How does an Islamic state (or a corporation) borrow a substantial amount of capital from mostly Muslim savers or high net-worth individuals, and do so quickly? This was the urgent question faced by the Ottoman Minister of Finance in 1774. After being defeated by the armies of Imperial Russia, the Ottomans were required to pay a large war indemnity within a year. Furthermore, since the borrowing had to be undertaken by the government of the Caliph, it needed to be fully Shari`ah compliant. The solution developed was known as esham (plural of sehm, meaning share). It successfully raised about one third of the required indemnity within less than a year and subsequently became a dominant feature of Ottoman public finance for nearly a century.
While this example relates to sovereign borrowing, esham in modern times can also be applied to corporate financing. In fact, the terms “borrowing,” as well as “loan” or “bond,” may be somewhat misleading, since esham does not impose a redemption obligation on the borrower. Nevertheless, for the sake of clarity, these terms will continue to be used in this discussion.
