
partnerships would have in adopting managing agencies: they would not be familiar
with the dynamics of managing durable institutions or know how to effectively
manage relationships between the central unit and branches of a business.
We have examined the histories of four partnerships and have noted the
difficulties involved in sustaining long-lived partnerships. We have also seen that
the skills gained from working in a partnership differed from those necessary to run
managing agencies. The history of the Sarupchand family offers powerful contrast
with the histories of the partnerships discussed above. In the history of this family,
we have an example of how Hindu inheritance law and the joint family structure
could allow for a relatively easy transition to the managing agency model. The roots
of the family lie in northern India and it has been involved in money-lending for
many centuries. In 1789, one of the family’s members, Seth Pusaji, migrated to
central India and used the capital at his disposal to enter the retail business in the city
of Indore. Seth Pusaji’s sons and grandsons managed the family’s enterprises
collectively and held them as one unit. One of his grandsons, Magniram, was a very

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dynamic businessman and managed to expand the family business into the fields of
banking and opium marketing. After Magniram’s death in 1872, the family business
was jointly managed by his three brothers. The family business continued to be
successful and on the eve of the twentieth century its assets were worth Rs. 3 million.
It was only in 1913 that the family’s fortune was partitioned. Despite the
partitioning of family fortunes, the different branches of the family continued to have
ample capital and provided assistance to each other. In 1916, one of Pusaji’s
descendants, Hukamchand, had built three textile mills in Indore. Hukamchand also
used his share of the family’s capital to build the first one of the largest Indian-
owned jute mills in Calcutta in 1919. The family business was also registered as a
managing agency in 1919 and controlled joint stock companies in many areas such
as textiles, precious metals, and agricultural products (Taknet 1986, 80-81; Timberg
1978, 216-217).
Hindu inheritance law allowed the Sarupchand family to hold its assets
collectively from 1789 to 1913. At least four generations passed form Seth Pusaji to
Hukamchand. Under Islamic law, the family’s wealth would have been split up with
each passing generation. Hindu inheritance laws helped to assure that as long as the
males of the family did not partition the fortune, it could be held jointly. This played
a particularly important role in a capital-scarce environment such as India. The
family had enough capital to expand into new areas such as opium and banking.
And when the partition of the family’s fortune finally took place in 1913,

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Hukamchand had enough funds at his disposal to enter industry. Since Pusaji’s
descendants managed the families businesses jointly in different areas, Hukamchand
was conceptually familiar with the model of one central unit managing numerous
enterprises. This allowed him to set up a managing agency that controlled numerous
joint stock companies. If Hukamchand had been only acquainted with Islamic
partnerships, he would not have the same conceptual framework and skills to grasp
how one central unit ran numerous businesses.
From the above discussion, we can see that Hukamchand benefited greatly
from two factors. Firstly, Hindu inheritance law allowed his family to retain capital.
This capital allowed the family to expand its operations into other areas. Despite the
partitioning of the family, Hukamchand had the capital to launch a cotton mill.
Secondly, the business culture and experience of the joint family’s business made the
managing agency framework less alien to Hukamchand.
If the Sarupchand family had functioned under Islamic institutions we can
surmise that the fortunes of the family may have differed in some ways. It is likely
that the family’s fortune would have been partitioned with each passing generation.
Not only would this would have limited the family’s stock of capital, it would have
also prevented the family from expanding into new fields of business. This would
have prevented the family’s members from gaining valuable experience of managing
different businesses while working from one central unit. The relevant model for

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business under Islamic institutions would have been the Islamic partnership rather
than the Hindu joint family.
Having examined the history of the Sarupchand family, we now look at
specific case studies of other Hindu families that transitioned from the Hindu joint
family to the managing agencies. The five case studies below were selected from a
sample of 20 case studies of business houses from The Structure of the Corporate
Private Sector (Hazari 1966).
31
In addition to the criteria utilized by Hazari, the five
cases in our sample have been chosen to illustrate how the Hindu joint family could
be effectively used to transition into managing agencies. Two of the families in our
sample (Kirloskars and Mafatlals) did not belong to merchant castes and were also
handicapped by a lack of capital. The case studies of these two families emphasize
that it was not necessary for a Hindu family to belong to a merchant caste in order to
transition towards the use of managing agencies. The other three families (Lalbhais,
Khataus, and Birlas) in our sample illustrate the relative ease with which families
from merchant castes were able to utilize the Hindu joint family to transition into
managing agencies. While the experience of the families in our sample may not be
typical of all Hindu families involved in industry, the case studies below will provide
insight to the dynamics involved in the transition from the Hindu joint family to the
managing agency.

31
Hazari states that his sample of 20 business groups is a accurate representation because it accounts
for “caste, provincial origin, age...and techniques of control” (Hazari 1966, 24).

135

Case Study 5: Kirloskars
Laxmanrao Kirloskar was a Maharashtrian Brahmin born in 1869. He came
from a religious family that laid heavy stress on education. The Kriloskars lacked
both business connections and capital. Since Laxmanrao had little capital, he took a
small loan from his friend and attempted to set up a plant that would manufacture
bicycles. He was unable to secure any more capital and began to repair bicycles
instead of manufacturing them. In order to raise greater amounts of capital,
Laxmanrao converted his company into a joint stock concern in 1920. Kirloskar
soon set up a managing agency consisting of family members to administer this joint
stock company. Through managing agency contracts, Kirloskar placed other
members of his joint family in charge of oil and electricity companies. As late as
1958, seven joint stock companies were controlled via managing agencies by the
Kirloskars (Hazari 1966, 261-263; Tripathi 1990).
Analysis: Laxmanrao’s early career involved a struggle against a formidable
obstacle: difficulty in obtaining capital to finance his business. Laxmanrao was
unable to secure capital to finance his plans for manufacturing bicycles. He was
forced to go into the less capital intensive business of repairing bicycles instead. It is
significant to note that for a period of 30 years, Laxmanrao had only two sources of
capital: profits from his business or loans from friends. He could not turn to
informal institutions such as a merchant network because he did not belong to one of

136

the merchant castes, and he could not turn to formal credit institutions such as
Western style banks, because these were not sufficiently developed at the time.
32

Laxmanrao launched a joint stock company in order to raise the necessary
capital for his business. While Laxmanrao did not possess a majority of the shares in
this joint stock company, he was able to retain control via a managing agency
contract. Laxmanrao was able to utilize the managing agency to control the joint
stock company because a sufficient number of the members of the Kirloskar family
were willing to become managing agents and support him in his venture.
Laxmanrao’s brothers and son had sufficient experience in Hindu joint families and
thus had a grasp of the dynamics of the relationship between different branches of
the joint family. This experience proved useful when they used managing agency
agreements to branch out the family business into new areas such as electricity and
oil. If the Kirloskars had not been familiar with the dynamics managing numerous
branches of a family centrally, it is likely that they would have lacked the skills to
manage numerous joint stock companies.

Case Study 6: The Mafatlals
The Mafatlals belong to the Kanbi caste. The Kanbis have traditionally been
engaged in agriculture, although in the seventeenth century some Kanbis settled in
urban centers and became weavers and traders. Mafatlal began his career as a

32
It is likely that a Muslim entrepreneur from a non-mercantile caste would have faced similar
obstacles.

137

peddler at the age of thirteen in 1886. He eventually took up a side job as mill-boy
in a cotton mill. In 1905 he launched a joint stock company known as Shorrock
Spinning and Manufacturing Company. Shares for the company were bought mainly
by other members of the Kanbi caste. A managing agency run by Mafatlal and his
close associates controlled the joint stock company. By the 1930s Mafatlal and his
sons had expanded family’s business empire to include numerous mills, ginneries,
and an insurance company. These new additions to the Mafatlal’s business empire
were controlled through managing agency contracts and by the 1970s, Mafatlal’s
sons and grandsons controlled ten joint stock companies via such contracts (Hazari
1966, 207-208; Tripathi 1990, 105-114).
Analysis: The history of the Mafatlals offers an example of successful
utilization of both caste networks and the Hindu joint family. While the Mafatlals
may have initially lacked capital, they were able to tap into the resources of fellow
Kanbis. Since the majority of the shares of the Shorrock Spinning and
Manufacturing Company were bought by Kanbis who had close ties with the
Mafatlals, it was easy for the Mafatlals to maintain a cordial relationship with the
shareholders of their company. Due to ties of caste, the shareholders of Shorrock
Spinning and Manufacturing Company trusted the Mafatlals, and granted them near-
complete power over the company via a managing agency agreement. The success
of the Shorrock Spinning and Manufacturing Company enabled the Mafatlals to
branch out into new areas.

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A key reason the Mafatlals were able to successfully expand and retain
control of their business empire from 1905 to the 1970s is that they were able to
incorporate members of the joint family into the business. The sons and grandsons
of Mafatlal held the family’s wealth collectively. Although each of them may have
managed a particular section of the family’s business empire, they were able to
coordinate as a unit.

Case Study 7: The Lalbhais
The Lalbhai family is one of India’s oldest business families and has a very
rich history. The family settled in the Gujarat region in the last quarter of the
sixteenth century. Under the leadership of Shantidas Jhaveri, it acquired a
considerable fortune in the second decade of the seventeenth century. The family
members were jewelers to the Mughal emperors of the time and had access to the
imperial court. The family augmented its earnings by lending money to the Mughal
nobility and gradually moved into the field of banking. The Jhaveri family was
partitioned into six branches in 1814 after the death of the then family head,
Wakatchand. The sons of Wakatchand continued to participate in the traditional
venues of banking and retail, and maintained friendly relations amongst each other.
One of the six branches was headed by Dalpatbhai, who made significant
gains through speculation in cotton during the American Civil War. His sons
Lalbhai, Jagabhai, and Manibhai grew up under prosperity and continued their

139

father’s banking business. The family wealth and business were managed
collectively by the brothers. Lalbhai took over the family business when his father
Dalpatbhai passed away in 1885. In 1897, Lalbhai launched the Sarsapur
Manufacturing Company. Lalbhai raised the necessary capital from distant relatives
and members of his caste. The three brothers owned equal shares in the managing
agency firm and appointed a cousin as chairman of Saraspur Manufactuing
Company. In 1905 the brothers floated Raipur Mills, and both mills made enormous
profits during World War I. Lalbhai succumbed to a heart attack at the age of 49 and
sons and nephews continue to jointly run the cotton mills. In the 1930s the family
acquired Ahemdabad Cotton Mills. This company was acquired to provide
management experience for some of Lalbhai’s nephews (Tripathi 1990, 88-102). In
the late 1950s the Lalbhais retained control over nine joint stock companies via
managing agencies (Hazari 1966, 247).
Analysis: The Lalbhais in many ways represent the experience of many of the
prominent joint families in Indian business. The family was in retail and trade for
many generations and held its wealth jointly. The family fortunes were partitioned
in 1814, nearly two and a half centuries after the family had moved to the Gujarat
region. The brothers in each of the six branches had capital and business acumen;
both of these assets ensured that they would remain a force to be reckoned with in
the business world of Gujarat. One of the descendants of Shantidas, Dalpatbhai was
able to use his capital to amass an even greater fortune by speculating during the

140

American Civil War. His sons used the family’s jointly held wealth and capital
borrowed from their relatives to float cotton mills. The family entered industrial
ventures only in the 1890s when it had been demonstrated that cotton mills were
sufficiently profitable. The sons continued to hold the wealth jointly and managed
the mills collectively as would be done in a Hindu joint family.
The Lalbhais used the managing agency agreement to control their joint stock
companies. The Lalbhais managed the joint stock companies in a manner akin to
running a joint family business: wealth was held collectively, a united front was
presented to the rest of the world, the younger nephews were given mills financed by
family wealth to quench their ambition, and management decisions were made
collectively not individually. The transition to a managing agency was a most
natural one; the managing agency was composed of family members and functioned
just as a family firm. This assured the family that they would retain control over the
mills.
In many ways the Lalbhais’ are typical of Hindu merchant families. They
raised capital through traditional networks and their reputation allowed them to do
this with ease. Lalbhais used the managing agency model to make the transition
from retail to industry.

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Case Study 8: The Birlas
The Birla family is of the Marwari caste from Rajasthan. The family has
been engaged in the moneylending industry since the at least as early as the
eighteenth century. One of the members of the family, Seth Shivnarayan, migrated
to Bombay in the 1863 and set up a money lending business there.
33
He was later
joined by his son and other members of the family. In 1896, the family business
opened other branches, expanding its operations to cities such as Calcutta. The
Birlas also expanded their trade to include precious metals, opium, textiles, and
cotton. By the end of World War I, the Birlas had gained prominence and earned an
annual profit of Rs. 8 million from their operations. The Birla family entered
industry in 1916 by setting up a cotton mill. A joint stock company Birla Brothers
was incorporated in 1918. The company had a paid up capital of Rs. 5 million and
four of Seth Shivnarayan’s grandsons held an equal number of shares in the newly
established company. In the 1920s the family launched other joint stock companies
and expanded into the jute, cotton, and paper industries. In 1933 the family set up its
first insurance company. During the World War II period, the family expanded into
other industrial sectors, including automobiles, fans, vegetable oils, and other goods.
Members of the Birla family maintain control of 50 joint stock companies through
various managing agencies (Hazari 1966, 51-52; Jaju 1985, 17-26).

33
Shivnarayan migrated to another region but records do not indicate that he partitioned off a portion
of the family fortune for himself.

142

Analysis: Athough the Birla family has been in moneylending since at least
the eighteenth century, they showed a marked reluctance to enter industry. It was
only in 1916 that the family floated its first industrial venture. The family used the
traditional Hindu joint family model to do business and was able to hold their wealth
collectively as a result of the Hindu inheritance law. The Birlas amassed
considerable amounts of capital through traditional venues such as banking and
trade, and this capital was used to float joint stock companies to enter industry.
Since the Birlas had numerous branches in their traditional business the concept of
managing agencies was not alien to them. They were able to use this institution to
maintain control over family’s joint stock companies.

Case Study 9: The Khataus
The Khatau family belongs to the Bhatia caste. The Bhatias have been
traders in the Kutch region of Gujarat and had networks extending into the Middle
East and southern India. The Khatau family moved to Bombay during the first half
of the nineteenth century. They dealt in cotton and textiles and were one of the
prominent families in the Bhatia community of Bombay. They floated their first
joint stock company, Khatau Makanji and Company in 1874. The shares for the
company were worth over one million rupees. A managing agency firm dominated
by members of the family was set up to run the joint stock company. The Khataus
were very reluctant to enter areas of industry other than textiles and it was only in

143

1936 that the family acquired active interests in the cement industry. By the late
1950s the Khataus controlled eleven joint stock companies through managing
agencies (Hazari 1966, 199-200; Tripathi 1990, 76-85).
Analysis: The Khatau family belongs to a trading community and its roots lie
in both trade and the cotton industry. The business history of Khataus conforms to
the general pattern of transition from joint family businesses to managing agency
firms that was followed by other Hindu families with a background in trade.
Although the family had substantial amounts of capital in 1874, they launched a joint
stock company to supplement their capital. A managing agency firm that consisted
of family members was set up to retain control of this joint stock company. When
the Khataus floated other joint stock companies, these were also controlled through
family run managing agencies.

Conclusion
From the discussion above, we can draw some key lessons about gradual
move from the Hindu joint family into the managing agency model. One lesson is
that access to capital played a key role in shaping the history of the business family.
Mafatlal and Kirloskar did not have initial fortunes to build upon. Both individuals
launched joint stock companies as a means of raising additional capital.
34
On the
other hand, the wealthier families in our sample such as the Khataus and Birlas did

34
Mafatlal was able to raise capital from his caste networks while Kirloskar’s joint stock company
had its shares sold to the general public.

144

not use the joint stock company as a means of raising capital for their initial ventures
but instead as a means of supplementing their business activities. Hindu inheritance
law allowed families such as the Birlas and Khatus augment capital over centuries
and so these groups did not have to struggle to raise their initial stock of capital.
Five of our case studies involve individuals who were raised in Hindu joint
families. This experience provided them with the necessary experience to make a
transition into the managing agency model.
The managing agencies allowed these families to retain control of numerous
joint stock companies without having an ownership of the majority of shares in these
companies.
We can also see from these case studies how potential entrepreneurs could be
at a disadvantage. First, Muslim entrepreneurs would most likely lack the capital
resources of families such as the Khataus or Lalbhais. They would have to search
for other means of acquiring capital as Mafatlal or Kirloskar did.
35
Second, we have
seen from our case studies of partnerships that even if a Muslim entrepreneur such as
Esmailji Sulemanji had access to sufficient capital, he would have a different set of
skills from the individuals in our list of Hindu entrepreneurs. While the skills and
experience acquired in a Hindu joint family could be translated into the skills used
for a managing agency, an individual not raised such a family would not have those
particular skills.

35
There are no references in the literature about attempts by orthodox Muslim businessmen to adopt
the managing agency system.

145

Thus we can see that on both counts Muslims faced more difficulties in
transitioning into the managing agency than Hindus did. We have seen case studies
that illustrate how Hindu families were able to use the managing agency system to
raise capital, maintain control of numerous joint stock companies, and diversify into
multiple business ventures. We have also seen case studies that demonstrated how
the relative fragility of partnerships prevented Muslim businessmen from replicating
the success of their Hindu colleagues. In the next chapter, we will look at statistical
evidence in order to deepen our understanding of the dynamics of Muslim economic
underdevelopment in colonial and post-colonial India.

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Chapter 6: Methodology and Data Analysis

In previous chapters we explored the business institutions and inheritance
practices of Hindus and Muslims. We also examined case studies in Chapter 5,
which provided us with evidence in regards to the usage of different business
institutions and also the adoption of joint stock companies through a managing
agency.
1
Thus far, our study has relied largely on qualitative evidence. We now turn
to statistical evidence to compare the degree and extent to which the joint stock
company was adopted by Hindus and Muslims. We will pay special attention to the
adoption of the joint stock company by heterodox Muslims.
Two different sets of data will be used to assess the adoption of joint stock
companies by the two communities. The first data set is from Investor’s India
Yearbook (issues 1920 and 1940) and has the composition of board of directors of
publicly traded joint stock companies in India. We will examine the proportions of
Hindus and Muslims on board of directors to examine whether their respective
proportions change over time. The second data set is from Bombay Law Reporter
series (1900-1947) and consists of commercial cases that were presented before the
Bombay High Court. We will use this data set to look at the type of business
institutions used by Hindus and Muslims, with an eye toward determining whether

1
The terms “joint stock company” and “corporation” will be used interchangeably throughout this
chapter. For a brief discussion of the relationship between the two, see Chapter 5.

147

there is a movement in either of the groups towards the usage of joint stock
companies. A brief discussion of both data sets follows below.

Investor’s India Yearbook

The Investor’s India Yearbook (issues 1920 and 1940) provides the names of
all publicly traded companies in India for the respective years. The names of
members of the board are also provided. The members of the board of each
company were counted and classified into four categories: Hindu, Muslim,
Zoroastrian, and European (i.e. British).
2
The companies were classified according
to location of head quarters (North, South, East and West) in India and their
respective industries. The industries were classified into the following five
categories: finance, manufacturing, clothing, agriculture, and others.

2
This study, however, limits its discussion to a comparison between Hindus and Muslims.

148

Table 6.1
Classification of Industries into Categories as per Investor’s India Yearbook and
Bombay Law Reporter

Category Industries Included in Category
Finance Banking, Brokerage, Investing, Moneylending
and Insurance

Manufacturing Coal, Oil, Gold/Silver/Precious Metals, Mining,
Aluminum, Steel, Iron, Construction,
Automobiles, Heavy Industry, other
Manufacturing

Clothing Clothing, Cotton, Textiles, etc.

Retail Retail, Trade

Agriculture Agricultural Products, Animal Products,
Condiments, Flour, etc.

Other Any industry not listed above

The Muslim members of the board were further divided into 2 categories:
heterodox and orthodox. Heterodox Muslims often have last names indicating caste
origins. For example, a typical name could be Rehmat Ali Bohra or Yusuf Memon.
All Muslims with last names indicating heterodox origin were counted and classified
as heterodox. Muslims without these types of names were classified as orthodox
Muslims. Because only some heterodox Muslims have names signaling their caste,
the number of heterodox Muslims in our study serves as a lower limit.

149

The data from Investor’s India Yearbook series was used to obtain
information about the distribution of Hindus and Muslims in the board of directors of
companies and how this composition changed over time during the period of 1920 to
1940. These data also allowed us to determine the proportions of orthodox and
heterodox Muslim members of boards of directors and the evolution of these
proportions over time, during the period of 1920 through 1940.
The period between 1920 and 1940 is particularly significant because it
witnessed a dramatic increase in Indian participation in industry. The total number
of joint stock companies registered in India increased from 3,668 in 1918 to 10,657
in 1938. Meanwhile, the share of capital invested by Indian-controlled companies
went up from 13% to 34% while the share of capital invested by European-controlled
companies declined from 72% to 40% (Tripathi 2004, 175).
3
By looking at the
change in composition of board of directors we can see which group of Indians took
advantage of the opportunities available during this period.

Bombay High Court Records
4

This dataset includes every commercial case that went to the Bombay High
Court from the period of 1900 to 1947.
5
The cases were classified according to the

3
The remaining capital, 15% in 1918, and 26% in 1938, was invested in companies controlled jointly
by Indians and Europeans (Tripathi 2004, 175).
4
Source: Bombay Law Reporter (1899-1948).
5
We exclude commercial cases involving promissory notes from our data set because these cases are
not relevant to our study.

150

religion of defendant, industry, and institution used. The religion of the defendant
was used to classify cases into four categories: Hindu, Muslim, Zoroastrian, and
European. Six categories were created for industry: agriculture, retail, finance,
manufacturing, clothing, and others. Finally, institutions in this data set were
classified into five of the following categories: corporation, Hindu joint family,
partnership, contract, and others.
6
For many of the tests conducted below, the data
gathered from the Bombay High Court is divided into two periods: 1900-1923 and
1924-1947. This is done in order to assess the differences between the respective
periods.

Data Analysis
Before turning to a comparison of the use of business institutions by Hindus
and Muslims, we can discuss the general patterns that emerge from a comparison of
the 1900-1923 and 1924-1947 periods. Table 6.2a shows that for these two periods
there was not a significant difference in the types of industries that were represented
in court cases. (The category of manufacturing is an exception: the number of court
cases in this category increased from 15 for the years 1900-1923 to 44 for the years
1924 to 1947).

6
While partnerships are often formed on the basis of a contract, we make a distinction between a
partnership and other agreements involving contracts. This is done in order to assess the use of
partnerships by Hindus and Muslims.

151

Table 6.2a
Frequency Table of Industries in Court Cases from 1900-1947

Agricult. Clothing Finance Manufact. Other Retail
1900-1923 25 67 72 15 31 23
1924-1947 27 96 118 44 38 32
χ
2
=7.835 p=0.166, 5 degrees of freedom

Figure 6.2a

While Indian businessmen may not have made radical changes in sorts of
industries in which they were involved, there was a significant difference in the
composition of business institutions of 1900-1923 and 1924-1947 periods. There
was a small drop in the number of court cases involving the use of contracts. While
Frequency Table of Industries in Court Cases from 1900-1947
0
20
40
60
80
100
120
140
Agriculture
Clothing
Finance
Manufacturing
Other
Retail
1900-1923
1924-1947

152

there was increase number of court cases that involved a partnership or the Hindu
joint family, the most dramatic increase came in the number of court cases involving
corporations. This increase in the number of cases involving corporations (and
decrease in the number of cases involving contracts) indicates that Indian
businessmen were moving towards using more sophisticated institutions to conduct
business. We shall see shortly that Hindus and Muslims diverged in their adoption
of sophisticated business institutions.

Table 6.2b
Frequency of Organizational Forms Observed in Court Cases, 1900-1947

Contract Corporation Partnership
Hindu
Joint
Family
Other
1900-1923 84 51 49 38 28
1924-1947 76 101 78 72 33
χ
2
=15.041 p=0.0046, 4 degrees of freedom

153

Figure 6.2b
Frequency of Organizational Forms Observed in Court
Cases, 1900-1947
0
20
40
60
80
100
120
Contract Corporation Partnership Hindu Joint
Family
Other
1900-1923
1924-1947

A Comparison of Hindus and Muslims
A look at the business institutions used by Hindus and Muslims reveals that
despite their involvement in similar industries both groups tend to use different sets
of institutions. We can see from Table 6.3 and Figure 6.3 that for 1900-1947, cases
involving Hindus and Muslims tended to come from the same industries. An analysis
of Table 6.3 yields a chi-squared of 9.536, which produces a p-value of 0.09. Since p
> 0.05, we fail to reject the null hypothesis and conclude that no significant
difference exists between the industries of Muslims and Hindus.

154

Table 6.3
Frequency Counts of Religion versus Industry

Agriculture Clothing Finance Manufacturing Other Retail
Hindu 41 150 168 49 60 49
Muslim 12 13 22 10 9 6
χ
2
=9.536, p=0.09, 5 degrees of freedom

Figure 6.3

While Hindus and Muslims tended to be involved in similar industries, the data
suggests that they used different institutions to conduct business. Table 6.4 gives us
χ
2
=46.649 with p<0.0005. We can see from Table 6.4 and Figure 6.4 for 1900-1947,
contracts tended to be the most popular method of business with both Hindus and
Frequency Counts of Religion versus Industry
0
20
40
60
80
100
120
140
160
180
Agriculture
Clothing
Finance
Manufacturing
Other
Retail
Muslim
Hindu

155

Muslims. This may be because contracts may have been the most effective method
for conducting relatively simple transactions between two parties. Of the remaining
cases involving Muslims, the partnership was utilized as the institution of business in
50 out of 77 or nearly two-thirds of the time.
7
On the other hand, corporations were
utilized in only 21 out of 77 such cases. The relatively low frequency of the use of
corporations by Muslim businessmen is significant in light of the fact the corporation
was an institution fluid enough to be used frequently in all industries except retail
and agriculture (see Table 6.5 and Figure 6.5). The frequent use of partnerships vis-
à-vis corporations indicates that throughout first half of the twentieth century,
Muslim businessmen by and large stuck to their traditional organizational forms and
did not start using the corporate form to any significant degree.
A look at non-contract cases involving Hindus shows that they tended to use
the corporation more frequently than either the Hindu joint family or the partnership.
The Hindu joint family was used in 108 of 411 non-contract cases while the
corporation was used in 133. The more frequent use of corporation vis-à-vis the
Hindu joint family by Hindu businesses suggests that during the first half of the
twentieth century a significant portion of the Hindu business community had moved
away from the Hindu joint family as a means of conducting business and instead
adopted the corporation. Furthermore, we can see from Table 6.5 that the Hindu
joint family was not considered as an effective institution for use in manufacturing

7
Cases in which institution type was not mentioned have not been included in this count.

156

and instead the corporation or the partnership was used. The Hindu joint family was
relegated to industries traditional to Hindu merchant castes, such as finance and
retail.

Table 6.4
Institutions Used by Hindus and Muslims, 1900-1947

Contract Corporation Partnership
Hindu
Joint
Family
Other
Hindu 203 133 113 108 57
Muslim 51 21 50 2 4
χ
2
=46.649, p<0.0005, 4 degrees of freedom

Figure 6.4

Institutions Used by Hindus and Muslims, 1900-1947
0
50
100
150
200
250
Contract Corporation Partnership Hindu Joint
Family
Other
Muslim
Hindu

157

Table 6.5
Frequencies of Industry and Institution in High Court Data

Contract Corporation
Hindu Joint
Family
Partnership Other
Agriculture 21 3 6 5 2
Clothing 59 30 15 11 12
Finance 15 43 17 4 5
Manufacturing 17 17 1 10 2
Other 18 17 4 10 6
Retail 3 1 21 10 4
χ
2
=119.402 p<0.0005, 20 degrees of freedom

Figure 6.5

Frequency of Industry and Institution in High Court Data
0
10
20
30
40
50
60
70
Contract Corporation Partnership Hindu Joint
Family
Other
Agriculture
Clothing
Finance
Manufacturing
Other
Retail

158

Data from the Bombay Law Reporter also points towards an increase in the
use of corporations by Hindus. Table 6.6a shows that approximately 16.4% of
commercial cases with a Hindu defendant involved use of a corporation during from
1900 to 1923. This figure goes to 29.4% for the 1924-1947. Table 6.6b shows us
that a hypothesis test by confidence intervals comparing both periods yields a p-
value of .00165, indicating a statistically significant rise occurs in the proportion of
court cases involving Hindus.
We do not see similar increase in Muslim commercial cases involving use of
corporations. Table 6.6a shows us that from 1900 to 1923, 15.6% of commercial
cases involved use of corporations. This figure increases to 16.7% for 1923-1947.
When subjected to a hypothesis test involving confidence intervals comparing
proportion of Muslim cases for the two periods, we find a p-value of .45044, which
indicates that no significant rise occurs across the two periods.
The data collected from Bombay Law Reporter also supports the contention
of this study that over time a gap in the use of corporations by Hindus and Muslims
emerged. We can see from Table 6.6b that for 1900-1923 there is no significant
difference in proportion of cases involving corporations for either Hindus or
Muslims. But in 1924-1947 there is a statistically significant gap.

159

Table 6.6a
Corporation Use by Religion and Date

Year
Corporation
Total
Proportion Variation
Hindu
1900-
1923
38 232 0.164 0.0184
1924-
1947
95 323 0.294 0.0159
Muslim
1900-
1923
10 64 0.156 0.08466
1924-
1947
10 60 0.167 0.07479

Table 6.6b
Hypothesis Test by Confidence Interval for Hindu and Muslims

Populations
p-value Null Hypothesis
Hindus and Muslims of 1900-1923 .293975 Cannot reject null
Hindus and Muslims of 1924-1947 .039295 Reject null
Hindus of both periods .00165 Reject null
Muslims of both periods .45044 Cannot reject null

The greater use of joint stock companies by Hindus may also be seen in the
composition of board of directors of publicly traded companies. We can see from
Table 6.7 and Figure 6.7 that in 1920 that Hindus were over-represented on the board
of directors, while Muslims were under-represented, vis-à-vis their respective

160

proportions in the Indian population.
8
Table 6.7 gives us a statistically significant χ
2

value of 22.78, indicating that there is was a considerable degree of Hindu over-
representation and Muslim under-representation on boards of directors.

Table 6.7
Number of Hindus and Muslims in Board of Director Positions 1920

Observed Expected
Hindu 403 358
Muslim 69 113
χ
2
=22.78, p=0 degrees of freedom=1

Figure 6.7
Number of Hindus and Muslims in Board of Director
Positions 1920
0
50
100
150
200
250
300
350
400
450
Hindu Muslim
Observed
Expected

8
The expected proportions of Hindus and Muslims on boards of directors for the years 1920 and 1940
were based on data from the Census of India 1921 (I:II, 40-41) and Census of India 1931 (I:I, 422-
423) respectively. The Census of India 1931 data was utilized because no census was taken in India
in 1941.

161

The gap between Hindus and Muslims grows over time, as Table 6.8 and Figure 6.8
indicate. In 1940 Hindus continue to be over-represented on board of directors while
Muslims continue to be under-represented. The increase in χ
2
value to 147.2
indicates that the gap between both groups grew from 1920 to 1940.

Table 6.8
Number of Hindus and Muslims in Board of Director Positions 1940

Observed Expected
Hindu 1043 866
Muslim 103 279
χ
2
=147.2, p=0 degrees of freedom=1

162

Figure 6.8
Number of Hindus and Muslims in Board of Director
Positions 1940
0
200
400
600
800
1000
1200
Hindu Muslim
Observed
Expected

Let us turn to the question of the increase in proportion of Hindus and
Muslims in the boards of publicly traded companies. We can see from Table 6.9 and
Figure 6.9 that during the period 1920-1940 there was a statistically significant
difference in the percentage increase between Hindu and Muslim directors. Table 6.9
demonstrates that the number of Hindu directors grew more rapidly than the number
of Muslim directors. While the 1920-1940 period saw a dramatic increase in both
the total number of joint stock companies registered in India and investment by
Indian businessmen, we can see that Hindu businessmen took advantage of these
changes to a greater extent than did their Muslim colleagues.

163

Table 6.9
Number of Hindus and Muslims in Board of Directors Positions by Year

1920 1940
Hindu 403 1043
Muslim 69 103
χ
2
=10.53, p=0 degrees of freedom=1

Figure 6.9

Numbers of Hindus and Muslims in Board of Director
Positions by Year
0
200
400
600
800
1000
1200
1920 1940
Muslims
Hindus

From the analysis of Hindu and Muslim composition of board directors we
can draw some important lessons. First, a significant gap existed in the extent to
which Hindus and Muslims were represented on boards of directors in 1920. This
indicates that before the joint stock company gained broad popularity across India,

164

Hindu businessmen were utilizing it as a vehicle for industrial ventures to a much
greater extent than Muslim businessmen. Second, by 1940 the gap between Hindus
and Muslims on board of directors became more pronounced.

Distribution of Muslims on Boards of Directors
A closer look at the composition of Muslims on boards of directors of
publicly traded companies reveals that it was influenced by the regional locations of
the companies and industries. We turn first to the impact of regional location on
distribution of Muslims on boards.
9
We can see from Table 6.10a indicate that
region played a statistically significant role in determining the distribution of
Muslims on boards of directors. Table 6.10b shows us that Muslim presence on
boards of directors tended to be weakest in Northern and Eastern India, while it was
strongest in Western India.
10
This may have been because the heterodox Muslim
population tended to reside in Western India rather than in Eastern or Northern
India.
11

9
This was tested via ANOVA with the dependent variable being percentage of Muslim directors and
the independent variable being region.
10
Muslim under-representation in the industry in northern provinces such as Punjab and Baluchistan
and eastern provinces such as Bengal has been noted before (Talha 2000, 66-69).
11
The number of observations was insufficient to obtain a statistically significant result for southern
India.

165

Table 6.10a
ANOVA Comparing Region of Company to Proportion of Muslim Directors

Source
Type III Sum of
Squares
Df Mean Square F Sig.
Corrected
Model
.823 3 .274 42.587 .000
Intercept .635 1 .635 98.612 .000
Region .823 3 .274 42.587 .000
Error 9.818 1525 .006

Total 11.556 1529

Corrected
Total
10.641 1528

R
2
= 0.77

Table 6.10b
Regional Differences in Percentage of Muslim Directors

* The mean difference is significant at the .05 level.

(I)
Region
(J)
Region
Mean
Difference
(I-J)
Std. Error Sig.
95% Confidence Interval
Lower Bound
Upper
Bound
East
North -.022
*
.008 .036 -.044 0.000
South -.037 .014 .051 -.074 .0001
West -.061
*
.005 .000 -.075 -.046
North
East .022
*
.008 .036 .001 .044
South -.015 .016 1.000 -.056 .027
West -.038
*
.009 .000 -.063 -.014
South
East .037 .014 .051 -.0001 .074
North .015 .016 1.000 -.027 .056
West -.024 .015 .619 -.062 .015
West
East .061
*
.005 .000 .046 .075
North .038
*
.009 .000 .014 .063
South .024 .015 .619 -.015 .062

166

Table 6.11a indicates points to a significant relationship between industry and
percentage of Muslim directors. In Table 6.11b all pairs of industries have
significant differences with respect to proportions of Muslim directors. The Muslim
presence is strongest in the publicly held financial companies and weakest in
companies dealing with agricultural goods. The paucity of Muslim directors in
companies dealing with agricultural goods may be explained by European
domination of sectors such as tea and jute. These two industries comprised a large
portion of the category of agriculture in the Investor’s India Yearbook. (Bagchi 1972,
174-181).
12

12
The share prices of joint stock companies in Eastern India (particularly in the jute industry)
increased by up to ten times their normal value during the years 1918-1920 and were promptly sold by
their European owners. Hindu businessmen (belonging to the Marwari caste from Western India)
such as the Ghanshyamdas Birla and Sarupchand Hukamchand (Goswami 1985, 231) bought these
companies. Birla (Jaju 1985), Sarupchand (Taknet 1985, 80-81; Timberg 1978, 216-217), and the
other Hindu businessmen belonged to families that had preserved their fortunes over many centuries
through the effective use of Mitakshra inheritance laws. It is likely that Hindu businessmen from
Eastern India and Muslim businessmen failed to take advantage of this opportunity because their
respective inheritance codes (Dayabagha and Hanafi) did not permit their families to accumulate
sufficient capital to buy these companies.

167

Table 6.11a
ANOVA Comparing Industry to Proportion of Muslim Directors

Source
Type III Sum
of Squares Df
Mean
Square F Sig.
Corrected
Model
.376 4 .094 12.607 .000
Intercept .632 1 .632 84.652 .000
Industry .376 4 .094 12.607 .000
Error 7.799 1045 .007

Total 8.779 1050

Corrected
Total
8.176 1049

R
2
= .046

168

Table 6.11b
Least Significant Difference Comparison of Industries’ Percentage of Muslim Directors
(I) Industry (J) Industry
Mean
Difference
(I-J) Std. Error Sig.
95% Confidence Interval
Lower Bound Upper Bound
Agriculture
Clothing -0.038
*
0.007 0.000 -0.052 -0.025
Finance -0.067
*
0.013 0.000 -0.093 -0.041
Manufacturing -0.010
*
0.007 0.186 -0.024 0.005
Other -0.026
*
0.010 0.008 -0.045 -0.007
Clothing
Agriculture 0.038
*
0.007 0.000 0.025 0.052
Finance -0.029
*
0.013 0.030 -0.055 -0.003
Manufacturing 0.029
*
0.007 0.000 0.015 0.043
Other 0.012
*
0.010 0.206 -0.007 0.032
Finance
Agriculture 0.067
*
0.013 0.000 0.041 0.093
Clothing 0.029
*
0.013 0.030 0.003 0.055
Manufacturing 0.057
*
0.013 0.000 0.031 0.084
Other 0.041
*
0.015 0.006 0.012 0.070
Manufacturing
Agriculture 0.010
*
0.007 0.186 -0.005 0.024
Clothing -0.029
*
0.007 0.000 -0.043 -0.015
Finance -0.057
*
0.013 0.000 -0.084 -0.031
Other -0.016
*
0.010 0.108 -0.036 0.004
Other
Agriculture 0.026
*
0.010 0.008 0.007 0.045
Clothing -0.012
*
0.010 0.206 -0.032 0.007
Finance -0.041
*
0.015 0.006 -0.070 -0.012
Manufacturing 0.016
*
0.010 0.108 -0.004 0.036
* The mean difference is significant at the .05 level.

169

Heterodox and Orthodox Muslims
The active role played in business by members of heterodox Muslims castes
(the Khojas, Bohras, and Memons) has been discussed earlier.
1
We mentioned that
while heterodox Muslims profess Islam they use Hindu commercial institutions and
are governed by Hindu inheritance law. A comparison of the heterodox Muslim
population with the remainder of the Muslim population will be useful because it
will allow us to assess what impact differences in inheritance laws and commercial
institutions had when we control for religion.
In 1921 the heterodox Muslim population was approximately 300,000
(Timberg 1969, 106) out of a total Muslim population of approximately 68.7 million
(Census of India 1921, 74).
2
Thus the proportion of the heterodox Muslims during
in 1921 was 0.4% of the total Muslim population. Unfortunately caste based data
was not taken after the 1921 census so we will assume that the proportion of
heterodox Muslims was the same in 1940. The expected values for the number of
heterodox Muslims on the board of directors for 1920 and 1940 are calculated on this
basis. The data suggests that for both 1920 and 1940 heterodox Muslims had a
disproportionately large number of positions on the board of directors.

1
Heterodox Muslims are discussed in greater detail in Chapter 5.
2
Heterodox Muslims tended to be concentrated in Western India.

170

Table 6.12a
Number of Heterodox and Orthodox Muslims in Board of Director Positions 1920

1920(Observed) 1920(Expected)
Heterodox Muslims 42 .276
Orthodox Muslims 27 68.724
χ
2
=6307.58, p=0 degrees of freedom=1

Figure 6.12a
Number of Heterodox and Orthodox Muslims in Board
of Director Positions 1920
0
10
20
30
40
50
60
70
80
Heterodox Muslims Orthodox Muslims
Observed
Expected

171

Table 6.12b
Number of Heterodox and Orthodox Muslims in Board of Director Positions 1940

1940(Observed) 1940(Expected)
Heterodox Muslims 43 .412
Orthodox Muslims 60 102.588
χ
2
=4419.56, p=0 degrees of freedom=1

Figure 6.12b

Number of Heterodox and Orthodox Muslims in Board
of Director Positions 1940
0
20
40
60
80
100
120
Heterodox Muslims Orthodox Muslims
Observed
Expected

A look at the distribution of court cases involving heterodox and orthodox
Muslims shows that the groups tended to be involved in different industries. Table
6.13 shows that orthodox Muslims had a greater number of cases in industries such

172

as agriculture and finance, while heterodox Muslims had a greater number of cases
in the clothing industry. Despite their involvement in different industries, a
comparison of the business institutions used by heterodox and orthodox Muslims
will be useful because it will allow us to observe the to extent to which both groups
moved away from their traditional business institutions and towards the adoption of
the corporation.

Table 6.13
Frequency Counts of Heterodox Muslims Versus Orthodox Muslims in Industry,
1900-1947

Agriculture Clothing Finance Manufacturing Retail Other
Heterodox 1 8 4 4 1 2
Orthodox 11 5 18 6 8 4
χ
2
=12.74, p=0.025, 5 degrees of freedom

173

Figure 6.13
Frequency Counts of Heterodox Muslims versus
Orthodox Muslims in Industry 1900-1947
0
2
4
6
8
10
12
14
16
18
20
Agriculture
Clothing
Finance
Manufacturing
Retail
Other
Heterodox
Orthodox

A comparison of business institutions used by heterodox and orthodox
Muslims in Table 6.14a shows us that from 1900 to 1923 both groups relied upon
similar institutions. If we exclude contracts from our analysis, we can see that both
groups tend to rely heavily on partnerships: 16 of the 25 cases involving orthodox
Muslims used the partnership as a business institution, while 6 out of 9 cases with
heterodox Muslims had the partnership as the institution of business. This is
consistent with the results we obtained earlier from Table 6.4: Muslim businessmen
tended to rely heavily on partnerships as a means of conducting business.

174

Table 6.14a
Institutions Used by Heterodox Muslims and Orthodox Muslims, 1900-1923

Contract Corporation Partnership
Hindu
Joint
Family
Other
Heterodox 4 2 6 1 0
Orthodox 25 8 16 0 1
χ
2
=1.735, p=0.62918, 4 degrees of freedom

Figure 6.14a

Institutions Used by Heterodox Muslims versus
Orthodox Muslims, 1900-1923
0
5
10
15
20
25
30
Contract Corporation Partnership Hindu Joint
Family
Other
Heterodox
Orthodox

However a comparison of the business institutions used by the two groups
from 1924 to 1947 reveals that there was a significant difference in the types of
institutions used. We can see from Table 6.14b that orthodox Muslims continued to

175

use the partnership very frequently: in 18 out of 23 non-contract cases the
partnership was utilized. However, they were less likely to use the corporation: in
only 2 out of 23 non-contract cases was the corporation utilized. Heterodox Muslims
tended to rely less on the partnership and more on the corporation than did orthodox
Muslims: they utilized the partnership in 10 out of 19 non-contract cases, while using
the corporation in 8 of these cases. It appears from the data in Table 6.14b that the
heterodox Muslims had decreased their traditional reliance on the partnership and
were transitioning towards greater use of the corporation; this was not the case with
orthodox Muslims.

Table 6.14b
Institutions Used by Heterodox Muslims and Orthodox Muslims, 1924-1947

Contract Corporation Partnership
Hindu
Joint
Family
Other
Heterodox 1 8 10 1 0
Orthodox 11 2 18 0 3
χ
2
=15.641, p=0.003547, 4 degrees of freedom

176

Figure 6.14b
Institutions Used by Heterodox Muslims versus
Orthodox Muslims, 1924-1947
0
2
4
6
8
10
12
14
16
18
20
Contract Corporation Partnership Hindu Joint
Family
Other
Heterodox
Orthodox

Table 6.15a shows us that the proportion of cases in which heterodox
Muslims used corporations increased from 15.4% during the 1900 to 1923 period to
40% for the 1924 to 1947 period. These statistics are buttressed by results obtained
in Table 6.15b, which show us that a comparison of usage of corporations by
heterodox Muslims during both periods points towards significant differences in use
of this institution during the two periods. Similar comparisons of heterodox and
orthodox Muslim populations illustrate that while both groups may have used the
corporation in similar degrees from 1900 to 1923, both groups used it in different
degrees from 1924 to 1947. While the figures for orthodox Muslims in Table 6.15a

177

point towards a decrease in use of the corporation, more rigorous statistical testing in
Table 6.15b does not indicate a statistically significant change in use of corporation
by orthodox Muslims between 1900-1923 and 1924-1947.

Table 6.15a
Corporation Use by Religion and Date

Year
Corporation
Total
Proportion Variation
Het.
Muslim
1900-
1923
2 13
0.154 0.0819
1924-
1947
8 20
0.400 0.0159
Orth.
Muslim
1900-
1923
8 51
0.156 0.0655
1924-
1947
2 40
0.05 0.0747

Table 6.15b
Hypothesis Test by Confidence Interval for Heterodox and Orthodox Muslims

Populations
p-value Null Hypothesis
Het. and Orth. Muslims of 1900-1923 .327015 Cannot reject null
Het. and Orth. Muslims of 1924-1947 .028185 Reject null
Heterodox Muslims of both periods .042815 Reject null
Orthodox Muslims of both periods .197945 Cannot reject null

Conclusion
The data above provides us with some important insights in regards to the
questions posed by this study. Let us first address the adoption of the corporation by

178

Hindus and Muslims. We can see from above Table 6.9 had a chi-squared value of
10.53 for a significance of p=0.001. This indicates that during the 20 years from
1920 to 1940 the Hindu proportion of the board of directors of publicly traded
companies in India showed significant growth, whereas we cannot detect a similar
growth in the Muslim proportion on the board of directors of Indian companies.
As discussed earlier, the 1920-1940 period saw two important trends: a sharp
increase in the number of joint stock companies registered in India, and a dramatic
increase in the Indian share of capital invested in these companies. From the
changes in composition of the board of directors of these companies, we can discern
that Hindu businessmen contributed to both trends. On the other hand, the Muslims
of India did not partake of this growth.
The results of Table 6.9 are buttressed by those of Table 6.6b. We can see
from Table 6.6b that there is a significant difference in use of corporations by Hindus
during the 1900-1923 and 1924-1947 periods. On the other hand there we cannot
reject the null hypothesis for a similar comparison of Muslim cases. This suggests
that there may have been a growth in use of corporations by Hindus but not in the
Muslim population. While a comparison of Hindu and Muslim cases for the 1900-
1923 period indicates that there was not a significant difference in usage of
corporations between both groups, a comparison of Hindu and Muslim cases for the
1924-1947 period indicates a significant difference in usage of corporations. This

179

supports the central thesis of this work that the Hindus were quicker than the
Muslims in adopting the corporation.

180

Chapter 7: Conclusions

Summary of Results
This work was devoted to an examination of the causes of the economic
underdevelopment of India’s Muslims vis-à-vis Hindus. Muslim underdevelopment
in India is a relatively recent historical phenomenon and must be seen in light of the
introduction of large scale industry to India after the middle of the nineteenth
century. Large scale industry required greater capital inputs than was common. It
needed durable business institutions that could manage industries for the long term.
The managing agency arose as a response to both of these needs and much of India’s
industrialization and the spread of the corporation in India took place under the aegis
of this institution.
There were two reasons for the underdevelopment of India’s Muslims. First,
it was more difficult for Muslims to transition from the Islamic partnership to the
managing agency than it was for Hindus to make their transition from the Hindu
joint family. This allowed Hindus to adopt the managing agency (and subsequently
corporations) at a faster rate than the Muslims. Second, Muslims had greater
difficulty acquiring capital than did Hindus, because Islamic inheritance laws
encouraged capital fragmentation, while Hindu inheritance laws encouraged capital
accumulation. This acquired enormous significance because India’s capital markets
were undeveloped. Let us examine our two reasons for the causes of Muslim

181

underdevelopment in greater detail. We will begin with the adoption of managing
agencies.
The introduction and spread of the managing agency was discussed in
Chapter 5. We noted that even though joint stock companies had been introduced in
India first in the late seventeenth century and again in 1829, it was only during the
late nineteenth century that joint stock companies began be used frequently in India.
This is due in part to the fact that they were launched under the aegis of managing
agencies. Hindus and Muslims responded differently to the introduction of
managing agencies: the former adopted this institution to a much greater extent than
the Muslims were able to. We also noted how the differences in the abilities of
Hindus and Muslims to adopt this institution can be traced to the differences in the
commercial institutions used by both communities. The Hindu joint family was a
durable institution and its members could branch out into new areas with relative
ease. The Hindu joint family shared these characteristics with the managing agency
giving Hindu businessmen an advantage in its adoption.
Case studies of families such as the Birlas and Lalbhais were used to
illustrate how the skills acquired in Hindu joint family businesses could be
transferred over the effective utilization of managing agencies. Managing agencies
provided two key benefits to Hindu families: First, the managing agency contract
allowed Hindu families to retain control of the numerous joint stock companies they
had launched without having to own a majority of the shares in these companies.

182

Second, members of the joint family could manage the different joint stock
companies under a managing agency just as they would manage the different
branches of a Hindu joint family business.
The Islamic partnership did not share characteristics such as durability with
the managing agency. Consequently Muslim businessmen found the managing
agency to be a more alien institution than their Hindu counterparts did. We saw
through case studies in Chapter 5 that while Muslim businessmen such as Najoo
Khan may have been skillful at setting up partnerships and engaging in short term
business ventures, their experience did not provide them with the skills that were
needed to effectively run managing agencies.
Let us now turn to the second cause of the economic underdevelopment of
India’s Muslims: the differences in the inheritance laws of the Hindus and Muslims.
Chapter 4 showed, the application of Islamic inheritance laws led increased capital
fragmentation amongst Muslims. The mechanisms used by Muslims had limitations
of their own: the hiba-bi’l-‘iwad could no longer be utilized during the nineteenth
century because British-Indian courts insisted upon immediate transfer of property,
while the waqf-alal-awlad often locked up much of a family’s capital in one venture.
By the same token, Hindu inheritance laws allowed many Hindu families to avoid
partitioning their estates and thus accumulate capital. This acquired enormous
significance because India’s capital markets were underdeveloped during the
nineteenth and early twentieth centuries, and a potential entrepreneur had to rely on

183

either his familial or caste networks in order to raise sufficient capital to launch
industrial ventures. A Muslim entrepreneur seeking to enter industry was at a
disadvantage vis-à-vis a Hindu entrepreneur because his familial and caste networks
did not have the same resources as did the latter’s. When Muslim merchants did
attempt to set up industrial ventures, they were handicapped by a lack of available
capital. Muslim-founded enterprises such as Koilpatti Mills and the Petai Sugar
Refining Co. Ltd. suffered from under-financing and were eventually purchased by
Hindus who had adequate capital.
The inheritance laws of Hindus and Muslims also affected the respective
functioning of the Hindu and Muslim businesses. Islamic inheritance laws limited
the life span of Islamic partnerships: since the assets of a partner had to be given to
his heirs following his death, the heirs had a vested interest in dissolution of the
partnership. Accordingly, every new partner increased the chances of the
partnership’s dissolution. Thus Islamic inheritance law made it difficult to include
large numbers of partners in a business. It also discouraged the development of
economies of scale in Muslim businesses. On the other hand, Hindu inheritance laws
allowed heirs to collectively hold assets of the propositus and so Hindu joint family
businesses did not have to dissolve at the death of each coparcener.
The importance of role played by the respective business institutions and
inheritance laws of Hindus and Muslims can also be assessed by taking a closer look
at the economic success achieved by heterodox Muslims. We have seen from Table

184

6.12a and Table 6.12b that heterodox Muslims were represented well beyond their
proportions on the board of directors of publicly traded companies in India. We have
also seen from Table 5.4 and Table 5.5 that heterodox Muslims also played a
disproportionately important role in Pakistan’s industrial life. Given that heterodox
Muslims used the Hindu joint family and practiced Hindu inheritance law but
professed Islam, we can infer two points from their economic success: First, Islam as
a faith does not preclude economic development. Second, it was the business
institutions and inheritance laws used by group and not its religion per se that
affected the group’s ability to adopt managing agencies.

The Question of Islam and Underdevelopment
A considerable literature exists on discussing the relationship between Islam
and underdevelopment.
1
In many crucial aspects, this work differs from previous
attempts to examine the relationship between Islam and underdevelopment.

First, this study posits that the causes of underdevelopment among Indian
Muslims are not to be found in the nature of Islamic theology or the belief system(s)
of adherents of Islam. Hence, this work breaks from the notion suggested by Weber
(Turner 1974, 1996; Crone 1999; Schulchter 1999) and others (Guiso et. al 2003,
228; Voigt, 2005) that Islam is incompatible in some way fundamental way with
economic progress. If Islam had been the sole cause of Muslim underdevelopment,

1
For a more detailed analysis of this literature see Chapter 2 of this study.

185

then the Muslims of India would have lost ground to the Hindus much earlier than
the late nineteenth century. Bernard Lewis ([1982] 2001, 2002), David Landes
(1999), and others (Alamdari 2004, Griffin 1999, Murray 2003, 399-401) have
suggested that cultural insularity played a key role in bringing about Muslim
underdevelopment. Yet, the economic underdevelopment of Indian Muslims could
have led to their ostensible cultural insularity, rather than the other way around.
2

This work posits that the causes of the underdevelopment of Indian Muslims are not
found in any supposed hostility Indian Muslims displayed towards Western culture
but, instead, in Islamic business institutions and inheritance codes, which prevented
Muslim merchants from transitioning towards the usage of Western business
institutions such as the corporation.
Second, this work’s central thesis also disagrees with previous literature that
suggests that specific interest groups such as the British (Ahmad 1991, Chughtai
1974) or the Muslim elite (Haq 1989, Kibria 2001) worked to deliberately bring
about the underdevelopment of Indian Muslims. It is true that the British conquest of
India brought about crucial changes such as the introduction of large scale industries
with large capital requirements and the introduction of Western business institutions.
But the causes of Muslim underdevelopment lie in the reaction of Muslims to these
changes. Hindu institutions such the Hindu joint family and the Mitakshara

2
Proponents of the notion that cultural insularity has led to underdevelopment in the Islamic world
ignore the extent to which Islam borrowed from Greek and Persian cultures during its formative phase
(Arberry [1967] 1971, 13-14).

186

inheritance laws allowed Hindu businesses to successfully move from their
traditional business model towards a new business model capable of incorporating
large scale manufacturing with large capital requirements. On the other hand, the
nature of the Islamic partnership and Islamic inheritance codes made it difficult for
Muslim businessmen to move towards a new business model. Numerous scholars
have also suggested that Western imperialism has played a key role in the decline of
the Islamic world (Alnasrawi 1991; Amin, 1978; Ayubi 1993; Frank 1998;
Islamo ğlu-Inan 1987; Owen, 1981). While this study does not discuss the Islamic
world in its entirety, its findings suggest that Islamic business institutions and
inheritance practices rather than Western imperialism may have played the key role
in hampering the economic development of many regions of the Islamic world.

Impact of Islamic Institutions in the Middle East and India
These findings of this study resonate with previous studies of the
underdevelopment of the Middle East which attribute the region’s underdevelopment
to similar institutions (Kuran 2003, 2004b, 2005a 604-606). We noted in Chapter 2
that three institutions, namely, Islamic inheritance laws, the strict individualism of
Islamic law, and the waqf, hindered institutional innovation in the Middle East and

187

dampened prospects for economic modernization. Let us briefly compare the impact
of the first two on underdevelopment of the Muslims of both regions.
3

Earlier we saw that Islamic partnerships lacked durability and were also
ineffective at accommodating economies of scale. The lack of durability of Islamic
partnership in both regions stems in part from Islamic law’s reluctance to grant legal
personhood to business institutions. We have noted that this played a key role in
restricting the size and scope of Islamic partnerships in both regions. It also proved
to be an additional disadvantage to the Muslims of India: they were unable to adopt
the managing agency model as effectively as the Hindus. The Muslims of the
Middle East were prevented from the adopting Western business institutions by a
different obstacle: the legal framework of the region gave choice of law to Christians
and Jews but not to Muslims. Thus Muslims had to continue using Islamic
commercial and legal institutions, even as the former adopted Western institutions
(Kuran 2004a).
The application of Islamic inheritance laws also restricted the size and scope
of Islamic partnerships in both regions. This had a dynamic consequence: Islamic
partnerships in both India and the Middle East appear to have gone through minimal
structural evolution. A second result of the application of Islamic inheritance laws
was the fragmentation of estates of Muslim families in both India and the Middle

3
Unlike the Middle East, in South Asia waqfs were usually utilized for religious rather than
commercial purposes (Kozlowski 1995). We have noted above that the waqf-alal-awlad was first
utilized for estate preservation during the late nineteenth century. It is beyond the scope of the present
paper to present a comparative analysis of the waqfs of South Asia and the Middle East.

188

East. We have noted throughout this work that the fragmentation of estates put
Muslim entrepreneurs at a disadvantage vis-à-vis their Hindu counterparts because
the latter’s inheritance laws encouraged capital accumulation. The Muslim
entrepreneurs of the Middle East may not have been at a disadvantage vis-à-vis their
Christian and Jewish counterparts in this regard because the effects of the application
of the inheritance laws of the latter were similar in many respects to the effects of the
application of Islamic laws of inheritance (Kuran 2004b, 84).
The innovation of the managing agency was a solution to the new
requirements put forth by the emergence of the economies of scale. The Hindus of
India were at an advantage vis-à-vis the Muslims in their ability to adopt the
managing agency because the Hindu joint family shared some important
characteristics with the managing agency while the Islamic partnership did not. The
Hindus had a second crucial advantage over Muslims: the Hindu inheritance system
encouraged capital accumulation whereas the Islamic inheritance system led to the
fragmentation of estates. While Hindus were able to tap into familial and caste
networks and raise capital, Muslims were unable to do so.

189

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Abstract (if available)

Abstract This work suggests that the underdevelopment of South Asia's Muslims vis-a-vis Hindus of the region stems from differences in the commercial institutions and inheritance laws of the two communities. First, the Hindu joint family was a durable institution that could branch out into long term business ventures. Islamic partnerships were not durable and could not carry into long term business ventures. Because of this difference, Hindus enjoyed a competitive advantage in the adoption of joint stock companies. Second, whereas Hindu inheritance law tended to accumulate capital over time, Islamic inheritance law tended to fragment capital over time. This gave Hindus more access to capital vis-a-vis Muslims in India's capital-scarce economy. As a consequence, India's Hindus came to dominate South Asia's industry, marginalizing its Muslims.

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Asset Metadata

Creator Singh, Anantdeep (author)

Core Title The divergence of the economic fortunes of Hindus and Muslims in British India: a comparative institutional analysis

School College of Letters, Arts and Sciences

Degree Juris Doctor / Doctor of Philosophy

Degree Program Political Economy

Publication Date 11/19/2008

Defense Date 04/16/2008

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag Hindu,India,inheritance law,Islam,Islamic institutions,joint family,OAI-PMH Harvest

Place Name India (countries)

Language English

Contributor Electronically uploaded by the author (provenance)

Advisor Kuran, Timur (committee chair), Klerman, Daniel (committee member), Nugent, Jeffrey B. (committee member)

Creator Email anantdeepsingh@hotmail.com,asinghtpr@yahoo.com

Permanent Link (DOI) https://doi.org/10.25549/usctheses-m1820

Unique identifier UC1102162

Identifier etd-Singh-2464 (filename),usctheses-m40 (legacy collection record id),usctheses-c127-138452 (legacy record id),usctheses-m1820 (legacy record id)

Legacy Identifier etd-Singh-2464.pdf

Dmrecord 138452

Document Type Dissertation

Rights Singh, Anantdeep

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Repository Name Libraries, University of Southern California

Repository Location Los Angeles, California

Repository Email cisadmin@lib.usc.edu