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The term Musharakah is an Arabic-rooted word derived from the word ‘Shirkah’, meaning ‘being a partner’.
In the context of Islamic jurisprudence, Musharakah is defined as, “A joint partnership formed by the partners in which the profit is distributed among them at the pre-agreed ratio and the loss is borne according to the ratio of their capital in the partnership”.
In classical Fiqh books, one can hardly find the concept of a running business where a partner can join or leave without affecting the continuity of the business. These books were written in eras when business and trade activities were not as complex as they are today.
Read more about: Your Basic Guide to Musharakah Contracts
However, this does not mean that these concepts cannot be applied to modern business activities. All such activities fall under the different types of Musharakah (M. I. A. Usmani, 2015; M. T. Usmani, 2007) .
If we look toward the contemporary conventional system of financial institutions, it is solely based on interest, which affects the distribution and production of wealth in the economy.
The financial institutions, on both the asset and liability sides, extend services and products to clients on an interest basis, which is strictly prohibited from a Shariah perspective.
The best alternative and substitute for this system is Musharakah-based financing, where all partners share the profit and bear the risk according to their contribution to the capital of the Musharakah.
Islam also encourages partnership-based business, provided that the Shariah and ethical requirements are fulfilled. As mentioned in some hadith:
“Allah Subhan-o-Tallah has declared that He will become a partner in a business between two Mushariks until they indulge in cheating or breach of trust (Khayanah).” (Sunan Abi Dawood, Hadith no.3376).
“Allah’s hand is with both the partners unless any one of them indulge in cheating and when any one of them indulges in cheating than Allah takes back his hand from both the partners.” (Sunan Dar al Qutni, Hadith no.2898). (M. I. A. Usmani, 2015)
According to traditional Fiqh, Musharakah is broadly divided into two types: Shirkat al-Milk and Shirkat al-Aqd. These two types are further subdivided into various sub-types,
This means that the ownership of two or more partners in a specific asset or property can come into existence either optionally or compulsorily.
It is optional when two or more people agree to purchase a property jointly, in which case the property will be owned by them by mutual consent, and their partnership will be Shirkat al-Milk Ikhteyari.
It is compulsory when the property comes into the ownership of two or more people through inheritance, and this type of partnership is known as Shirkat al-Milk Ghair Ikhteyari.
This is the second type of Shirkah, in which two or more partners enter into a contract by contributing their capital to form a joint venture for business. It is also known as 'joint commercial enterprises.' Shirkat al-Aqd is further classified into different types:
This type of partnership involves two or more partners contributing their capital, which are then invested in a commercial enterprise.
This type of partnership involves a partner who does not have the capital to purchase items for the business upfront but has a creditworthy. As a result, they purchase commodities on credit, sell them on the spot, and share the profit according to a pre-agreed ratio.
This is a type of partnership in which two or more partners offer services to clients, and the profit is distributed among them according to a pre-agreed ratio.
This is a type of Shirkat al-Aqd where all partners share their capital, management, profit, and risk equally. If there is any inequality in these aspects, the partnership will not be classified as Shirkat al-Mufawadah, but rather as Shirkat al-Ainan.
This is a form of Shirkat al-Aqd where the partners contribute a specific amount to the partnership.
Each partner has the right to manage the business activities, with the profit distributed according to the agreed ratio, and the loss borne in proportion to their contribution. (M. I. A. Usmani, 2015)
A joint-stock company is a company whose capital is divided into equal, tradable shares.
Each partner is only responsible to the extent of their share in the capital. It follows the provisions of Shirkat al-Ainan, except in matters related to determining the partner’s liability and the prohibition of dissolution by one of the partners.
A joint liability company is a form of personal partnership in which the company is publicly registered with a unique title.
The company can hold assets and incur liabilities in its name, but if its assets are insufficient to cover the liabilities, the partners are personally liable for the remaining debts.
A partnership in commendum consists of two types of partners: the active partner and the sleeping partner.
The personality of the active partner is important for the sleeping partner, and there is a difference in the determination of ownership in the assets, which is typically in disproportionate ratios, rather than equal, proportionate ratios.
This partnership is a form of financing partnership because the sleeping partner completely relies on the active partner.
The company is managed by the active partner, who is jointly liable for all the company’s liabilities, even with his personal wealth. On the other hand, the liability of the sleeping partner is limited to the extent of his share in the company.
A company limited by shares is a type of partnership that includes both active and sleeping partners. In this company, the subscription is made through an equal number of shares.
Shirkah al-Muhassa does not have a separate legal personality, nor does it carry independent financial responsibility.
This partnership is a form of a personal private company, and the definition of Shirkat al-Ainan applies to this type of partnership.
This means that the capital, profit, and management of the company are not equally contributed by all partners. (Ummah, 2019)
The above-mentioned are simply the definitions of the five types of modern corporations. Each has a specific Shariah ruling that should be taken into consideration when investing in these corporations.
For further details, please refer to AAOIFI Shariah Standard No. 12, Musharakah,
Read more about: Musharkah Contracts vs. Standard Partnership Agreement
This type of Musharakah involves two partners jointly purchasing an asset, with the value of the asset divided into equal units. Each partner holds a specific share in these units. Over time, one partner gradually buys the units of the other partner at market value, and eventually, the purchasing partner becomes the sole owner of the asset.
When financing is needed for a project or trade, the traditional form of Musharakah can be easily adopted.
The Musharakah may be either Ainan or Mufawada, as discussed in the previous paragraph. In this arrangement, the partners contribute their capital and form a joint venture for trade or project financing.
Read more about: What Are The Pros & Cons of Musharkah Contracts?
References:
i. Ummah, M. S. (2019). AAOIFI Eng. Sustainability (Switzerland), 11(1), 1–14. Retrieved from http://scioteca.caf.com/bitstream/handle/123456789/1091/RED2017-Eng-8ene.pdf?sequence=12&isAllowed=y%0Ahttp://dx.doi.org/10.1016/j.regsciurbeco.2008.06.005%0Ahttps://www.researchgate.net/publication/305320484_SISTEM_PEMBETUNGAN_TERPUSAT_STRATEGI_MELESTARI
ii. Usmani, M. I. A. (2015). Maktaba Ma’ariful Quran (Quranic Studies Publishers). 342.
iii. Usmani, M. T. (2007). To Iu. An Introduction to Islamic Finance.
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