The term Musharaka is derived from the Arabic word Sharikah which mean partnership. It refers to all form of sharing and partnership.
Musharaka was practiced by many civilizations long before the advent of Islam. When Islamic principles were introduced during the time of the Prophet ﷺ, Musharaka was approved as a valid means of financing. Based on that, it is considered by many scholars to be the most authentic Islamic finance contract.
Originally, Musharaka was used only by traders who invest in a business together and share profit or loss of the joint venture. Today, the contract is used widely not just by traders but also banks, insurance, capital market and by non-bank financial institutions.
Types of Partership
There are various forms of Sharikah as outlined below:
- Shirkat-ul-Milk: Joint ownership in a property by two or more parties. This happens when two or more people contribute towards purchase of a property which they will then own jointly.
- Shirkat-ul-Aqd: The term Aqd means contract. This is a joint partnership where two or more parties enter in to a mutual agreement to conduct business. It is commonly known as “Joint Commercial Enterprise” This kind of Shirkat can be further divided into three;
- Shirkat-ul-Amwal: The term amwal means wealth/funds. This is parternship where all partners invest some funds into a joint commercial enterprise. e.g. a company limited by shares. It therefore means partnership through contribution of capital.
- Shirkat-ul-A’mal: The term a’mal means work/labour. Each party here contributes capital in form of labour. All the parties jointly undertake to render some services for their customer and the fee charged is distributed among partners according to pre-agreed ratio. A good example is a group of tailors in the same building or shoe shiners, barbers where the fees collected is deposited in a pool which is shared amongst them regardless of the work done.
- Shirkat-ul-wujooh: Wujooh literary means the face/reputation. This type of partnership is also referred to as partnership in good will. Here, the partners have no investment at all. They purchase items on loan. The loan for the commodities is obtained because of their good will/reputation and sell them at spot. The profit so earned is distributed between them at an agreed ratio.
The most common types of Musharaka that is practiced in modern day Islamic finance are Shirkat-ul-Milk for Property financing, and Shirkat-ul-Aqd e.g. giving funds to customers for investment as partners where the bank share in risk and return and vise versa where deposit is taken from customers for investment purposes.
Basic Shariah Rules Concerning Musharaka
- Details of the capital contribution must be specific, in existence and immediately available. A contract is void if it is built on non-existent funds or debt.
- It is not necessary for the partners in Musharaka to have equal capital contribution.
- The participation capital must be in form of money and tangible assets.
- It is permissible for one partner to manage the Musharaka project with the mandate of the other partners, but it is not permitted to impose conditions that prevents one or more of the partners from work.
- It is not permissible to take security for profit return on capital but it is permissible to take a guarantee against negligent or misconduct of working partners.
- Profit share must be determined on pre agreed ratio for all partners, in order to avoid uncertainty. The profit share cannot be determined in absolute figure because this contravenes the requirement of Shari’ah law toward partnership contract and is tantamount to riba.
- Profit share ratio of each partner must be based on the proportion of their shares in capital. However, some of the jurists permit variation in profit shares based on mutual agreement.
- In case of loss, each partner bears losses according to its proportion of ratio of capital investment.
- It is permissible for any partner to leave the contract whenever he/she wishes. However, the same must occur with the knowledge of the other partners because it may prejudice his/her interest or interest of the other partners.
Musharaka in Islamic Banking Industry
Musharaka involves advancing capital to a company, project, or any kind of asset or business transaction as partners.
Profit is shared on the pre agreed ratio but losses are borne proportionately based on the capital provided by each party (pro rata).
In this contract all parties must provide capital. However, it is not a requirement of Musharakah that all parties must take part in the management of the venture.
The Islamic banks also collect deposit from customers through savings or investment accounts. The funds are then invested in various income generating activities where returns are shared with the customers on pre agreed ration.
The Islamic Banks normally agree with the customer on an expected rate of return. The expected rate is based on projection from past performance. Based on the past performance, the Bank is able to give an indicative or expected rate of return in any investment.
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