The word Musharakah is derived from 'Shirkah' means sharing, while the term 'Musharakah' is not found in the books of Fiqh. This term has been introduced recently by those who have written on the subject of Islamic Finance and it is normally restricted to a particular type of 'Shirkah', that is, the Shirkat-ul-amwal where two or more persons invest some of their capital in a joint commercial venture. However, sometimes it includes Shirkat-ul-amal also, where partnership takes place in the business of services. (These terms will be discussed later in this article).
Musharakah does not envisage a fixed rate of return to the investors rather the return depends on the actual earnings of business. If a business earns profit, it is distributed among partners according to predetermined profit sharing ratio and in case of loss, each partner will suffer according to ratio of his investment(capital).
This article covers the following aspects of Musharakah
| Types of Musharakah |
| Distribution of Profit |
| Sharing of Loss |
| Management of Musharakah |
| Termination of Musharakah |
| Termination without Closing the Business |
Types of Musharakah
There are two basic types of Musharakah
Shirkat-ul-Milk
It means joint ownership of two or more persons in a particular property. This kind of "Shirkah" may come into existence in two different ways:
By Option of the Parties:
If two or more persons purchase a property, it will be owned jointly by both of them and the relationship between them with regard to that property is called 'Shirkat-ul-milk', here this relationship has come into existence at their own option.
By Enforcement of Law:
After the death of a person, all his heirs inherit his property which comes into their joint ownership as an automatic consequence of the death of that person.
Shirkat-ul-Aqd
Shirkah-ul-Aqd means "a partnership executed by a mutual contract". It may be translated as "joint commercial enterprise.
Shirkat-ul-aqd is further divided into three kinds:
Shirkat-ul-amwal
where all the partners invest some capital into a commercial enterprise.
Shirkat-ul-Amal
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.
Shirkat-ul-wujooh
Here the partners have no investment at all. All they do is that they purchase the commodities on a deferred price and sell them at spot. The profit so earned is distributed between them at an agreed ratio.
Distribution of Profit
The profit sharing ratio must be defined and agreed between the partners at the time of agreement. If no such ratio is determined, the contract is not valid in shariah
The partners are not allowed to fixed rate of return or fixed ratio of profit with respect to their capital. They can only get their share of profit/loss.
Therefore, if A and B enter into a partnership and it is agreed between them that A shall be given Rs 10,000/- per month as his share in the 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 settlement 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 be adjusted to the actual profit he may deserve 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.
Is it necessary that the ratio of profit of each partner conforms to the ratio of capital invested by him? There is a difference of opinion among the Muslim jurists about this question.
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 makes him entitled to get more or less than 40% will render the musharakah invalid in Shari‘ah.
On the contrary, the view of Imam Ahmad is that 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%.
The third view is presented by Imam Abu Hanifah which can be taken as a via media between the two opinions mentioned above. 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 case of loss, all muslim jurists are agreed that loss will be distributed accoriding to their ratio of investment. For example if partner has invested 30% of total capital, he will suffer 30% in case of loss. If there is any condition to the contrary, it will be deemed void.
Management of Musharakah
The management of Musharakah business will be done by all partners, every partner has right to take part in management of Musharakah business. However, partners may agree on a condition that management of Musharakah business will be carried out by one or few of them. In such a condition sleeping partners are allowed to the profit only to the extent of their investment.
However, if all the partners agree to work for the joint venture, each one of them shall be treated as the agent of the other in all the matters of the business and any work done by one of them in the normal course of business shall be deemed to be authorized by all the partners.
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 contract of musharakah at any time after serving a notice to other partners.
2) In case of death of a partner, the contract of musharakah come to an end. 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 partner becomes insane or incapable of being a partner, the musharakah agreement stands terminated.
Termination of Musharakah without Closing the Business
If one of the 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 the Musharakah with one partner 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 the distribution of the assets themselves.
The question arises whether the partners can agree, while entering into the contract of the 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 Fiqh 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 a 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 it’s 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 amounts of money which has been invested in a 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 a condition seems to be justified.
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