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Musharakah

Khairuddin Zakaria
khairuddinzakaria@gmail.com

INTRODUCTION

 The Islamic economy promotes equity-


based financing whereby the returns for
the investors will be based on the actual
profits of the enterprise.

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Definition of Musyarakah
 The word musyarakah in Arabic is a derivative from syaraka or to share. share.
Al-
Al-Shirkah covers both shirkah al- al-mulk a joint ownership of a common
property as well as shirkah al-al-aqad or a partnership in a business as a
consequence of a mutual contract.
 The term musyarakah,
musyarakah, as it is used in modern financing, is confined to
the second type of al-
al-shirkah only, that is, contractual partnership.
 The Hanafi scholars define musyarakah as a contract between partners
on both capital and profit.
 The Shafi’
Shafi’i scholars define it as the confirmation of the rights of two or
more people over a common property.
 Hanbali scholars, it is the amalgamation of rights and freedom to use.
 Malikis define it as permission to transact where each of the partners
permits the other to transact with the partnership property while
while at the
same time retaining his own right to transact with the same property.
property.
 The definition given by Hanafis,
Hanafis, however, explains the essence of a
modern partnership as a type of contract.
 This definition seems to be more appropriate with reference to the the
modern connotation of the word musyarakah as a partnership where
profits are shared as per an agreed ratio whereas the losses are shared
in proportion to the capital/investment of each partner.

SOURCES OF LAW
 Quran:
Quran: There are several verses usually quoted in support of musyarakah. musyarakah.
 One of them is the verse that encourages mutual assistance or joint joint effort
for good purposes: “Help one another in righteousness and piety” piety”. (Al
Maidah: 2). .(2:‫"وَﺗَﻌَﺎوَﻧُﻮا ﻋَﻠَﻰ اﻟْﺒِﺮﱢ وَاﻟﺘﱠﻘْﻮَى وَﻻ ﺗَﻌَﺎوَﻧُﻮا ﻋَﻠَﻰ اﻹِﺛْﻢِ وَاﻟْﻌُﺪْوَانِ" )اﻟﻤﺎﺋﺪة‬
Maidah:
 Musyarakah is one of the forms of mutual assistance for the sake of gaining gaining
profits in business by permitted means, therefore it is encouraged encouraged in Islam.
Another Quranic verse which is normally quoted to support musyarakah is
the verse that specifically mentions about business partnership in
which, Allah says: “Truly many are partners in business who wrong each
other: not so do those who believe and work deed of righteousness righteousness’ and
how few are they?” they?” – (Al- (Al-Sad: 24)
 "ْ‫"وَإِنﱠ ﻛَﺜِﯿﺮًا ﻣِﻦَ اﻟْﺨُﻠَﻄَﺎءِ ﻟَﯿَﺒْﻐِﻲ ﺑَﻌْﻀُﮭُﻢْ ﻋَﻠَﻰ ﺑَﻌْﺾٍ إِﻻ اﻟﱠﺬِﯾﻦَ آَﻣَﻨُﻮا وَﻋَﻤِﻠُﻮا اﻟﺼﱠﺎﻟِﺤَﺎتِ وَﻗَﻠِﯿﻞٌ ﻣَﺎ ھُﻢ‬
.(24:‫)ص‬
 The above verse reminds the partners to bind themselves to ethical ethical values
in dealing with each other. This verse indirectly indicates the
acknowledgement of the Quran for partnerships.
 Sunnah:
Sunnah: The The Prophet (pbuh (pbuh)) said that Allah s.w.t. s.w.t. said in the form of Hadith
qudsi:
qudsi:
 “I am the third in the partners as long as there is no defector. If one of the
partners does betray the other, I cease to be the partner to them. them.”” ‫ﻋﻦ أﺑﻲ‬
‫ إن اﷲ ﺗﻌﺎﻟﻰ ﯾﻘﻮل أﻧﺎ ﺛﺎﻟﺚ اﻟﺸﺮﯾﻜﯿﻦ ﻣﺎ ﻟﻢ ﯾﺨﻦ أﺣﺪھﻤﺎ ﺻﺎﺣﺒﮫ ﻓﺈذا ﺧﺎﻧﮫ ﺧﺮﺟﺖ ﻣﻦ‬:‫ھﺮﯾﺮة رﻓﻌﮫ ﻗﺎل‬
.3383 :‫ رﻗﻢ‬،276‫ ص‬،2‫ ج‬،‫ وراه أﺑﻮ داود‬.‫ﺑﯿﻨﮭﻤﺎ‬
 This Hadith indicates that Allah will safeguard the partners and the trade. It
therefore, encourages the Muslims to enter into partnerships, provided provided that
each of the parties is honest in respect of the rights of the other. other.

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ELEMENTS & CONDITIONS
 The elements of musyarakah include:
offer and acceptance, contracting parties (two or more contracting
contracting
parties), subject matter of the agreement (capital and work).

 Condition of subject matter of the contract:


The subject matter of the contract, which is the capital, has to fulfil the
following conditions:
 1: Capital contributed shall be in cash, gold, silver or their equivalent
equivalent in
value. There is no difference among the jurists in this respect.
 2: Capital may consist of trading assets such as goods, property and and
equipment.
 It may also be in the form of intangible rights, such as trademark,
trademark, and
similar rights, provided they are valued at their cash equivalent
equivalent according
to what the partners have agreed upon.
 3: The Shafi’
Shafi’is and Malikis require capital provided by partners to be
commingled in order that no privilege is given to the share of either
either of
them.
 The Hanafis do not stipulate this condition provided the capital was in
cash, while the Hanbalis do not require commingling of capital at all.

THE BASIC RULES OF MUSYARAKAH


 1: Distribution of Profit
1. The proportion of profit to be distributed between the partners must be agreed
upon at the time of affecting the contract.
2. The ratio of profit for each partner must be determined in proportion
proportion to the actual
profit accrued to the business and not necessarily in proportion to the capital
invested by him.
3. It should not be fixed as a lump sum amount for any one of the partnerspartners or any
rate of profit tied up with his investment.
4. The distribution of profit is whether it is necessary that the ratio
ratio of profit for each
partner to conform to the ratio of capital invested by him?
The Malikis and the Shafi‘
Shafi‘is view that it is necessary for the validity of
musyarakah that each partner gets the profit exactly in the proportion of his
investment.
However, the Hanbalis held a contrary view by saying that the ratio of profit may
differ from the ratio of investment if it is agreed between the partners based on
free consent.
The Hanafis opined that the ratio of profit may differ from the ratio of investment
investment
in normal conditions. However, if a partner has put an express condition
condition in the
agreement that he will never work for the musyarakah and will remain a sleeping
partner throughout the term of the musyarakah,
musyarakah, then his share of profit cannot
be more than the ratio of his investment.

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Cont. Basic rules
2: Sharing of Loss
All Muslim jurists are unanimous on the point that each partner shall bear the loss
exactly according to the ratio of his investment.

3: Management of Musyarakah
In a musyarakah venture, all partners have a right to take part in its management
management
and to work for it since all of them contributed capital for such
such an enterprise.

4: Termination of Musyarakah
the musyarakah can be terminated in any one of the following instances:
1: Every partner has a right to terminate musyarakah at any time after giving his
partner a notice to this effect, whereby the musyarakah will end.
 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.
partners.
 If there is a dispute between the partners on this matter i.e. one
one partner seeks
liquidation while the other wants partition or distribution of the
the non-
non-liquid assets,
the latter shall be preferred.
because after the termination of musyarakah,
musyarakah, all assets are in the joint ownership
of the partners, and a co-
co-owner has a right to seek partition or separation, and no
one can compel him on liquidation.

Cont. Basic rules


2: If any one of the partners passes away.
3: If any one of the partners becomes insane or incapable of effecting
effecting
commercial transactions.

5: Termination of Musyarakah without Closing the Business


 If one of the partners wants termination of the musyarakah,
musyarakah, while the other
partner or partners would like to continue with the business, this
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.
 In this respect, one of the pertinent questions is whether the partners
partners can agree,
while entering into the contract of musyarakah,
musyarakah, on a condition that the liquidation
or separation of the business shall not be effected unless all the
the partners or the
majority of them wants to do so.
 In addition, a single partner who wants to come out of the partnership
partnership shall have
to sell his share to the other partners and shall not force them to liquidate or
separate.
 Most of the classical literature of fiqh seems to be silent on this question.
However, it appears that there is no objection on such an agreement
agreement from the
Shariah point of view provided that the partners agree to such a condition
condition at the
beginning of the musyarakah agreement.

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MUSYARAKAH AS MODE OF FINANCING
Musyarakah is applicable in different modes of financing. Some of the
modes are as follows:
1: Project Financing
Musyarakah is one of the tools that can be used in project financing. This
concept can be utilised particularly if investment comes from different
parties.
2: Financing of a Single Transaction
Musyarakah can also be used for financing a single transaction.
this instrument can be utilised for financing imports and exports.
 The banks can also use this instrument for import financing.
 If the letter of credit is opened with some margin, the form of musyarakah
can be used.
 Similarly, musyarakah is also applicable in export financing.
 The exporter has a specific order from abroad. The price on which
which the
goods will be exported is well-
well-known beforehand, and the financier can
easily calculate the expected profit.
 He may finance on the basis of musyarakah and may share the amount
of export bill on a pre-
pre-agreed percentage.

Cont.
 3: Financing of the Working Capital
 The instrument of musyarakah may be used where finances are
required for the working capital of a running business in the following
following
manner:
 The capital of the running business may be evaluated with mutual
consent.
 As stated earlier, apart from cash, non-
non-liquid assets can also form part of
the capital on the basis of evaluation. This view can be adopted here.
 In this way, the value of the business can be treated as the investment
investment
of the person who seeks finance, while the amount given by the
financier can be treated as his share of investment.
 The musyarakah may be affected for a particular period, like one year or
six months or less.
 Both parties agree on a certain percentage of the profit to be given
given to the
financier, which should not exceed the percentage of his investment,
investment,
because he shall not work for the business.
 On the expiry of the term, all liquid and non-
non-liquid assets of the business
are again evaluated and the profit may be distributed on the basisbasis of this
evaluation.

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Some Issues in Musyarakah Financing
 There are some who have raised concern about utilising musyarakah as a mode
of financing. The following discussion will concentrate on some objections raised
from the practical point of view against using musyarakah as a mode of
financing.
A. Risk of Loss
 The depositors being constantly exposed to the risk of loss, so they will not want
to deposit their money in the banks and financial institutions and
and thus their
savings will either remain idle or will be used in transactions outside of the
banking channels, which will not contribute to economic development.
development.
 B. Dishonesty and Moral Hazard
 Dishonesty is another hesitation against musyarakah financing in the sense that
dishonest clients may exploit the instrument of musyarakah by not paying any
return to the financiers.
 They can always show that the business did not earn any profit.
 the solution to this problem is If the banks in a country are run on a pure Islamic
pattern with excellent regulation from the Central Bank and the government, the
problem of dishonesty is not hard to overcome.
 a well-
well-designed system of auditing should be implemented whereby the
accounts of all clients are fully maintained and properly controlled
controlled and the profits
may be calculated on the basis of gross margins only.

Cont.
 C. Secrecy of the Business
 Another concern against musyarakah is that, by making the financier a partner in
the business of the client, it may disclose the secrets of the business
business to the
financier, and through him to other traders.
 This concern can be overcome by requesting the insertion of certain certain conditions
in the musyarakah agreement.
 the client, while entering into the musyarakah,
musyarakah, may place a condition that the
financier will not interfere with the management affairs, and thatthat he will not
disclose any information about the business to any person withoutwithout prior
permission from the client.
 D. Clients’
Clients’ Unwillingness to Share Profits
 the clients are not willing to share with the banks the actual profits
profits of their
business.
 This reluctance is based on two reasons:
 1. They think that the bank has no right to share in the actual profit,
profit, which may
be substantial, because the bank has nothing to do with the management
management or
running of the business and why they should share the fruits of their labour with
the bank that merely provides funds.
 2. the clients are afraid to reveal their true profits to the banks,
banks, lest the
information is also passed on to the tax authorities, and as suchsuch clients’
clients’ tax
liability increases.

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Diminishing Musyarakah
 Diminishing musyarakah or musyarakah mutanaiqisah is
another form of musyarakah which was developed recently
by the scholars.
 It is a musyarakah in which the Islamic bank agrees to
transfer gradually to the other partner its (the Islamic bank’
bank’s)
share in the musyarakah,
musyarakah, so that the Islamic bank’
bank’s share
declines and the other partner’
partner’s share increases until the
latter becomes the sole proprietor of the venture.
 According to this concept, a financier and his client
participate either in the joint ownership of a property or an
equipment, or in a joint commercial enterprise.
 The share of the financier is further divided into a number of
units and it is understood that the client will purchase the
units of the share of the financier one by one periodically,
thus increasing his own share until all the units of the
financier are purchased by him so as to make him the sole
owner of the property or the commercial enterprise.

DOCUMENTATION OF
MUSYARAKAH
 As for the documentation of the contract of musyarakah,
musyarakah,
the following are some important elements that shall be
included in the documentation and the samples of salient
important features in the contract are as follows:
 1.The
1.The Parties: An Islamic bank as the first partner and
the client as the second partner.
 2. The Institution hereby agrees, at written request of the
Client, to provide financing up to a sum of RM XX on the
terms and conditions hereinafter contained (which
financing is hereinafter referred to as “Institution’
Institution’s
Investment”
Investment”).
 3.This
3.This Agreement shall be valid for a period of XX years
from the date of first disbursement of the Institution’
Institution’s
Investment.
 And so on till the end of the agreement.

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Thank you
‫ﺷﻜﺮا ﺟﺰﯾﻼ‬

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