Form of partnership in Islam

Nuradli RS

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The structure of a Musharaka Contract

ISLAMIC ISLAMIC BANKBANK

ISLAMIC ISLAMIC BANKBANK

PARTNERPARTNER(Customer)PARTNERPARTNER(Customer)

MUSHARAKAMUSHARAKAMUSHARAKAMUSHARAKA

60% Ownership40% Ownership

• Both the Bank and the customer contributes towards the capital of the enterprise

• Under a “diminishing” musharakah, the customer buys out the bank`s share over a period of time.

• The customer and the bank share in the profits according to the agreed proportions, which may be different from the proportions of capital contributed. Any losses of the enterprise will be borne by the customer and the bank according to their capital contributions.

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• Shirk or Shirkah in Arabic means partnership • In classical Islamic law, partnerships are referred to as

Shirkah. In the parlance of contemporary jurists, the term Musharakah (sharing) is more commonly used

• In its broader sense Musharakah means a joint enterprise formed for conducting some business in which all partners share the profit according to a specific ratio while the loss is sharedaccording to the ratio of the contribution.

• Shirkat-al-Milk: Partnerships by ownership• -- Ikhtiyari (optional) and Ghair-Ikhtiyari• Shirkat-al-Aqud: - these are further divided into three

major types:• -- Shirkat-al-Amwal:• - Shirkat-al-Aamaal• -- Shirkat-al-Wujuh: • All of the above three are then further divided into two

types:• -- Mufawadhah:• -- Inan:

• 1. The partners’ capital invested must be equal at all times.2. Each partner equally shares the profit or loss of the

business3. Each partner is a Wakeel or agent of the other partner/s

and has therefore the right to buy or sell goods on the other partner/s behalf. Thus every partner represents the other partner/s when negotiating any business deal.

4. Each partner is also a Kafil or a guarantor and thus responsible for the debts incurred by the other partner/s

1. Partners’ Capital• The partners’ capital invested can be in any proportion. 2. The Nature of Capital• The share capital can be contributed either in cash or

in form of commodities such as equipment, furniture, motor vehicles etc. In the latter case, the market value of the commodities shall determine the share of the partner in the capital.

• 1. Existence of Mutaaqideen (Partners) • 2. Legal capacity of partners (ahliyah): Partners

must be sane & mature; • 3. The rate of profit sharing should be determined: • 4. Profit & Loss Sharing: All partners will share in

profit as well as loss. By placingthe burden of loss solely on one or a few partners makes the partnership invalid

• 5. Distribution of loss: • 6. Management of Musharakah: • 7. Rights of partners in Musharakah:

a) The right to sell the mutually owned property b) b) The right to buy on cash or credit c) c) The right to hire people to carry out business if

needed.• d) The right to deposit money & goods of the business • e) The right to use Shirkah funds or goods in

Mudarabah (entrepreneur-based partnership)• f) The right of giving Shirkah funds as loan. If one

partner for purpose of investing in the business has taken a loan (Qard), then paying it becomes liable on both.

• Musharakah will terminate if the purpose of formingthe Shirkah has been achieved; if any of the partners applies for termination; if any ofthe partners die or becomes insane or incapable of effecting commercial transaction

• MARKET VALUE

• ACTUAL LIQUIDATION

• CONSTRUCTIVE LIQUIDATION

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CLIENTCLIENT(Mudarib)

Investor ofCapital

ISLAMIC BANKISLAMIC BANK

Payment of Mudarabah

Capital

INVESTMENT / TRADING INVESTMENT / TRADING ACTIVITIESACTIVITIES

Earning of Profits

CLIENTCLIENT

(Mudarib)

Distributor of Profits Earned

ISLAMIC BANKISLAMIC BANK

Periodic proportionate Profits / Return of Capital

• The bank provides to the customer (mudarib) all the capital to fund a specified enterprise

• The customer contributes only entrepreneurship.• The customer is responsible for the day to day management of

the enterprise and is entitled to deduct its management fee(mudarib fee) from the enterprise`s profits.

• The mudarib fee could be a fixed fee (to cover management expenses) and a percentage of the profits or a combination of the two. A classical mudarib fee is based on a percentage of the profits only.

• The balance of the profit of the enterprise is payable to the bank• If the enterprise makes a loss, the bank (as the fund provider or

Rabbul Mal) has to bear all the losses unless the loss has resulted from negligence on the part of the mudarib.

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