The concept of Shirkah
& Musharakah
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Overview
o Terminology & Definition of Musharakah
o Types of Musharakah
o Structure of Musharakah
o Basic Rules in Musharakah
o Termination of Musharakah
o Constructive Liquidation of Musharaka
o Security / Collateral in Musharaka
o Musharaka Management and Liability
o Application of Musharaka As a Mode
o Problems and Risk for Banks in Musharaka Financing
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Musharakah
Hadees-e-Qudsi
“Allah (SWT) has declared that he will become a
partner in a business between two Mushariks until
they indulge in cheating or breach of trust”
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Musharakah
Terminology & Definition of Musharakah
“Musharakah ” means “Sharing” and in the terminology
of Islamic Fiqh.
The word Musharakah has been derived from “Shirkah”
which means being a partner
Musharakah is basically a kind of partnership in which
the partners join together with different contributions,
work or obligation for the common objective of
undertaking business and trade in accordance with the
principles of Shariah.
It is an ideal alternative for the interest based financing
with far reaching effects on the economy
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Musharakah
Contract of Musharakah
The contract of Musharakah can take place
between two or more persons with the capital
contributed by the partners/shareholders and the
profit to be distributed among them according to
the rates agreed upon by the shareholders.
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Types of Musharakah
SHIRKAH
SHIRKAT-UL-MILK SHIRKAT-UL-AQD
IKHTIARI GAIR IKHTIARI
SHIRKAT- SHIRKAT- SHIRKAT-
UL-AMWAL UL-AAMAL UL-WUJOOH
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Types of Musharakah
Shirkat has been divided into two kinds:
1. SHIRKAT-UL-MILK
It means joint ownership of two or more persons in a
particular property/asset.
2. SHIRKAT-UL-’AQD
This is the second type of Shirkah which means “a
partnership effected by a mutual contract for ”.
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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:
1. OPTIONAL SHIRKAT-UL-MILK (Ikhtiari)
If two or more person purchase an equipment, 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, as they themselves elected to purchase the
equipment jointly.
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Shirkat-ul-Milk
2. UNOPTIONAL SHIRKAT-UL-MILK (Ghair Ikhtiari)
There are cases where this kind of “Shirkah” comes to
operate automatically without any action taken by the
parties.
For example, 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.
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Shirkat-ul-’Aqd
This is the second type of Shirkah which means:
“A partnership effected by a mutual contract in which the
partners join together with different contributions,
work or obligation for the purpose of earning profit”.
For the purpose of brevity it may also be translated as
“Joint commercial enterprise.”
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Types of Shirkat-ul-’Aqd
Shirkat-ul-‘aqd is further divided into three kinds:
1. Shirkat-ul-amwal (contractual partnership)
2. Shirkat-ul-A’mal (liability partnership)
3. Shirkat-ul-wujooh (vocational partnership)
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Types of Shirkat-ul-’Aqd
1. Shirkat-ul-amwal:
Where all the partners invest some Capital into a
Commercial enterprise.
It is the most important & commonly used form of Shirkat
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Types of Shirkat-ul-’Aqd
2. Shirkat-ul-A’mal:
Where all the partners jointly undertake to render some
services for their customers.
The fee charged from them is distributed among them
according to an agreed ratio.
If two persons agree to undertake tailoring services for their
customers on the condition that the wages so earned will go
to a joint pool which shall be distributed between them
irrespective of the size of work each partner has actually
done.
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Types of Shirkat-ul-’Aqd
3. Shirkat-ul-wujooh
The word Wujooh comes from Wajahat meaning
goodwill
Hence this is a partnership in Goodwill
Here the partners contribute in the business not
through capital but through their goodwill and share
profit at an agreed ratio
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.
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Musharakah
All these modes of “Sharing” or partnership are termed as
“Shirkah” in the terminology of Islamic Fiqh, while the term
“Musharakah” is not found in the books of Fiqh.
The term Musharakah has been introduced recently by those
who have written on the subject of Islamic modes of financing
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-a’mal also where
partnership takes place in the business of services.
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Musharakah
Each of the above three types of Shirkat-ul-Aqd are further
divided into two types:
Shirkat-Al-Mufawada (Capital & labour at par):
All partners share capital, management, profit, and risk in
absolute equals. It is a necessary condition for all four
categories to be shared amongst the partners
Every partner who shares equally is a Trustee, Guarantor and
Agent on behalf of the other partners
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Musharakah
Shirkat-ul-Ainan :
A more common type of Shirkat-ul-Aqd where equality
in capital, management or liability might be equal in
one case but not in all respect meaning either profit is
equal but not labour or vice versa.
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Rules of Musharakah
Musharakah means relationship established under a
contract by the mutual consent of the parties for sharing of
profits and losses,arising from a joint enterprise or venture.
Investments come from all partners / shareholders
hereinafter referred to as partners.
Profits shall be distributed in the proportion mutually
agreed in the contract.
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Rules of Musharakah
The existence of Muta’aqideen(Partners):
Capability of Partners:
Must be sane & mature and be able of entering into a
contract.
The contract must take place with free consent of the
parties without any fraud or misrepresentation.
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Rules of Musharakah
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.
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Rules of Musharakah
Basic rules of distribution of Profit
1.The ratio of profit for each partner must be determined in
proportion to the actual profit accrued to the business and not
in proportion to the capital invested by him.
2.It
is not allowed to fix a lump sum amount for anyone of the
partners or any rate of profit tied up with his investment.
3.Ifboth partners agree that each will get percentage of profit
based on his capital percentage, whether both work or not, it is
allowed.
4.It
is also allowed that if an investor is working, his profit share
(%) could be more than his capital base (%) irrespective
whether the other partner is working or not.
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Rules of Musharakah
Basic rules of distribution of Profit
5.If
a partner has put an express condition in the agreement
that he will not 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.
6.It
is allowed that if a partner is not working, his profit share
can be established as less than his capital share.
7.If
both are working partners, the share of profit can differ from
the ratio of investment.
8.If
only a few partners are active and others are only sleeping
partners, then the share in the profit of the active partner could
be fixed at higher than his ratio of investment
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Rules of Musharakah
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.
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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 pro rata 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.
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Termination of Musharakah
(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.
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Termination of Musharakah
• If one partner wants to terminate the Musharakah but other
partners want to continue this can be done by mutual
Agreement
• Termination of Musharakah with one partner does not
mean termination with other partners
• Price of leaving partner’s share must be determined
• If assets are not liquid their valuation must be done to
distribute shares
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Termination of Musharakah
• If partners cannot arrive at consensus on value the
leaving partner can compel others to liquidate business
• However, partners may agree at the start of the project
that liquidation will require majority’s consent
• If assets are not liquid their valuation must be done to
distribute shares
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Security & Collateral in Musharakah
1. All partners in a Sharika contract maintain the assets of
the Sharika on a trust basis. Therefore, no one is liable
except in cases of misconduct, negligence or breach of
contract.
2. A third party may provide a guarantee to make up a loss
of capital of some or all partners. This guarantee is
circumscribed with the conditions that
a) The legal capacity and financial liability of such a third
party as a guarantor are independent from the
Sharika contract.
b) The guarantee should neither be provided for
consideration nor linked in any manner to the Sharika
Contract.
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APPLICATION
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Application
Musharakah can be successfully used to in the following areas:
• Project financing
• Working capital financing
• Import Financing
• Export Financing
• Running finance
• Saving/Deposit account
• Certificates of Investments
• Term finance certificates
• Inter bank financing
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Project Financing
• In the case of project financing, the traditional
method of Musharaka can be easily adopted.
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Exercise
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Exercise
Setup a Musharakah company
Data
Case 1:
a. Setup a company
Jan 1 Partner A Invest 12 mn (working partner)
Partner B Invest 5 mn (sleeping partner)
b. Operation
Dec 31: Profit earned 3.0 mn
c. Distribution of profit - Dec 31
d. Termination – Dec 31
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Exercise
Setup a Musharakah company
Data
Case 2:
a. Setup a company
Jan 1 Partner A Invest 10 mn (working partner)
Partner B Invest 5 mn (working partner)
b. Operation
Dec 31: Loss earned 1.5 mn
c. Distribution of profit/loss - Dec 31
d. Termination – Dec 31
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