Islamic Commercial Law
(Fiqh Muamalat)
Topic 10
Partnership (Al-Sharikat)
Introduction
Differentmeanings of shirkah:
Mixing of two properties in a manner that they
could not be distinguished from each other.
Sharing and participating something,
A property that belongs to several owners or
co-proprietors in common,
Division of Partnership (Al-Shirkah)
•Generally, Al-shirkah could be divided into two
broad divisions:
–Shared ownership,
• Voluntary,
• Involuntary
–Contractual partnerships
• Partnership of properties,
• Partnership of services,
• Partnership of reputation,
Shared Ownership
•Shared ownership is a partnership that comes
into existence without official partnership
agreement.
–E.g. inheritance, wassiyah (testament or will
writing), gifts, or purchase.
–In this form, the partners have to share the
property, or its income based on their allotted
respective shares until they decide to divide it or
to sell it.
– it is called the de facto partners,
Shared Ownership
•Shared ownership form of partnership is
categorized into two:
–Voluntary co-ownership,
– Involuntary co-ownership
Shared Ownership
•Voluntary co-ownership,
–Voluntary partnership refers to a situation in
which two or more persons jointly buy a
property or receive a certain property as a
gift or as a result of a will (wasiyyah),
–It this case the acceptance of the parties is
necessary,
Shared Ownership
•Involuntary co-ownership,
–Involuntary partnership refers to a situation
in which two or more persons acquire the
ownership over something without any
action on their part,
–E.g. inheritance of property by the several
inheritors,
Features of Shared Ownership
• No mutual agreement of the partnership by the
partners,
• A partner has no authority over another partner’s
share with his/her permission,
• Every partner represents an agent for the other
partner or partners,
Contractual Partnership (Sharikat
Al-’Uqud
• A partnership built on the agreement of the parties,
• Parties willingly decided to jointly invest and share
profits and losses of a venture,
•According to most of the jurists, partnership has
three pillars:
–The parties,
–The object or subject matter, and
–The expression (offer & acceptance),
Contractual Partnership (Sharikat
Al-’Uqud
• there are three major types of contractual
partnership:
–Partnership of capital (sharikat al-Amwal).
–Partnership of services (sharikat al-A’mal).
–Partnership of reputation or creditworthiness
(sharikat al-Wujuh).
Capital Partnerships (Sharikat al-
Amwal)
•In this type, partners contribute their capital.
•Capital
partnership is subdivided into:
○Sharikat al-mufawada, and
○Sharikat al-Inan
Capital Partnerships (Sharikat al-
Amwal)
•Sharikat Al-Mufawada (equal capital),
– Mufawada means equality and delegation, where it
refers to a partnership in which two or more persons
become partners in a venture on the condition that they
equally contribute to the capital and management and
equally share profits or losses,
– Although it is not common in the modern times,
however, it is relevant to work, especially for the family
members who inherit business and continue operation,
Capital Partnerships (Sharikat al-
Amwal)
•Characteristics of Sharikat Al-mufawada,
– The partners must contribute all their capital to the
partnership capital,
– Neither of the partners must be richer than the other
– Each partner is an agent as well as a guarantor for the
other partners.
– A partner is liable for the actions of other partners, since
an undertaking of partner binds all other partners,
Capital Partnerships (Sharikat al-
Amwal)
•Sharikat Al-Inan (Unequal capital)
– It is a partnership in which two or more partners
contribute different amounts of capital and share the
profit and loss in different proportions,
– It is not necessary of equality in capital, in management
of the enterprise, or in profit and loss,
– It is the most common partnership type in the current
financial system,
Capital Partnerships (Sharikat al-
Amwal)
•Characteristics of Sharikat Al-Inan
– One of the partners may contribute more capital than the
others.
– One or more partners may run the business while the rest
may not participate.
– Partners are considered agents for each other and actions
done by one of them binds other partners.
– However, partners are not guarantors for each other,
○ The liabilities toward third parties outside the
partnership business are individual and not joint.
Capital Partnerships (Sharikat al-
Amwal)
Conditions related to the capital of sharikat
•
Al-Inan
– The capital should be a property on which agency is
possible.
– The capital of each partner should be known.
– The percentage of each partner’s capital shall be clearly
defined,
– The capital of each partner should be presented. Debt
cannot be contributed as the capital,
Capital Partnerships (Sharikat al-
Amwal)
•Conditions related to the capital of sharikat
Al-Inan
–Profit Distribution= PLS Ratio, profit
sharing can flexible based on the agreement
of the partners,
–Loss sharing= based on CCR (capital
contribution ratio)
Capital Partnerships (Sharikat al-
Amwal)
•Conditions related to the capital of sharikat
al-Inan
– The capital of each partner should be mixed together in
such a way that the capital of one partner cannot be
distinguished from that of the others,
– Many of the jurists argue that a partner’s share shall be a
liquid or cash and they oppose a partners’ share to be an
asset (in kind), because an asset is distinguishable from
the other assets,
– However, Malikis argue that all kinds of wealth can be
contributed.
Capital Partnerships (Sharikat al-
Amwal)
•Conditions related to the capital of sharikat
al-Inan
– Ifproperties are contributed, it shall be valued at the
market price, and it shall be registered in the name of the
partnership,
– In this case, documentation is necessary for assets’
ownership transfer from the original partner,
– Shafici jurists are on the opinion that only homogeneous
properties can be contributed to the partnership, and
non-homogeneous properties shall not be accepted,
Capital Partnerships (Sharikat al-
Amwal)
•Conditions of profit/loss distribution of of
Sharikat al-Inan
– The profit must be based on percentage or proportions
(e.g. 20%, 30%, etc.).
– It is not permitted that a partner receives a specific
amount of money (e.g. $1,000, $2,000, etc.).
– The percentage in which each partner should receive
from the profit should be clearly specified in the contract
– Maliki/Shafici jurists, the ration of profit shall be the
same ratio of capital contribution,
Capital Partnerships (Sharikat al-
Amwal)
•Conditions of profit/loss distribution of
Sharikat al-Inan
– Hanafi/hanbali jurists, the ratio of the profit may differ
from the ratio of capital contribution,
– Because in some times, some partners may not
contribute capital, but at the same time very useful for
the projects success, and share the partnership profit,
– In case of loss,
○ All Muslim jurists unanimously agree that each partner
shall suffer the loss based on his capital contribution
ratio
Management of Partnership (Sh. Al-
Inan)
• Generally, every partner has the right to take part in the
management of the partnership,
• However, partners may agree that one of them runs the
partnership, and other partners shall not work for the
partnership.
• The partners who manage the partnership act as agents
for the other partners.
• But, all rights/obligations are attributed to all the
partners and not only to those who are running the
business
Management of Partnership (Sh. Al-
Inan)
• The partner who manages partnership is considered as a
trust, who cannot guarantee partnership capital unless
found neglected or misconducted,
Partnership of Services (Sharikat al-
a’mal)
• Partnership of services (known as sharikat al-abdan)
refers to a partnership of two or more workers or
professionals who agree to contribute their labor/service
to a joint enterprise and share the earnings,
• The partners only contribute their labor, service, and
skills without contributing to the capital,
• They jointly undertake to render services for their
customers, and the fee charged from them is distributed
among the partners according to an agreed ratio.
Partnership of Services (Sharikat al-
a’mal)
• Shafi’i jurists consider this type of partnership an invalid
one because:
– Labor and services contribution cannot form a capital as
labor and services cannot be quantified,
– This type of partnership suffers from ambiguity, as the
exact percentage of each partner is not clearly known,
and then profit/loss will be unfair,
– However, all other jurists, argue that the purpose of the
parties in a partnership of services is to collect profit for
which partners may become agents to each other.
Partnership of Services (Sharikat al-
a’mal)
– Those other jurists argue that human beings since time
immemorial used partnership of services to jointly
undertake certain task that was difficult for a single
individual to perform.
– Additionally, they contend that labor could become the
capital of partnership by an analogy to a mudarabah
partnership, whereas a mudarib only contributes his
efforts and labor.
Partnership of Services (Sharikat al-
a’mal)
– In practice, sharikat al-amal is suitable for the
following professional skills of:
○ Tailors,
○ Plumbers,
○ Barbers,
○ Lawyers,
○ Physicians, or
○ Accountants,
○ Other skills
– Those professionals contribute their labor/services and skills
to jointly undertake certain tasks and to share the profit
among them either equally or based on an agreement,
Partnership of Services (Sharikat al-
a’mal)
– This type of partnership is a way to empower the worker
or professionals to come together, form a partnership,
jointly perform tasks, and share the revenue instead of
being employed by an employer for doing the same job
in return for wages/salaries.
– Sharikah Al-A’mal encourages the workers and
professionals to jointly form enterprises/businesses, even
if there is no capital,
Partnership of Reputation or
Creditworthiness(sharikat al-Wujuh)
• In partnership of creditworthiness, two or more persons
agree to purchase goods upon their personal credit and to
sell them through their joint efforts on their joint account
• Wujuh refers to goodwill, creditworthiness, and good
reputation.
• The partners do not contribute any capital, but usually,
they purchase goods at a lower deferred price and sell
them for cash.
• In this approach, they may make profit and share it,
either equally or based on an agreed ratio,
Partnership of Reputation or
Creditworthiness(sharikat al-Wujuh)
• This form is useful for those who do not have sufficient
capital to purchase goods in cash, but have good
reputation in the market,
• It is a business that encourages individuals and
companies to establish their goodwill, which, in turn,
would benefit the society at large,
Partnership (Sharikat
al-’Inan/Musharakah) and Islamic Banks
–Partnership is one of the Islamic banking
products that represent the true spirit of Islamic
banking and finance,
–In Islamic finance, instead of lending money at a
fixed rate of return, an Islamic bank forms a
partnership with the customer, sharing in a
venture’s profit and losses.
–While fixed rate of interest predetermined, in
musharakah the actual profit earned by a joint
venture,
Partnership (Sharikat
al-’Inan/Musharakah) and Islamic Banks
–So, an Islamic bank is not merely lender,
but an investor,
–Based on partnership, Islamic banks could
invest trade both:
○Import, and
○Export,
–By sharing both profit and loss with a
predetermined PLS ratio,
Decreasing Partnership (Musharakah
Mutanaqisah)
• In decreasing partnership, each partner contributes to the
capital of the venture with a certain percentage,
• As the business activity starts, one of the partners (the
bank), decide to withdraw gradually from the venture by
selling its shares to the other partner,
• The profit ratio of the withdrawing partner will diminish
in the same percentage of the share decrease,
• The price of the shares being sold is negotiable, and
depends on the market value or on a predetermined
agreement,
Decreasing Partnership (Musharakah
Mutanaqisah)
• Decreasing Partnership for Home Financing:
– This form of partnership is used for housing, where a
customer a customer contributes 10% and the bank 90%,
– Both the customer and the bank will benefit the rental
income after the construction of the house.
– The customer has the option to purchase the share of the
bank (90%),
– If the customer decides to buy the bank’s share, then the
rental payment will include the profit of the bank as well
as the bank’s return of the sold shares,
Decreasing Partnership (Musharakah
Mutanaqisah)
• Decreasing Partnership for Home Financing:
– Based on the market value, or an arrangement between
partners, the full ownership of the venture will be
acquired gradually by the customer,
– The relationship between the bank and customer is “co-
ownership or partnership”, not a “creditor-debtor”
relationship,
– Read further information between MM and BBA
housing modes practiced by Islamic banks,
Dissolution of Partnership
• Originally, partnership is a nonbinding contract, but,
partners may agree to make it a binding contract for a
certain period.
• A partnership may come to an end in the following
circumstances:
– When a partnership fulfils its objective or when its
duration is expired.
– By mutual consent of the partners.
– By a request made by one of the partners, and approved
by other partners,
Dissolution of Partnership
• A partnership may come to an end in the following
circumstances:
– By death or incapacity of a partner if his heirs/guardian
decide to discontinue the partnership,
– By the bankruptcy of the partners or one of them,
• When partners decide to liquidate the partnership:
– The partnership shall be liquidated,
– The obligations shall be discharged first,
– If no loss, then capital shares shall be paid,
– If there is profit, it shall be distributed,
– If loss is suffered, shall be shared based on capital ratio.
END OF TOPIC 10
