Partnership – Definition and Types

The Arabic word sharekah means partnership or company and denotes mixing of two shares in a way as to make them indistinguishable.

In Islamic jurisprudence, there are several definitions of partnership

Hanafi scholars define partnership as “a contract between partners on both capital and profit.”

Shafe’i scholars define partnership as “a contract giving the right in something to two or more people, making it common.”

Hanbali scholars define partnership as “the coming together of two or more people in disposal or acting.”

Two main kinds of partnerships

Partnerships are primarily of two kinds: partnerships of ownership and partnerships of contracts.

Partnerships of Ownership (Amlaak)

A partnership of ownership means that two or more people share the ownership of a single property, either by their own choice (i.e., by agreeing to buy the property) or without their own choice (i.e., inherting the property, for example). Each of the parties is a partner and none of the parties can dispose of the object on his or her own, without the permission of all other partners.

Partnership of Contracts (Uqood)

A partnership of contacts is between two or more people to have partnership in capital and profit. Such partnerships are subdvided into four kinds:

  1. Amwal – financial company, where two partners contribute finances to start the company. This type further includes Al-‘Inan or unequal share partnership and Al-Mufawadah or equal share partnership;
  2. Wojuh – eminence, where a partner only contributes his or her eminence to the partnership (e.g., Al-Azhar University giving accreditation to an institute in Canada is a partnership where Al-Azhar is exhanging its eminence for a consideration);
  3. Sana’i – workmanship, where the partners contribute labour to the partnership;
  4. Mudarabah – capital-labour partnership, where one partner contributes labour and the other partner contributes capital.

It is the Mudarabah partnership that has become the focus of Islamic economics and finance in the modern era. We will generally not go into more details on all the various kinds of partnerships.

Source: Kharofa, 166-171.

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Contract of Al-Hewalah

Al-Hewalah means to move. The term is typically used where the debtor moves his debt to a third party. For Al-Hewalah to take place, there are two necessary steps that must take place:

  1. The third party (“C”) will become indebted to the creditor (“A”) for the original debt under the same terms and conditions, as well as the amount, or the original debt between A and the original debtor (“B”).
  2. A new debt will be created, whereby B will be indebted to C, for consideration similar in value to that of the original debt.

Al-Hewalah has been used by the Jewish scholars extensively to get around ribaa. The Muslim scholars, however, have clearly laid down the requirement for the original and the new debt to be of similar value. This difference between the Muslim scholars and the Jewish scholars stems from different core methodologies; the Muslim scholars emphasize the spirit of the law, whereas the Jewish scholars emphasize the letter of the law.

The Hewalah contract cannot take place unless all three parties agree to the arrangement.

Source: Abdelhaleem, 13. 

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Difference Between a Jua’alah and an Ijarah

The primary differences between a Jua’alah and an Ijarah are below:

  1. The specified payment in Jua’alah cannot be paid until the task is completed, whereas interim payments are accepted in an Ijarah arrangement. In a Jua’alah contract, payments in advance or interim payments are not legal.
  2. Jua’alah has some gharar in it, which is approved by the Shari’ah, whereas an Ijarah contract has no gharar.
  3. The Jua’alah contract is a permissible contract, which means it can be invalidated by either of the parties at any time, whereas an Ijarah contract is an obligatory contract which cannot be invalidated after being signed.
  4. An Ijarah contract has a specified time-frame attached to it, whereas a Jua’alah contract has no time-frame (though a minority opinion among the Malikies argues that a time-frame is necessary).
  5. The Jua’alah cannot be increased or decreased once the task has started.

Source: Abdelhaleem, 6.

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Definition of Jua’alah

Jua’alah is similar to Ijarah, however, it involved a fixed payment for a specific task that is not well-structured. An example of a Jua’alah would be offering a payment for finding a missing item. In a Jua’alah arrangement, the payment is made after the task has been completed.

According to a tradition in Al-Bukhari and Al-Muslim, the Prophet (SAW) approved of taking a sum as Jua’alah for blessing a sick person with the recitation of the Qur’an.

Source: Abdelhaleem, 6.

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Definition of Gharar

The Arabic word gharar means risk, uncertainty, and hazard. Unlike ribaa, gharar is not precisely defined. Gharar is also considered to be of lesser significance than ribaa. While the prohibition of ribaa is absolute, some degree of gharar or uncertainty is acceptable in the Islamic framework. Only conditions of excessive gharar need be avoided.

The concept of gharar has been broadly defined by the scholars in two ways.

  • First, gharar implies uncertainty.
  • Second, it implies deceit.

The Qur’an has clearly forbidden all business transactions, which cause injustice in any form to any of the parties. It may be in the form of hazard or peril leading to uncertainty in any business, or deceit or fraud or undue advantage. Apart from the above simplistic definition of gharar, some definitions of gharar seem to have a parallel in the concept of uncertainty in conventional finance. Gharar is defined by the Hanafi jurist al-Sarakhsi as any bargain in which the result of it is hidden.

Source: Obaidullah, 29.

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Norms of Ethics in an Islamic Economic System

In light of the Qur’an and the Sunnah, the scholars have defined some norms of ethics in an Islamic economics system. For brevity, we will list them here for now. Each of these will be discussed in further detail later. An Islamic economic system is based on the following norms of ethics:

  1. Freedom to contract
  2. Freedom from coercion
  3. Freedom from misrepresentation
  4. Freedom from Ar-Ribaa (interest)
  5. Freedom from Al-Gharar (excessive uncertainty)
  6. Freedom from Al-Qimaar (gambling)
  7. Freedom from Al-Maysir (unearned income)
  8. Freedom from price control and manipulation
  9. Freedom from impulse
  10. Right to trade at efficient prices
  11. Entitlement to transact at fair prices
  12. Right to equal bargaining power
  13. Entitlement to equal, adequate and accurate information
  14. Freedome from Darar (detriment)
  15. Mutual cooperation and solidatrity
  16. Maslahah Mursalah (unrestricted public interest)

Source: Obaidullah, 9-15.

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Terms and Conditions of Al-Ijarah

Al-Ijarah (rent/lease/hire) contract has a number of terms and conditions in addition to the common terms and conditions that apply to all contracts. Al-Ijarah contract is more widely used nowadays than ever before, primarily due to the creation of large commercial enterprises since the dawn of the industrial revolution. As such, these terms and conditions should be common knowledge to all Muslims.

  1. The property rented or leased must be in a useable condition (i.e., the lessee should be able to use the property for its intended purpose). Similarly, in a hire contract, the employee must be able to perform the job required of him or her.
  2. Ijarah has to be for inconsumable goods.
  3. The lessee or the employee is not permitted to use the subject in a manner contrary to what is permitted by the contract. Specifically, the lessee or the employee is not allowed to inflict any harm on the subject of the contract.
  4. Ijarah contract cannot be made for a task that is a religious obligation. For example, it is prohibited to enter into an employment contract for leading the prayer of making the azaan. Ijarah is valid, however, for teaching the Qur’an or religious sciences, as well as secular subjects because these are not religious obligations.
  5.  If the two parties disagree on the value of the reimbursement or the rent/lease on the property, after the contract commences, the word of the lessor/employer is accepted under oath upto the time of disagreement. At that point the contract is then invalidated.
  6. The majority of the scholars say that the Ijarah contract does not end by the death of one of the two parties, as long as both parties can fulfill their end of the contract. The Hanafis, to the contrary, deem the contract invalidated with the death of one party.

Source: Abdelhaleem, 11-12.

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