MUSHARAKAH
'Musharakah' is a word of Arabic origin which literally
means sharing. In the context of business and trade it
means a joint enterprise in which all the partners share the
profit or loss of the joint venture. It is an ideal alternative for
the interest-based financing with far reaching effects on
both production and distribution. In the modern capitalist
economy, interest is the sole instrument indiscriminately
used in financing of every type. Since Islam has prohibited
interest, this instrument cannot be used for providing funds
of any kind. Therefore, 'Musharakah' can play a vital role in
an economy based on Islamic principles.
The basic rules of Musharakah
Musharakah or Shirkat-ul-amwal is a relationship
established by the parties through a mutual contract.
Therefore, it goes without saying that all the necessary
ingredients of a valid contract must be present here
also. For example, the parties should be capable of
entering into a contract; the contract must take place
with free consent of the parties without any duress,
fraud or misrepresentation, etc.
Distribution of Profit
1. The proportion of profit to be distributed among the
partners must be determined and agreed upon at the
time of the contract. Otherwise the contract is not valid
under Shari’ah.
2. According to Imam Malik and Imam Shafe’i, it is
necessary that each partner’s share in the profit is
exactly equal to the proportion of initial investment into
the partnership.
3. According to Imam Ahmed, the ratio of profit
distribution may vary, without restriction, from the ratio
of investment.
4. According to Imam Abu Hanifah, the ratio of profit
distribution may vary, however, for silent partners (non-
active partners, who only contribute capital), it cannot
be any higher than the ratio of investment.
Distribution of Loss
All the Muslim jurists are unanimous that each partner’s
share in loss must be exactly equal to the ratio of initial
investment. Anything to the contrary will render the
contract invalid.
The Nature of Capital
There are the following opinions on this:
1. According to Imam Malik and some Hanbali jurists, the
nature of capital is not a restriction in a Musharakah
arrangement. Therefore, in-kind (non-cash)
contributions by partners are allowed. The share in
partnership will be determined based on the market
value of the commodity contributed.
2. According to Imam Abu Hanifah and Imam Ahmed, no
in-kind contributions are allowed in a Musharakah
arrangement. This is because they believe it poses
problems if the partnership needs to be liquidated or
redistributed.
The Nature of Capital
3. Imam Shafe’i makes a distinction between replaceable
commodities and irreplaceable commodities (like
cattle). The view is rather complex, and not important
for our purposes.
For the purposes of modern business, the view of
Imam Malik has been widely accepted.
Management of Musharakah
The normal principle of musharakah is that every partner
has a right to take part in its management and to work for
it. However, the partners may agree upon a condition that
the management shall be carried out by one of them, and
no other partner shall work for the Musharakah. But in this
case the sleeping partner shall be entitled to the profit only
to the extent of his investment, and the ratio of profit
allocated to him should not exceed the ratio of his
investment, as discussed earlier.
However, if all the partners agree to work for the joint
venture, each one of them shall be treated as the agent of
the other in all the matters of the business and any work
done by one of them in the normal course of business shall
be deemed to be authorized by all the partners.
Powers and rights of partners in Musharakah
After entering into a musharakah contract, partners have
the following rights:
a) The rights to sell the mutually owned property since all
partners are representing each other in Shirkah and all
have the right to buy and sell for business purposes.
b) The right to buy raw material or other stock on cash or
credit using funds belonging to shirkah to put into
business.
c) The right to hire people to carry out business if needed.
d) The right to use shirkah’s fund or goods in mudarabah.
e) The right of giving shirkah’s funds as hiba (gift) or loan.
If one partner for purpose of investing in the business has
taken a Qard-e-Hasana, then paying it becomes liable on
both.
The difference between interest based
financing and Musharakah
Interest Based Financing Musharakah
1 A fixed rate of return on a loan Musharakah does not envisage a fixed
advanced by the financier is rate of return. The return is based on
predetermined irrespective of the profit the actual profit earned by the joint
earned or loss suffered by the debtor. venture.
2 The financier cannot suffer loss. The financier can suffer loss. If the
joint venture fails to produce fruits.
3 Results in injustice either to the creditor The returns of the creditors are tied up
or to the debtor. If the debtor suffers a with the actual profits accrued through
loss, it is unjust on the part of the the enterprise. The greater the profits
creditor to claim a fixed rate of profit. of the enterprise, the higher the rate of
Also if the debtor earns a very high rate return to the creditor. If the enterprise
of profit, it is injustice to the creditor to earns enormous profits, all of it cannot
give him only small proportion of the be secured by the debtor exclusively
profit leaving the rest for the debtor. but will be shared by common people
e.g. depositors in the bank.
Termination of Musharakah
It is agreed upon by the jurists that a partnership is
terminated if:
1. One of the partners terminates the partnership;
2. One of the partners dies (where the heirs get the choice to
continue the partnership or liquidate it to draw their share
from the partnership);
3. One of the partners becomes insane.
If the remaining partners want to continue the business
under any of the above scenarios, it is achievable with
mutual agreement. The remaining partners would have to
purchase the share of the out-going partner.
Another question raised is whether the partners can agree,
at the time of contracting, that the partnership will not be
terminated unless all partners agree to the termination.
Though the earlier fiqh books are silent on the issue, there
is nothing in the Shari’ah that would prohibit such an
arrangement.
