Definition
Under Islamic jurisprudence, 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 shared according to the
ratio of the contribution”.
Musharakah in Arabic come from the word “shirkah”
which means “sharing” and in the terminology of Islamic Figh, it has been
divided into two kinds:
- Shirkah – ul - Milk, joint ownership of two or more person in particular property. For example, if two or more person purchase an equipment, it will be owned jointly by both of them and the relationship between them with regard to that property is called “shirkat – ul Milk”.
- Shirkat - ul - Aqd, a partnership effected a mutual contract. Aggreement to combine asset, labor or liability for the purpose of making profit. Shirkat- Ul - Aqd divided into three kinds: (i). Shirkat Ul – Amwal, all the partners invest some capital into a commercial enterprise. (ii). Shirkat Ul – A’mal, all the partners jointly undertake to render some services for their customers, and the fee charged from them is disributed among them according to an agreed ratio. Shirkat – Ul - A’mal is also called Shirkat Ut – Taqabbul or Shirkat – Us- Sana’i or Shirkat – Ul – Abdan. (iii). Shirkat – Ul – Aqd or Shirkat – Ul – Wujooh, here the partners have no investment at all. All they do is that they purchase the commodities on a deffered price and sell them at spot. The profit so earned is distributed them at an agreed ratio.
How the musharakah Operate
Musharakah or Shirkat – Ul – Amwal allows each party
involved in a business to share in the profits and risks. Instead of charging
interest as a creditor, the financier will achieve a return in the form of a
portion of the actual profit earned, according to a predetermined ratio.
However, unlike a traditional creditor, the financier will also share in any
losses. The relationship established between parties, in musharakah, is by a
mutual contract; hence, all the necessary ingredients of a valid contract must
be present. However, there are number of conditions that apply specifically to
the contract of musharakah. The parties should be capable of entering into a
contract; the contract must take place with free consent of the parties without
any duress, fraud or misrepresentation, etc.
Formulate profit and loss sharing ratios between
partners
Distribution of profit
The proportion of profit to be distributed between the
partners must be agreed upon at the time of effecting the contract. If no such
proportion has been determined, the contract is not valid in Shari’ah.
The ratio of profit for each partners must be
determined in proportion to the actual profit accrued to the business, and not
in proportion to the capital invested by him. It is not alllowed to fix a lump
sum amount for any one of the partners, or any rate of profit tied up with his
investment.
Therefore, if A and B enter into partnership and it is
agreed between them that A shall be given Rs 10.000/ per month as his share in
profit, and the rest will go to B, the partnership is invalid. Similarly, if it
is agreed between them that A will get 15% of his investment, the contract is
not valid. The correct basis for distribution would be an agreed
percentage of the actual profit accrued to the business. If a lump sum
amount or a certain percentage of the investment has been agreed for any one of
the partners, it must be expressly mentioned in the agreement that it will be
subject to the final settement at the end of the term, meaning thereby that any
amount so drawn by any partner shall be treated as “on account payment” and
will adjusted to the actual profit he may deserved at the end of the term. But
if no profit is actually earned or is less than anticipated, the amount drawn
by the partner shall have to be returned.
In the view of :
- Imam Malik and Imam Shafi’i : it is necessary for the validity of musharakah that each partner gets the profit exactly in the proportion of his investment. Therefore, if A has invested 40% of the total capital, he must get 40% of the profit. Any agreement to the contrary which make him entitled to get more or less than 40% will render the musharakah invalid in shariah.
- Imam Ahmad : He says the ratio of profit may differ from the ratio of investment if it is agreed between the partners with their free consent. Therefore, it is permissible that a partner with 40% of investment gets 60% or 70% of the profit, while the other partner with 60% of investment gets only 40% or 30%.
- Imam Abu Hanifah : He says that the ratio of profit may differ from the ratio of investment in normal conditions. However, if a partner has put an express condition in the agreement that he will never work for the musharakah and will remain a sleeping partner throughout the term of musharakah, then his share of profit cannot be more than the ratio of his investment.
Sharing of Loss
In the case of loss, all the muslim jurists are
unanimous on the point that each partner shall suffer the loss exactly
according to the ratio of his investment. Therefore, if a partner has invested
40% of the capital, he must suffer 40% of the loss, not more, not less and any
condition to the contrary shall render the contract invalid.
Specify Capital Contribution
Most jurist are of the opinion that the capital
invested by each partner must be in liquid form. It means that the contract of
musharakah can be based only on money and not on commodities. However there are
different views on this respect:
Imam Malik and some Hanbali Jurist, the liquidity of the capital is not a condition for the validity of musharakah, therefore, it is permissible that a partner contributes to the musharakah in kind, but his share shall be determined on the basis of evaluation according to the market price prevalent at the date of the contract.
Imam Abu Hanifah and Imam Ahmad are of the view that no contribution in kind is acceptable in a musharakah. Their standpoint is based on two reasons:
- They say that the commodities of each partner are always distinguishable from the commodities of the other. For example, If A has contributed one motor car to the business, and B has come with another motor car, each one of the two motor car is the exclusive property of its original owner. Now, if the car of A is sold, its sale proceed should go to A. B has no right to claim a share in its price. Therefore, so far as the propery of each partner is distinguished from the property of the other, no partnership can take place. On the contrary, if the capital invested by every partner is in the form of money, the share capital of each partner cannot be distinguished from that of the other, because the units of money are not distinguisable, therefore, they will be deemed to form a common pool, andd thus the partnership comes into existence.
- They say, there are a number of situation in a contract of musharakah where the partners have to resort to redistribution of the share capital to each partner. If the share capital was in the form of commodities, such redistribution cannot take place, because the commodities may have been sold at that time. If the capital is repaid on the basis of its value, the value may have increased, and there is a possibility that a partner gets all the profit of the business, because of the appreciation in the value of commodities he has invested, leaving nothing for the other partner. Conversely, if the value of those commodities decreases, there is a possibility that one partner secures some part of the original price of the commodity of the other partner in addition to his own investment.
Imam Al – Shafi’i has come with via media between the two point of view explained above. He
said that the commodities are of two kinds:
- Dhawat Ul- Amthal , i.e the commodities which, if destroyed, can be compensated by the similar commodities in quality and quantity e.g wheat, rice, etc. If 100 kg of wheat are destroyed, they can easily be replaced by another 100 kg of wheat of the same quality.
- Dhawat Ul- Qeemah, i.e the commodities which cannot be compensated by the similar commodities, like the cattle. Each head of sheep, for example, has its own characteristics which cannot be found in any other head. Therefore, if somebody kills the sheep of a person, he cannot compensate him by giving him similar sheep. Rather, he is required to pay their price.
Imam Al-Shafi’i says that the commodities of the first
kind (Dhawat – Ul – Amthal) may be contributed to the musharakah as the share
of the partner in the capital, while the commodities of the second kind (i.e
the Dhawat – Ul – Qeemah) cannot form part of the share capital.
If a partner wants to participate in a musharakah by
contributing some commodities to it, he can do so according to Imam Malik
without any restriction, and his share in the musharakah shall be determined on
the basis of the current market value of the commodities, prevalent at
the date of the commencement of musharakah. According to Imam Al- Shafi’i
, however, this can be done only if the commodities is from the category of
dhawat – ul- amthal. According to Imam Abu Hanifah, if the commodities are
dhawat – ul – amthal, this can be done by mixing the commodities of each
partner together. And if the commodities are dhawat – ul – qeemah, then, they
cannot form part of the share capital. It seems that the view of Imam Malik is
more simple and reasonable and meets the needs of the modern business.
Therefore, this view can be acted upon.
The conclusion that the capital to be invested in a
joint venture can be unequal between the partners and should be preferably be
in cash. If it were to be based on comodities or other Shari’ah compliat
assets, the market value prevalent at the time of the contract would have to be
appropriately valued with the mutual consent of all the partners in order to
determine the share of each of them. The commodity should be compensable by
similar commodities or assets in quality or quantity, in case it could be
destroyed. Otherwise, its price should be paid. The capital may also be in the
form of equal units or share representing currency. And if partnership capital
involves a variety of currencies, it must be translated into the currency of
the enterprise at the current rate. Finally, debts or receivables alone cannot
form part of the capital until they are received, although, they may become part
of the capital contribution where they become inseparable from the othe assets
of the business.
Management of Musharakah
The normal principle of musharakah is that every
partner to take part in its management and to work for it. However, the
partners may agree upon a condition that the management shall be carried out by
one of them, and no other partner shall work for the musharakah. But in this
case, the sleeping partner shall be entitled to the profit only to the extent
of his investment, and the ratio of profit allocated to him should not exceed
the ratio of his investment.
- Each partner has a right to take part in Musharakah management.
- The partners may appoint a managing partner by mutual consent.
- One or more of the partners may decide not to work for the Musharakah and work as a sleeping partner.
- If one or more partners choose to become non-working or silent partners. The ratio of their profit cannot exceed the ratio which their capital investment bears.
Termination of Musharakah
Musharakah is deemed to be terminated in any one of
the following events:
- Every partner has a right to terminate the Musharakah at 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 cash form, all of them will be distributed proportionately according to the share between the partners. But if the assets are not liquidated, the partners may agree either on the liquidation of the assets, or on their distribution or partition between the partners as they are.
- 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 draw the share of the deceased from the business, or to continue with the contract of musharakah.
- If any one of the partners becomes insane or otherwise becomes incapable of effecting commercial transactions, the musharakah stands terminated.
Termination of musharakah without closing the business
If one of partners wants termination of the
musharakah, while the other partner or partners like to continue with the
business, this purpose can be achieved by mutual agreement. The partners who
want to run the business may purchase the share of the partner who wants to
terminate his partnership, because the termination of musharakah with one
partners does not imply its termination between the other partners.
However, in this case, the price of the share of the
leaving partner must be determined by mutual consent, and if there is a dispute
about the valuation of the share and the partners do not arrive at an agreed
price, the leaving partner may compel other partners on the liquidation or on
the distribution of the assets themselves. The question arises whether the
partners can agree, while entering into the contract of musharakah, on a
condition that the liquidation or separation of the business shall not be
effected unless all the partners, or the majority of them wants to do so, and
that a single partner who wants to come out of the partnership shall have to
sell his share to the other partners and shall not force them on liquidation or
separation.
Most of the traditional books of Islamic Figh seem to
be silent on this question. However, it appears that there is no bar from the
shari’ah point of view if the partners agree to such condition right at the
beginning of the musharakah. This is expressly permitted by some Hanbali
jurists.
This condition may be justified, especially in the
modern situations, on the ground that the nature of business, in most cases
today, requires continuity for its success, and the liquidation or separation
at the instance of a single partner only may cause irreparable damage to the
other partners.
If a particular business has been started with huge
amount of money which has been invested in long term project, and one of the
partners seeks liquidation in the infancy of the project, it may be fatal to
the interests of the partners, as well as to the economic growth of the
society, to give him such an arbitrary power of liquidation or separation.
Therefore, such condition seems to be justified, and it can be supported by the
general principle laid down by the Holy Prophet Muhammad SAW (peace be upon
Him) in his famous hadith:
“All the conditions agreed upon by the Muslims are
upheld, except a condition which allows what is prohibited and prohibits what
is lawful”
Musharakah Mutanaqisah
For consumer financing
purpose, form of Musharakah is being used to provide housing mortgages by
forming a Musharakah between the bank and the client who own the property
jointly. The bank equity keep decreasing throughout the tenure of the the financing
while the client ownership keep increasing through the series of equity
purchases. Eventually the client become the sole owner. Lets take $220.000
house and lets say customers put down $20.000 and finances the remaining $200.000
from the Islamic bank. Lets also say the financing last 20 years and the bank
such 5% profit rate. For sake of simplicty we will make it 20 annual repayment.
For example calculation with excel table, in the first coloum we have the years, second
coloum the home buyer equity purchases, which is how much buyer pay every year
for buying the property actual equity. In this way, increasing his ownership in
the property while diminishing the bank ownership shown in the third coloum.
The fourth colum called “rent” is what the home buyer pay bank for that portion
of property he doesn’t yet own and number keep decreasing as the bank share
also decreases and final coloum shows what
the buyer pays in total every year.
Table 1 – example of
Diminishing Musharakah
|
Total cost of asset: $220,000
|
|
|
Down payment by customer
|
$ 20,000
|
|
Finance by Islamic bank
|
$ 200,000
|
|
Tenure
|
20 years
|
|
Profit rate
|
5%
|
|
Number of Instalments
|
20 per annum
|
Table 2 – example of
Diminishing Musharakah
|
Year
|
Homebuyer Equity Purchase
|
Bank Ownership
|
Rent
|
Homebuyer’s Payment
|
|
1
|
10,000
|
190,000
|
10,000
|
20,000
|
|
2
|
10,000
|
180,000
|
9,500
|
19,500
|
|
3
|
10,000
|
170,000
|
9,000
|
19,000
|
|
4
|
10,000
|
160,000
|
8,500
|
18,500
|
|
...
|
...
|
...
|
...
|
...
|
|
...
|
...
|
...
|
...
|
...
|
|
...
|
...
|
...
|
...
|
...
|
|
16
|
10,000
|
40,000
|
2,500
|
12,500
|
|
17
|
10,000
|
30,000
|
2,000
|
12,000
|
|
18
|
10,000
|
20,000
|
1,500
|
11,500
|
|
19
|
10,000
|
10,000
|
1,000
|
11,000
|
|
20
|
10,000
|
0
|
500
|
10,500
|
Homebuyer Equity Purchase:
200,000/20 = 10,000 every
year
Bank Ownership:
Year 1: 200,000 – 10,000 =
190,000
Year 2: 190,000 – 10,000 =
180,000
Year 3: 180,000 – 10,000 =
170,000
Rent:
Year 1: 200,000*5% = 10,000
Year 2: 190,000*5% = 9,500
Year 3: 180,000*5% = 9,000
Homebuyer payment:
(Homebuyer Equity + Rent)
Year 1: 10,000 + 10,000 =
20,000
Year 2: 10,000 + 9,500 =
19,500
Year 3: 10,000 + 9,000 =
19,000
Source:
Ethicha,
Institute of Islamic Finance ethicainstitute
