FIQH MUAMALAT

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Chapter 5: Concept Of Contract Chapter 6: Sale-Based Transactions 1 Chapter 7: Sale-based Transactions 2 Chapter 8: Mudarabah Chapter 9: Musharakah Chapter 10a: Ijarah Chapter 10b: Rhan Contract Chapter 11a: Kafalah Chapter 11b: Wakalah Chapter 12: Bay al-Dayn Chapter 13a: Wadi'ah Contract Chapter 13b: Contract of Sarf
Table of Contents ▼

    Introduction to Musharakah


    Definition of Al-Shirkah

    • General Meaning: Al-Shirkah refers to the joint ownership of a common property.
    • Two Main Categories:
      • Shirkat al-Mulk: A joint ownership where two or more people own an asset together without a formal commercial contract.
      • Shirkat al-Aqad: A contractual partnership where parties enter a mutual agreement to conduct business.
    • Modern Financing: In the context of Islamic finance, the term Musharakah is specifically limited to Shirkat al-Aqad (contractual partnership).
    • Hanafi Definition: A contract between partners involving both capital and profit.

    Legality of Musharakah
    The lawfulness of partnership is recognized by various Islamic schools of thought, though they differ on specific types:
    School of Thought View on Legality
    Hanafi School Considers all sharikat (partnerships) to be lawful.
    Maliki School Considers all types lawful, except for Shirkat al-Wujuh (partnership based on reputation).
    Hanbali School Considers all types lawful, except for Shirkat al-Mufawadah (equal-shares partnership).
    Shafi School & Zahiriah Generally consider all types unlawful, with the sole exception of Shirkat al-Inan (unequal shares partnership)

    Types of Partnerships Recognized
    Commonly discussed types of contractual partnerships include:
    • Inan: Unequal shares partnership.
    • Mufawadah: Equal shares partnership.
    • Al-Amwal: Partnership where the subject matter is capital/money.
    • Al-Amal: Partnership where the subject matter is labor/service.
    • Wujuh: Partnership based on the reputation or credit of the partners

    Classification of Partnerships


    1. Core Types of Contractual Partnerships
    The subject matter of the partnership determines its classification:
    • Shirkat al-Amwal (Money/Capital): All partners invest monetary assets into a commercial enterprise.
    • Shirkat al-Amal (Labor/Services): The subject matter is labor. Partners provide services to customers, and the generated income is distributed among them.
    • Shirkat al-Wujuh (Reputation/Credit): Partners use their reputation to purchase commodities on a deferred price (credit) and sell them on the spot for profit.

    2. The Inan Partnership (Unequal Shares)

    Inan is a contract where two or more people contribute a share of capital or property to be used in trade.

    Key Characteristics of Inan:
    • Investment: Equality in the investment amount is not required.
    • Status/Profit: Equality in personal status or the distribution of profit and liabilities is not a requirement.
    • Agency: Each partner is considered an agent for the other regarding capital and trade transactions.
    • Duty: Each partner must act in the best interest of the company.
    • Liability: Partners do not guarantee the liabilities of the other partners.
    • Nature: The contract is not binding, meaning a partner can terminate it.

    3. The Mufawadah Partnership (Equal Shares)
    In this model, partners maintain a higher level of equality in all aspects of the business.

    Key Characteristics of Mufawadah:
    • Capital: Each partner must have a share equal to that of their partner in the capital or business.
    • Profit & Liability: There must be equality in the distribution of profit and liability.
    • Mutual Guarantee: Each partner acts as both an agent for the partnership and a guarantor for the other partners.

    Comparison Summary
    Feature Inan Mufawadah
    Capital Contribution Can be unequal Must be equal
    Profit Distribution Based on agreement  Must be equal
    Liability No mutual guarantee Mutual guarantor
    Agency Partners are agents  Partners are agents 

    Basic Shariah Rules & Issues


    1. Basic Shariah Rules
    In a Musharakah contract, specific rules apply to capital, management, and the distribution of returns:
    • Capital of Musharakah: It should generally be contributed in the form of monetary assets.
    • Management of Musharakah: All partners have a legal right to take part in the management of the business.
    • Profit-sharing: Profits must be distributed according to an agreed upon ratio settled at the start of the contract.
    • Loss-sharing: Losses MUST be shared strictly according to the ratio of contribution (capital share).
    • Nature of Musharakah: The subject matter and activities of the partnership must be permissible (Halal) under Shariah.

    2. Common Issues in Musharakah Financing
    Islamic banks face several challenges when implementing this model:
    • Risk of Loss: Depositors are constantly exposed to the risk of loss, which may discourage them from keeping money in the bank.
    • Dishonesty and Moral Hazard: Dishonest clients might exploit the Musharakah instrument by underreporting profits to avoid paying returns to the bank.
    • Secrecy of the Business: Clients may fear that making the bank a partner will disclose business secrets to the financier or other traders.
    • Taxation: Some clients believe the bank has no right to share actual profit because of high taxation burdens
    Feature Shariah Requirement
    Profit Distributed by agreed upon ratio
    Loss Shared strictly by ratio of contribution
    Management All partners have the right to manage.
    Capital Must be in monetary assets

    Diminishing Musharakah (Musharakah Mutanaqisah)



    1. Concept of Diminishing Musharakah
    • Definition: It is a form of partnership where one partner (usually the client) promises to gradually purchase the shares of the other partner (the bank) until the client owns the asset entirely.
    • Classification: It typically falls under the category of Shirkat al-Inan (unequal shares partnership).
    • Requirement: It must be a real partnership involving the sharing of profits and losses, rather than just a credit-based finance.

    2. Basic Shariah Rules for Diminishing Musharakah
    To ensure the contract is Shariah-compliant, specific rules must be followed:
    • Separation of Contracts: The partnership agreement and the sale/lease agreements must be separate and not contingent on one another.
    • Profit-Sharing: Profit must be shared according to an undivided percentage (%) agreed upon by the partners.
    • Loss-Sharing: Losses must be shared strictly according to the ratio of capital contribution.
    • Additional Costs: Ownership-related costs, such as insurance (Takaful) and maintenance, must be shared between the partners according to their ownership ratio.
    • Purchase Undertaking: It is permissible for the client to promise to buy the bank's shares over time, but the bank cannot force the client to redeem the contribution amount at its original face value if the asset value has changed.

    3. Case Studies (Practical Applications)

    A.
    Buying a House 
    • Initial Purchase: The Partner contributes 20% (RM 20,000) and the Bank contributes 80% (RM 80,000) for a house valued at RM 100,000.
    • Gradual Transfer: Every three months, the partner buys a portion of the bank’s shares (e.g., in RM 10,000 increments).
    • Outcome: The Bank's shares decline gradually, while the Partner's shares increase until 100% ownership is achieved.
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    B.
    Buying a Taxi 
    • Initial Setup: Similar to the house, the Bank and Partner buy the vehicle together (e.g., 80/20 ratio).
    • Income Generation: The taxi earns daily income (e.g., RM 1,000). This income is shared based on ownership (Bank gets 80% or RM 800).
    • Redemption: Over time, the partner uses their portion of the profit or separate funds to buy the bank's shares