Musharakah

Musharakah is a type of Shirkat-ul-Amwal which literally means sharing. In the context of business, it refers to a joint enterprise in which partners (or parties) to the enterprise share the profit and loss of the enterprise. Musharakah has far reaching implications for Islamic banking and finance in the modern context and provides an excellent alternative to the interest-based economy.

In a Musharakah, the party investing the capital shares equally in both the profit and loss, which is different from an interest-based system where the upside is limited while the downside is very nearly non-existent.

The Basic Rules of Musharakah

Since Musharakah is, in essence, a contract, all conditions and rules of a contract must be met. Apart from those, there are some basic rules that apply specifically to Musharakah.

Distribution of Profits

  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.
  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 norm is for each partner to take part in the management of the partnership, with each partner acting as an agent of the partnership and any work done by one partner deemed to be authorized by all partners. However, if the partners wish they can contract under alternate arrangements for the management of the partnership.

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.

Source: Usmani, Chapter 1.

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7 responses to “Musharakah

  1. FINANCE, personal finance, business finance, Financial economics, Experimental finance, Financial instruments – best web resources for finance, search information site.
    …Personal financial decisions may involve paying for education, financing durable goods such as real estate and cars, buying insurance, e.g. health and property insurance, investing and saving for retirement.

  2. ikhwan

    do u know what is the differences btwn shafi’and others scholar regarding partnership?……..

  3. this is an informative post in real..

  4. THE CONCEPT OF INTEREST IN ISLAM:

    The concept of interest is one of the most complicated in Islam.
    The Prophet received the revelation condemning riba only a few days
    before his Wafat and so the companions had no opportunity to ask
    Rasulullah (SAW) for the fullest implications of the order. Even
    Sayyidina Umar ibn al-Khattab had said,

    “The last revelation of the Quran was concerning riba and the Apostle
    of Allah passed away before explaining the full meaning of the passage
    to us” ( Ibn Hanbal, on the authority of Said ibn al-Musayyab).

    The exploitation of the economically weak by the strong is a form of
    oppression. Hence, attaching profits (riba) on the personal loans
    obtained by those who are really poor, downtrodden and debt-laden is a
    disgrace and is condemned as haram by Islam. There can never be two
    conflicting opinions on this.

    But not all interest-bearing financial transactions fall within this
    category of exploitation by the economically strong. Life assurance
    and buying houses on mortgage are two examples of contractual
    financial transactions which fall outside this category of
    exploitation.

    To quote Muhammad Asad again,” the question as to what kinds of
    financial transactions fall within the category of riba is, in the
    last resort, a moral one”.

    It is impossible to give an outright judgment in a non-Muslim country
    banning on all kinds of interest-bearing financial transactions, in a
    rigid and once-for-all manner putting the economically weak Muslim
    minority in India at a greater economic disadvantage. The
    interpretation of Islamic scholars must not ignore the changes to
    man’s environment on his social, economic and technological
    development.

    That is the adoring beauty of the Quran. It is Islam’s biggest
    miracle. People living the third millennium may read the same Quran
    without an alphabet having been changed, but will see totally new
    light, new messages, new interpretations and new discoveries that go
    beautifully and logically cognizant of the socio-economic-
    technological environment of that time that we people living in the
    second millennium never ever dreamt of. Hence my simple assertion is
    that, our traditional Alims should not apply the first century Hijrah
    definition of Riba to solve the most complicated economic problems of
    the 21st century.

  5. One other point that is worth mentioning here is that, during the time
    of the Prophet(SAW) the value of money was constant and inflation was
    non-existent and hence Riba ( as the sort practised by Abbas-RAA )was
    haram because the lender even after a year of waiting will get the
    money that he lent whose purchasing power had not diminished at all.

    But in our country the annual rate of inflation is about 10 to 15%. In
    such a condition of rising prices, is it fair to expect a person
    depositing his money for safe-keeping ( or lending to another trader
    who makes profits) with a bank to withdraw the same amount without any
    additions, say after a period of 12 months. Should the Alims give a
    fatwa that bank interest on deposit is haram, the depositor will get
    back the same amount whose purchasing power has fallen by 10 to 15%

    This is one of the angles (there are many others) from which we should
    aim for a new definition of riba.

    WA MA TAWFIQ ILLA BILLAH
    Nothing from me except with the help of Allah
    P.A.Mohamed Ameen

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