A simple guide to Musharakah (Business partnership)

The definition:

Shirkah literally means partnership.  Technically, it refers to two or more persons jointly owning an item, or contracting jointly for profit.

For example, Maryam and Aisha purchase a laptop for £500.  Each of them paid £250.  They now co-own this laptop and each have a 50% share in the laptop.  This is partnership due to purchase; hence the laptop belongs to both.

 

Another example, Talha and Usama are two good friends.  They decide to launch their own business.  Talha and Usama invest £30,000 each.  Talha and Usama are now partners, and have contracted a shirka contract.

In principle, there are two types of shirkah:

(1) Shirkat-ul-milk:

This means joint ownership of two or more persons in a particular property or item. This kind of “Shirkah” may come into existence in two different ways:

 

a) By purchase:

This is an optional form of shirkah and comes into existence through choice.  If two or more persons buy an item splitting the total cost, then it will be owned jointly by both of them and the relationship between them with regard to that property or item is called “Shirkat-ul-milk.”  Here, the investing partners opted to buy a product together.

 

For example, Aaliya and Safiyya pay £50 each for a printer.  In such a case, Aaliya and Safiyya will be partners due to purchasing an item.  They will jointly own the printer.

 

b) By inheritance:

This is an automatic form of shirkah which takes place without any action by the parties.  As soon as somebody passes away, his/her heirs inherit the property and own it collectively as an automatic consequence of the death of that person.

 

(2) Shirkat-ul-‘aqd (Partnership by contract):

This is the second type of Shirkah which means “a partnership effected by a mutual contract”.   In simple terms, this is the type of partnership formed when two or more persons do business together.
Shirkat-ul-‘aqd is further divided into three kinds:

a) Shirkat-ul-amwaal (Partnership by investment):

This shirkah or partnership is formed when partners invest some capital into a business.

For example, Abdullah and his brother Hassan begin a business of clothing, each investing £12,000 in the business.

 

b) Shirkat-ul-a‘maal (Partnership by work):
This is where all the partners jointly undertake to render some services for their customers, and the fee charged from them is distributed among them according to an agreed ratio.

For example, Zaid and Zakariyya under take tailoring services for their customers.  The money received earned will go to a joint pool which shall be distributed between them, irrespective of the size of work each partner has actually done.

This partnership will be a shirkat-ul-a‘mal which is also called Shirkat-ut-taqabbul or Shirkat-us-sana’i‘ or Shirkat-ul-abdan.

c) Shirkat-ul-wujooh (Partnership by face):

Here the partners have no investment at all. All they do is that they purchase items on credit and attempt to resell them for cash at a higher price. The resulting profit is shared among the partners after the debt is repaid from the proceeds.

For example, Ishaaq and Dawud desire to start a business but lack the funds.  They decide to approach Harun, who has a lot of goods to sell.  They ask Harun to sell his goods to them on credit, he agrees.  Ishaaq and Dawud take these goods and advertise them on their website.  A month later, all the goods have been sold and a considerable profit has been made.  Ishaaq and Dawud pay Harun and then divide the remaining profit.

Profits shall be distributed in the proportion mutually agreed in the contract.

 

Management of Musharakah

• 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.

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 or species at an agreed valuation.
  • Share capital in a Musharakah can be contributed either in cash or in the form of commodities. In the latter case, the market value of the commodities shall determine the share of the partner in the capital.

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 and not as a percentage of partner’s investment or a lump sum amount.

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

 

Rules for Loss

  • In the case of a loss, all the Muslim jurists are unanimous on the point that each partner shall suffer the loss exactly according to the ratio of investment.

There is a complete consensus of jurists on this principle.

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

 

Termination of Musharakah:

Musharakah is deemed to be terminated in any one of the following events:

(1) 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.

 

(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 draw the share of the deceased from the business, or to continue with the contract of musharakah.

 

(3) If any one of the partners becomes insane or otherwise becomes incapable of effecting commercial transactions, the musharakah stands terminated.

(An introduction to Islamic finance)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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