MUSHARAKAH Instructor: Dr.

Abidullah Khan
DEFINITION
Stems from Arabic word Shirkah/Sharkah
Shirkah is more broader in connotation as compare to Musharakah.
Al-Shirkah covers both shirkah al-mulk/milk a joint ownership of a common
property and shirkah al-aqd or a partnership in a business as a consequence of a
mutual contract.
1. SHIRKAT UL MULK
It is a joint ownership of two or more persons in a particular asset or property
without common intention to engage in business with respect to such asset or
property.
Optional (Ikhtiari)
 The parties become joint owner of a property by utilizing an option of sale or gift.
 For instance, two brothers buys a house by contributing money.

Compulsory (Ghair Ikhtiari)

 This comes into existence by operation of law i.e. inheritance.
 The undivided share in this type of shirkat ul milk can be used as
 Mustarik Intifa
 Mutually or jointly using an asset by taking turns under circumstances where the partners or joint owners are on good terms.
 Muhaya
 The joint owners decide each other’s turn in days.
 Taqseem
 Divide the property permanently.
 If the owners agree they may choose the part of property that each owner will get with mutual agreement.
 If there is no mutual agreement on terms, then property can be sold and the proceeds may be divided between the parties.
2. SHIRKAT UL AQD
Sharika al-aqd (contractual partnership) means an agreement between two or more
parties to combine their assets, labour or liabilities for the purpose of making profit.
 Assets  better to be in monetary form; tangible assets can be consider as capital upon mutual
consent and after the valuation in monetary form.
 Labour/Skill  partners contributing specific skills or labour.
 Liabilities  Not to include the receivables alone. However, if not separable from the total assets,
then may be included. – Current Account deposits contributed by the bank.
TYPES OF SHIRKAT UL AQD
Shirkat ul Amwal (Partnership in Capital)
 All partners invest some form of capital into a business.
 Capital can be in the form the money, assets/commodities or liabilities.

Shirkat ul Aamal (Partnership in Services)

 All partners jointly undertakes to render some services for their customers.
 The fee is then divided among the partners accordingly.

Shirkat ul Wujooh ( Partnership in Goodwill)

 Where the partners have no investment.
 Purchase commodities on goodwill basis and sell them on spot.
 1. INAN(UNEQUAL SHARES
PARTNERSHIP)
This contract means two or more people
commit themselves to paying a Inan
specified share into a capital which is to
be used in trade and profit would be
divided between them according to a
specified rate agreed upon by them.

Meaning

Characteristic

Equality of each partner

personal is each partner each one each of the
Equality status or considered transact of them partners will
in distribution of as an agent The
with capital must act to not
investment profit and of the other contract
according serve the guarantee
Amount liabilities concerning of this
to the best the liabilities
is not among the the capital company is
terms of the interest of of the
require partners of the not binding
partnership the other
is not a company agreement. company. partners.
requirement. and trade
transactions.
 2. MUFAWADAH (EQUAL-SHARES
PARTNERSHIP)

In this company each one of

the partners has a share equal
to that of his Colleague
Characteristic

Equal in

each partner is
an agent for
the partnership
Business.
capital profit Liability and stands as
guarantor
for the other
partners.
BASIC RULES OF SHIRKAT UL
AQD
1. Existence of Partners
2. Partners must be sane and mature
3. The commodity and its price should be known.
4. Each partner is an agent of other partners.
5. Profit sharing ratio should be determined.
MUSHARKAH
BASIC RULES OF
MUSHARKAH
Normally restricted to shirakt ul Amwal and sometimes shirkat ul a’amal too.
Since musharakah is specific in its connotation as compare to shirkah therefore, it
should have all the rules of valid contract.
However, musharakah is usually limited to shirakt ul amwal therefore, certain rules may
need to be specified related to
i. Form of Capital
ii. Management
iii. Profit and Loss Distribution Rules
iv. Rights of Partners
v. Termination
vi. Securities
vii. Dispute Resolution
BASIC RULES OF
MUSHARAKAH
i. Form of Capital
 Must be quantified – the quantity should be known
 It must be specific – the value should be known
 It needs not to be merged so that the proportion of ownership can be realized after execution of
the contract.
 Can be in liquid or illiquid form.

ii. Management of Partnership

 Management duties may be performed by all partners.
 In case of sleeping partner, the share in profit needs not to exceed his capital invested.
 In case of collective management, each partner acts as agent of others in such a way that the act
of one partner in business is consider as the act of all.
iii. Rules of Profit and Loss Distribution
 The profit ratio needs to be defined as a percentage of the profit of each partner rather than tying it
to the capital invested e.g. 2% of capital invested.
 The profit ratio of each partner may differ than the percentage of capital contributed, as investment
is not the only deciding factor in profit distribution.
 Sharing of profit as per capital contribution is allowed.
 It is not allowed to fix a lump sum amount for any of the partners e.g. Rs 50,000 for one partner
and rest for others.
 A partner can get more share out of profit irrespective whether other partners are sleeping partners.
 The share of sleeping partner cannot exceed the portion of capital contributed.

The loss is distributed exactly according to the ratio of investment and the profit is divided according to
the agreement of the partners.
(Syedna Ali ibn e Abi Talib)
iv. Rights of Partners
 Right to transact on behalf of other partners/business e.g. buying raw material and selling finish goods, buying
on credit etc.
 Right to hire people to carry out business
 Right to deposit money of business whenever necessary.
 Right to use funds in mudarabah.
 If the business earns a non-compliant income, then a partner can hiba (gift) it on behalf of the partners/business.
If a partner takes loan for the business, then it also becomes the liability of others.
iv. Termination of Musharakah (Actual Liquidation)
 If musharakah is formed for a specific purpose and the purpose is achieved.
 If the partner wants to exit. In such case the exiting partner must give a notice.
 If other partners want to continue, the constructive liquidation may occur.
 If all want to exit, then actual liquidation will occur.
 If they don’t agree on liquidation, then the asset will be distributed as they are, and each partner will be
liable to the business according to their capital contribution.
 In case of liquidation, first all assets should be valuated at market price. Then
 The liquidation expenses should be paid
 The financial labilities should be settled.
 Distribution of remaining assets among the partners:
 First the capital will be recovered and then the profit will be distributed according to the profit ratio.
 If the loss is more, then the distribution will be on pro rata basis. i.e. the loss should be recovered from
capital portion of the partners according to capital contribution ratio.
 In case of shirkat ul a’mal (service based), the ratio of profit and loss can be set by mutual agreement.
 In case of liquidation of such partnership, the partners may agree on liquidation or take a share of their
liquid assets. However, in latter case, each partner will be liable for the loss according to the terms of
contract.
Termination of Musharakah (Constructive Liquidation)
 In case a partner wants to exit while others compel on continuity, in such case, the partners may
valuate the share of exiting partner and purchase it from him/her.
 If the exiting partner does not agree on such valuation, the he/she can demand liquidation or
termination of partnership.
 Constructive liquidation in such case can resolve the issue.
 In constructive liquidation, the rules of actual liquidation are followed for valuation purpose but the
partnership remains intact.
v. Dispute Resolution
 First, the dispute must be resolved by the partners themselves.
 If the dispute is not settled, then dispute may be settled through court.
 In Islamic Banking, if the dispute related the provision in agreement arise between the client and
the bank, it may be settled through a review committee.
ISSUES IN MUSHARKAH
Liquidity of Capital
 Imam Abu Hanifa and Imam Ahmad are of the view that in-kind capital should not be part of
musharakah capital.
 The commodities of each partner will always be distinguishable from other e.g. one contribute
money and other contribute machinery.
 If the commodities were sold out and do not exist at the time of liquidation.
 Imam Shafi’i divided the commodities in two categories i.e. dhawat ul Athmal (fungible) and Dhawat
ul qeemah (non-fungible).
 The fungible can be part of capital and at termination each would get their share in the form of same
commodity.
 However, Imam Shafi’i did not answer the second objection.
 Imam Malik answers the concerns raised by suggesting that the in-kind commodities must be
valuated at prevalent market prices at the time of contract.
POOLING OF CAPITAL
Imam Shafi’i is of the view that the capital should be mixed in a ways that it is not distinguishable.
In case of illiquid assets, these cannot be mixed as per rule above hence, the investment remains in
the ownership of the original investor.
Therefore, the profit and loss of such asset will also be associated with the same partner.
On contrary, Imam Abu Hanifah, Imam Ahmad, and Imam Malik are of the view that mixing of
capital is not important.
If one partner contributes illiquid assets, it becomes in co-ownership of all partners.
If the same asset is destroyed before contract the owner will be responsible in his own capacity
however, after the contract all partners will be responsible.
If Imam shafi’i rule is applied, it will create the problem for the partner who import machinery via
L/C and include it in the partnership.
TENURE OF MUSHARAKA
Can last as long as business meets its objectives and no further activity can be
conducted.
Short time period during which the partnership is necessary e.g. bridge financing,
L/C etc.
According to Imam Abu Hanifah, the time period in the contract can be set because
it is an agreement and every agreement has a minimum and maximum duration.
According to Imam Ahmad, partnership acts like an agency and we can fix the
tenure.
Imam shafi’i and Imam Malik are of the view that fixing tenure will restrict the
business and its benefits and therefore, not allowed.
DIMINISHING MUSHARAKAH
• Musharakah Mutanaqisah (Diminishing Musharakah) technically is a partnership
contract between two or more parties on a particular asset or venture which
allows one of the partners to gradually acquire the shareholding of the other
partner through an agreed redemption method during the tenure of the contract.
• An IFI may request its customer to give a binding promise (wa’d) to the IFI to
purchase the Musharakah asset or IFI’s share either on a lump sum basis or
gradually over an agreed period of time at market value or at a fair value or at any
price to be agreed by the parties.
• The execution of the promise shall not violate the element of profit and loss
sharing in the Musharakah Mutanaqisah contract.
• The transfer of Musharakah asset or share to the other party in a diminishing
Musharakah may be executed in a single payment or on staggered basis.
CONT.

• Transfer of Musharakah asset may be made by way of conditional gift upon the
full payment of the rental obligation.
• In the event of a customer’s default to acquire the Musharakah asset or IFI’s
share, the IFI may terminate the Musharakah contract.
• The IFI may recover its capital from the proceeds of disposal of the jointly
owned asset to a third party.
• Should the proceeds from the disposal be insufficient to cover the capital loss, the
IFI may have recourse to the customer for the outstanding balance.
• In the case where the customer is insolvent, the IFI shall bear the loss of capital.
• In the event of a surplus from the disposal of the proceeds, the surplus shall be
distributed between the partners according to their respective ownership share.
SAC ILLUSTRATION OF DM
• The following issues:
i. Whether the collective usage of musharakah and ijarah agreements in one document of
musharakah mutanaqisah is allowed since such collective usage may be perceived as having two
transactions in one sale and purchase contract which is prohibited in Shariah; and
ii. Whether a pledge may be imposed by one of the owners of the asset over the jointly owned asset.

• Resolution
• The SAC, in its 56th meeting dated 6 February 2006, has resolved the following:
i. Collective usage of contracts of musharakah and ijarah in one document of agreement is permissible
as long as both contracts are concluded separately and clearly; and
ii. A pledge in musharakah mutanaqisah may be imposed if the pledge document involves only the
customer’s shares being pledged to the Islamic financial institution. This is because beneficial
ownership is recognised by the Shariah.
PRACTICAL CALCULATION OF
DM