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HAIZAM FITRI BIN ABDUL JALIL

2008268206

SITI NURAMANI BINTI ABDUL MANAB

2008261672

SITI NUR HANIM BINTI ISMAIL

2008268228



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Islamic Law of Transactions (Law 737)

Research Topic:

Mudharabah and Musyarakah are among

the products introduced in Islamic Law in

order to avoid the practice of riba

(interest). Compare and contrast these two

contracts.



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Definition:

- Mudharabah : means that one party provides capital and theother utilises it for business purposes under the agreementthat profit from the business will be shared according to aspecified proportion. (Partnership and Profit-Sharing in

Islamic Law, Muhamad Nejatullah Siddiqi, The IslamicFoundation, London, U.K, 1985 pg15)

- Musyarakah : means participation of two or more persons ina certain business with defined amount of capital accordingto a contract for jointly carrying out a business and for

sharing profit and loss in specified proportions. (Partnershipand Profit-Sharing in Islamic Law, Muhamad NejatullahSiddiqi, The Islamic Foundation, London, U.K, 1985 pg15)



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Definition (cont..)

Riba (interest): the extra money that you pay for borrowing

money from bank or the money that you earn when you

keep money in a bank. (Oxford Wordpower Dictionary, new

3rd edition)

Prohibited in Islam through Al-Quran verse (3.130) Ýouwho believe, devour not usury, double and multiplied; but

fear God that you may [really] prosper.· (Article by Hussein

Hassan; Contracts in Islamic Law: The Principles of

Commutative Justice & Liberality (2002))

The Prophet p.b.u.h said: ´Gold for gold, silver for silver,wheat for wheat, barley for barley, date for date, salt for

salt, of the same quantity and quality, from hand to hand.

If there is a surplus, this is usury. If the article are of

different nature, sell as you please, but from hand to hand.µ

(from same article)



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Cont..

Furthermore, Al-Quran verse 2:275; Állahpermitted bay (sale and purchase) and prohibited

riba (interest or usury)µ. [The Practices of Shariah

Principles in Instrument of Islamic Financial

System : An Overview by Fadillah Mansor)

In applying the above verse, muslim scholar as

well as the practitioners established principles of

mudharabah and musyarakah.



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FE ATURES OF MUDHARABAH

Agreement between at least 2 parties known as lender/investor (I)

(ra·s al-mal) & entrepreneur (E)(mudarib).

I entrust money to E who will manipulate for profit in the agreed

manner. If any, I will receive principles and profit on pre agreed

proportion and remaining balance will be kept by E.

Profit will be on proportional basis not on lump sum or

guaranteed return. It revealed no unfair terms to be shouldered

by E.

Uncontrollable loss by E, I will face it consequence of financial

losses (tangible) but E only losses time, effort or may be

reputation in the eye of future investor (intangible). I tend to act as ´sleeping partnerµ.

Only I contribute the capital. (all from Fadillah Mansor·s

article)



CONT«

Ali bin Abi Talib empahsised that all losses must be paid for out

of capital.

If the profits are divided equally as per their agreement, no losses

will be charged to the mudarib.

If the investor has stipulates the conditions that the mudarib

should not enter into any transaction involving certain conditions

and the investor did not follow the instruction then the investor is

not liable to any repayment or replacement of the capital

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FE ATURES OF MUSHARAKAH

2 broad categories:

Sharikah al-mulk i.e property partnership

Sharikah al-·aqd i.e contractual partnership

5 types of Sharikah al-·aqd:

Sharikah al-mal or finance partnership

Sharikah al-a·mal or labour partnership

Sharikah al-wujuh or credit partnership

Sharikah al-·inan or limited investment partnership

Sharikah al mufawadah or unlimited investment



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cont,.

Joint-venture agreement involves 2 parties for specific businessactivity for the sake of profit.

Timely based agreement or fulfillment of certain objective

Both parties will contribute capital and involve in themanagement of that business activity. Capital can be in any formof immovable property or cash.

Profit sharing based on specified agreed ratio.

Consequence of any loss, parties shoulder the loss in proportion totheir share of financing.



SHARIKAH AL-MULK

The origin of the partnership is the joint ownership of property.

Joint ownership is its only qualification, and no joint exploitation

of property is necessary.

It occurs when two or more people are partners in the possession

of property. The rule governing this type of sharikah is that any increase in

the property shall be shared by the co-owners in proportion with

the extent of their ownership.

Each of them is in the category of a stranger in regard to any

action on the part owned by his colleague.

It is unlawful for either partner to perform any act with respect to

the other·s share except with the latter·s express permission.

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CONT«

In terms of liability of the partners, they are quite independent of

each other, except for actions based on express authorizationby

any of the partners.

Their partnership is only in terms of ownership and potential

sharing of any profit or increase in the co-owned property, not in

term of sharing the liabilities arising from the partners· actions.

This type of sharikah may not be known in the common law or

Malaysian law. In fact mere joint-ownership is generally

insufficient to constitute a partnership in common and Malaysian

law

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SHARIKAH AL-· AQD

The origin of the partnership is the contract between the parties.

The structure of this type of sharikah may have more similarities

with the normal partnership in common law and Malaysian law.

For sharikah al àqd, joint ownership is not an element necessary

for the establishment of the partnership. The emphasis is rather on the joint exploitation of capital and the

joint participation in profits and losses, based on the terms of the

partnership contract.

Joint ownership is one possible consequence, and not a

prerequisite for the formation of sharikah al àqd

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CONT«

The jurists further sub-divide Sharikah Al Aqd into various other

categories.

The subdivisions depend on a number of factors. If the underlying

factor is the subject matter of capital contribution, sharikah al

àqd can be sub-divided into three main categories:-

(1) sharikah al amwal,

(2) sharikah al a`mal

(3) sharikah al wujuh.

When the subject matter of the capital is money, it becomes

sharikah al amwal (monetary partnership).

If the capital is in the form of labour, it becomes sharikah al

a`mal (labour partnership).

If the capital is in the form of reputation or creditworthiness, it

becomes sharikah al wujuh (reputation partnership).13



CONT«

The jurists also make further sub-divisions to sharikah al àqd

based on the terms of the contract, i.e., whether the partners are

required to contribute equally to the capital and enjoy full

equality in exploiting the capital and sharing the profit or not.

Based on this consideration, sharikah can be divided into two

types, sharikah al mufawadah and sharikah al ¶inan.

Sharikah al mufawadah means an unlimited investment

partnership, whereby each partner must contribute equally to the

capital, and enjoys full and equal authority to transact with the

partnership capital or property.

The Hanafis consider each partner as an agent (wakil) for thepartnership business and stands as surety (kafil) for the other

partners. Thus, the partners can be made jointly and severally

responsible for the liabilities of their partnership business

provided that such liabilities have been incurred in the ordinary

course of business.14



CONT«

This type of sharikah clearly implies unlimited liability on the

part of partners since they are both agents and guarantors of each

other.

Sharikah al·inan can be defined as a limited investment

partnership.

Whereby each partner may only transact with the partnership

capital according to the terms of the partnership agreement and

to the extent of the joint capital. Hence, their liability towards

third parties is several but not joint.

The liability of partners in Sharikah Alìnan resembles that of

modern-day limited liability partnerships. Both Sharikah Al-Mufawadah and Sharikah Al inan can occur in

all the three earlier types of sharikah, i.e., Sharikah Al Amwal

(monetory partnership), Sharikah Al A`mal (labour partnership)

and Sharikah Al Wujuh (reputation partnership). 15



CONT«

Sharikah Al Mufawadah is rarely opted for due to the higher

degree of responsibility and the practical difficulty to achieve full

equality between the partners in all aspects of the partnership

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COMPARE AND CONTRAST

Definition

Profit sharing.

SunnahIt was narrated by Ibn Majah

that the Prophet was reported

to have said:

´Three things done which have

a blessing in it, namely, credit

sale, Mudharabah, and a

mixture of flour and barley for

the purpose of invitation, and

not for the purpose of saleµ

Definition

Partnership. Literally itmeans a joint venture

agreements between 2 parties

to engage in a specific

business activity with an aim

making profit.

MUDHARABAH MUSYARAKAH

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Mudharabah capital

represents savings for the

owner or investor but isgenerally a source of livehood

for the working partner or

entrepreneur.

Method

It the basis of reorganizing

banking activity in an

interest free framework. This

can be done by entering into 2

tier Mudharabah Agreement.

Method

The Islamic investment

company and the client agree

to participate in a joint

venture to be completed

within an agreed period of time.

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First Tier

Between the bank and the

depositor who agrees to put

money in the bank·s

investment account and to

share profit with it.

In this case, the Depositors

are the providers of the

capital and the Bank

functions as the Manager of

funds.

Both parties contribute to the

capital of the operation in

varying degrees and agree to

divide the net profit in

proportion to the amounts

invested by each.

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Second Tier

Between the bank and theentrepreneurs who seek

finance from the Bank on the

conditions that profit

accruing from their business

will be shared between them

and the bank in previouslyagreed proportion, but the

lost shall be borne by the

financier only.

In this case, the Bank

functions as provider of

capital and the Entrepreneur

work as the Manager.

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In case there is more than one

financier of the same project

i.e one project is jointlyfinanced by several Banks,

profits are to be shared in

mutually agreed proportion

previously determined but

lost is to be shared in the

proportion in which the

different financier·s have

invested the capital.

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Principle

As a basis of financialintermediation in the Islamic

economy is offered as a viable

basis for an interest free

banking system.

The creditor does not earninterest on the fixed rate in

this system but participate in

the business risks and earn

the share of the profit.

Thus, under an Islamic

Banking system, the cost of

capital is not zero, i.e,

analogous to a zero interest

rate, as some people assume

it to be.

Principle

Both parties will providecapital and the investor or

lender may also participate in

the management.

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The only difference between

Islamic banking and the

interest banking in this

respect is that the cost of

capital in interest based

banking is expressed in terms

of a predetermined fixed rate,

while in Islamic Banking, it is

expressed in absolute amount

which may also be expressedas a ratio of profit.

The distribution of profit

between two parties must

necessarily be on aproportional basis and cannot

be a lump sum or a

guaranteed amount.

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In the case of loss as a result

of circumstances beyond the

control of the entrepreneur,

the investor will bear all the

financial risk and the

entrepreneur losses the time

and his effort s only.

Profit distribution

No profit can be recognized or

claimed unless the capital of

the Mudharabah is

maintained intact.

Profit distribution

Profit will be shared by two

parties in the agreed ratio

and the ratio not coincide

with the ratio of participation

in the financing activity.

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Whenever the Mudharabah

incurred losses, such losses

stand to be compensated by

the profits of future operation

incurs losses, such losses

stand to be compensated by

the profits of future

operations of the

Mudharabah.

The losses brought forward

should be set again the future

profits.

All in all, the distribution of profit depends on the final

result of the operations at the

time of liquidation of the

Mudharabah contract. 25



If losses are greater than the

profits at the time of

liquidation, the balance (net

loss) must be deducted fromthe capital.

If the total Mudharabah

expenses are equal to the

total Mudharabah revenues,

the capital provider will

receive his capital back

without either profit or loss,

and there will be no profit in

which the entrepreneur is

entitled to share. If profit

realized, it must be

distributed between parties

as per Agreement.

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Liability

Entrepreneur shall not beliable for any loss of the

venture.

Thus, if the Mudharabah

business runs into a loss, only

the investor will have to bearthe loss.

Liability

In the event of loss, all partiesbear the loss in proportion to

the share of financing

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Period

Continues as such for as longas the entrepreneur does not

contribute his own funds to

the business.

Period

Each partner is entitled toterminate the partnership after

giving his partner(s) due notice to

the effect, in which the case he

shall be entitled to his share in

the partnership, and the

withdrawal would not necessitate

the termination of thepartnership of the remaining

partners.

It come to an end at the expiry

date or before the expiry date if

the partners agree to terminate itprematurely, or, in the case of

partnership in a particular

business, by actual liquidation of

the assets that constitute the

subject matter. 28



CONCLUSION

Although equity financing was not dealt with th Quran, the Sunnah

affirmed that Uqud al Ishtirak (profit sharing contracts of Al Mudharabahand Al- Musharakah practised by pre-Islamic Arab society are allowed in

Islam.

As stated earlier, this would extend to the profit sharing contracts practised

by Pre-Islamic Arab society. On this basis, equity financing was allowed in

islam as well.

Surah An-Nisa(4), verse 32 :

´ Do not convert the bounties which God has bestowed more abundantly on

some of you than on others. Men are allowed what they earn, and women

are alloted what they earn. Ask God for something of His bounty«.

- The above verse reiterates the principle that no one may claim more than

he has earned.29

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