Musharkah

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The concept of Shirkah &

Musharakah

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MUSHARAKAH

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Hadees-e-Qudsi

Allah (SWT) has declared that he will become a

partner in a business between two Mushariksuntil they indulge in cheating or breach oftrust

Musharakah

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Terminology & Definition of Musharakah Musharakah means Sharing and in the terminology of Islamic

Fiqh.

The word Musharakah has been derived from Shirkah whichmeans being a partner

Musharakah is basically a kind of partnership in which thepartners join together with different contributions, work or

obligation for the common objective of undertaking business andtrade in accordance with the principles of Shariah.

It is an ideal alternative for the interest based financing with farreaching effects on the economy

Musharakah

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Contract of Musharakah

The contract of Musharakah can takeplace between two or more personswith the capital contributed by thepartners/shareholders and the profitto be distributed among themaccording to the rates agreed upon bythe shareholders.

Musharakah

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SHIRKAH

SHIRKAT-UL-MILK SHIRKAT-UL-AQD

SHIRKAT-UL-WUJOOH

GAIR IKHTIARIIKHTIARI

SHIRKAT-UL-AAMAL

SHIRKAT-UL-AMWAL

Types of Musharakah

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Shirkat has been divided into two kinds:

1. SHIRKAT-UL-MILKIt means joint ownership of two or more persons in aparticular property/asset.

2. SHIRKAT-UL-AQD

This is the second type of Shirkah which means apartnership effected by a mutual contract for .

Types of Musharakah

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It means joint ownership of two or more persons in a particularproperty.

This kind of Shirkah may come into existence in two differentways:

1. OPTIONAL SHIRKAT-UL-MILK (Ikhtiari)

If two or more person purchase an equipment, it will be owned jointly by both of them and the relationship between themwith regard to that property is called Shirkat-ul- milk.

Here this relationship has come into existence at their ownoption, as they themselves elected to purchase the equipment

jointly.

Shirkat-ul-Milk

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2. UNOPTIONAL SHIRKAT-UL-MILK (Ghair Ikhtiari)

There are cases where this kind of Shirkah comes to operateautomatically without any action taken by the parties.

For example, after the death of a person, all his heirs inherit hisproperty which comes into their joint ownership as an automaticconsequence of the death of that person.

Shirkat-ul-Milk

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This is the second type of Shirkah which means:

A partnership effected by a mutual contract in which thepartners join together with different contributions, workor obligation for the purpose of earning profit.

For the purpose of brevity(shortness) it may also betranslated as

Joint commercial enterprise.

Shirkat-ul- Aqd

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Shirkat-ul- aqd is further divided into threekinds:

1. Shirkat-ul-amwal (contractual partnership)

2. Shirkat-ul- Amal (liability partnership)3. Shirkat-ul-wujooh (vocational partnership)

Types of Shirkat-ul- Aqd

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1. Shirkat-ul-amwal:

Where all the partners invest some Capital into

a Commercial enterprise.It is the most important & commonly usedform of Shirkat


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2. Shirkat-ul- Amal :

Where all the partners jointly undertake to rendersome services for their customers.

The fee charged from them is distributed among themaccording to an agreed ratio.

If two persons agree to undertake tailoring services fortheir customers on the condition that the wages soearned will go to a joint pool which shall be distributedbetween them irrespective of the size of work eachpartner has actually done.


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3. Shirkat-ul-wujooh

The word Wujooh comes from Wajahat meaninggoodwill

Hence this is a partnership in Goodwill Here the partners contribute in the business not

through capital but through their goodwill and shareprofit at an agreed ratio

All they do is that they purchase the commoditieson a deferred price and sell them at spot. The profit soearned is distributed between them at an agreedratio.


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All these modes of Sharing or partnership are termed asShirkah in the terminology of Islamic Fiqh, while theterm Musharakah is not found in the books of Fiqh.

The term Musharakah has been introduced recently by

those who have written on the subject of Islamic modesof financing

It is normally restricted to a particular type of Shirkah .That is, the Shirkat-ul-amwal, where two or more personsinvest some of their capital in a joint commercial venture.

However, sometimes it includes Shirkat-ul- amal alsowhere partnership takes place in the business of services.

Musharakah

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BASIC RULES FOR MUSHARAKAH

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Musharakah means relationship established under acontract by the mutual consent of the parties for sharingof profits and losses,arising from a joint enterprise orventure.

Investments come from all partners / shareholdershereinafter referred to as partners.

Profits shall be distributed in the proportion mutually

agreed in the contract.

Rules of Musharakah

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The existence of Mutaaqideen (Partners):

Capability of Partners:

Must be sane & mature and be able of enteringinto a contract.

The contract must take place with free consentof the parties without any fraud ormisrepresentation.

Rules of Musharakah

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MANAGEMENT OF MUSHARAKAH

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Asset of Musharakah All assets of Musharakah are jointly owned in proportion to the

capital of each partner.

Capital of Musharakah

All partners must contribute their capital in terms of money orspecies at an agreed valuation.

Share capital in a Musharakah can be contributed either in cash or inthe form of commodities. In the latter case, the market value of the

commodities shall determine the share of the partner in the capital.

Rules of Musharakah

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DISTRIBUTION OF PROFIT

View of Muslim Jurists About RATIO OF

PROFIT

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RATIO OF PROFIT

In the view ofImam Malik & Imam Shafi'i

it is necessary for the validity of musharakah that each

partner gets the profit exactly in the proportion of hisinvestment .

h i f

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EXAMPLE:

If Mr.A has invested 40% of the total capital,he must get 40% of the profit.

Any agreement to the contrary which makeshim entitled to get more or less than 40% willrender the musharakah invalid in Shari'ah.

In the view of

Imam Malik & Imam Shafi'i

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RATIO OF PROFIT

In the view of

Imam Ahmed

The ratio of profit may differ from the ratio of

investment if it is agreed between the partners withtheir free consent.

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EXAMPLE:

it is permissible that a partner with 40% ofinvestment gets 60% or 70% of the profit,

While the other partner with 60% ofinvestment gets only 40% or 30%

In the view ofImam Ahmed

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RATIO OF PROFIT

In the view of

Imam Abu Hainfah

The ratio of profit may differ from the ratio ofinvestment in normal conditions.

I th i f

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In the view of

Imam Abu Hainfah

EXAMPLE: Sleeping Partner:

If a partner has decided to remain inactiveor to become a sleeping partner throughoutMusharakah, then he is not entitled toreceive profit ratio more than the ratio of

his investment

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Distribution of Profit

The ratio of profit distribution must be agreed at the time

of execution of the contract

The ratio must be determined as a proportion of the actual

profit earned by the enterprise

- Not as percentage of partners investment

- Not in lump sum amount

A sleeping partner cannot share the profit more than thepercentage of his capital.

Rules of Musharakah

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ILLUSTRATION

If A and B enter into a partnership and it is agreed between themthat A shall be given Rs. 10,000/- per month as his share in theprofit, and the rest will go to B, the partnership is invalid.

Similarly, if it is agreed between them that A will get 15% of hisinvestment, the contract is not valid.

The correct basis for distribution would be an agreed percentagesof the actual profit accrued to the business.

Profit Distribution

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OBSERVATIONS

If a lump sum amount or a certain percentage of theinvestment has been agreed for any one of the partners,it must be expressly mentioned in the agreement that itwill be subject to the final settlement at the end of the

term, meaning thereby that any amount so drawn by anypartner shall be treated as on account payment and willbe adjusted to the actual profit he may deserve at theend of the term.

But if no profit is actually earned or is less thananticipated, the amount drawn by the partner shall have

to be returned.

Profit Distribution

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View of Muslim Jurists AboutRATIO OF LOSS

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Rules for Loss

In the case of a loss, all the Muslim jurists areunanimous on the point that each partner shallsuffer the loss exactly according to the ratio of

investment.There is a complete consensus of jurists on thisprinciple.

Profit is based on the agreement of the parties,but loss is always subject to the ratio ofinvestment.

Rules of Musharakah

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TERMINATION OF

MUSHARAKAH

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Musharakah is deemed to be terminated in any one of the

following events:(1) Every partner has a right to terminate the Musharakahat any time after giving his partner a notice to this effect,whereby the Musharakah will come to an end.

In this case, if the assets of the musharakah are in cashform, all of them will be distributed pro rata between thepartners.

But if the assets are not liquidated, the partners mayagree either on the liquidation of the assets, or on their

distribution or partition between the partners as they are.

Termination of Musharakah

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(2) If any one of the partners dies during the musharakah,the contract of musharakah with him stands terminated.His heirs in this case, will have the option either to drawthe share of the deceased from the business, or tocontinue with the contract of musharakah.

(3) If any one of the partners becomes insane orotherwise becomes incapable of effecting commercialtransactions, the musharakah stands terminated.


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Mr. A Mr. B Mr. C

Musharakah

Mr. A Mr. B Mr. C

Musharakah

Wishes to Terminatethe contract

Wishes to continue

Mr. B & C can continueto run the business bypurchasing Mr. Asshare

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If one partner wants to terminate the Musharakah but other

partners want to continue this can be done by mutualAgreement

Termination of Musharakah with one partner does not meantermination with other partners

Price of leaving partners share must be determined

If assets are not liquid their valuation must be done to

distribute shares


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If partners cannot arrive at consensus on value the leaving partner can compel others to liquidatebusiness

However, partners may agree at the start of theproject that liquidation will require majoritys consent

If assets are not liquid their valuation must be doneto distribute shares


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APPLICATION

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Musharakah can be successfully used to in the followingareas:

Project financing

Working capital financing

Import Financing

Export Financing

Running finance

Saving/Deposit account

Certificates of Investments

Term finance certificates

Inter bank financing

Application

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In the case of projectfinancing, thetraditional method ofMusharaka can beeasily adopted.

Project Financing

THE PROJECT

PARTNER BANK

1

Share in CapitalShare in Capital

2

3

Accruing Profits

Share of profits

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Exercise

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Setup a Musharakah companyData

Case 1:

a. Setup

Jan 1 Partner A Invest 10 mn (working partner)

Partner B Invest 5 mn (working partner)

b. Operation

Dec 31: Profit earned 3.0 mnc. Distribution of profit - Dec 31

d. Termination Dec 31

Exercise

Documents

Musharkah