Fiqh of Islamic Finance Musharakah Shirkah partnership It

Fiqh of Islamic Finance

Musharakah Shirkah (partnership): It literally means sharing. The sharing may be of money, labor, or anything else. The prophet (SAW) said, “People are partners in three [things]: water, herbage, and fire. ” 2. Shirkah (partnership): is defined as a contract between partners on both capital and profit. 1.

Kinds of Partnerships v Shirkat ul-milk (partnership of ownership): 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. 2. By the partners choice: means coming into the operation at the option of the parties. For example, if two partners agree to buy equipment it will be owned jointly by both of them. Without the partners choice: means coming into the operation automatically without any action taken by the parties. For example, if property is inherited.

Kinds of Partnerships v Shirakal al-aqd (partnership of a contract): 1. 2. which means a partnership effect by a mutual contract. This kind of Shirkah exists in three types: Shirkal ul-amwal (financial company): where all the partners invest some capital into a commercial enterprise. Shirkat ul-amal (company of workmanship): 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.

Kinds of Partnerships 3. Shirkal ul-wujooh (partnership with eminent people): where the partners have no investment at all. All they do is purchase the commodities on a deferred price and sell them at that spot. The profit so earned is distributed between them at an agreed ratio.

Basic Rules of Musharakah Distribution of profit 1. 2. The ratio of profit The proportion for each partner of profit to be must be distributed between determined in the partners must proportion to the be agreed upon at actual profit the time of the accrued to the effecting of the business, and not contract. in proportion to the capital invested by him.

Basic Rules of Musharakah Sharing of Loss In the case of loss each partner shall suffer the loss exactly according to the ratio of his investment. If a partner has invested 40% of the capital, he must suffer 40% of the loss, not more, not less.

Basic Rules of Musharakah The Nature Of the Capital Most of the Muslim jurists are of the opinion that the capital of a joint venture must be in monetary form, no part of it can be contributed in kind. Except in the opinion of Imam Malik who said that it is permissible for a partner to contribute to the musharakah in kind.

Basic Rules of Musharakah Management of Musharakah Every partner has a right to take part in the business's management and to work for it. n However the partners may agree upon a condition that the management shall be carried out by only one of them and that no other partner shall work for the musharakah. n If all the partners agree to work for the joint venture, each one of them shall be treated as an agent of the other in all the matters of the business. n

Basic Rules of Musharakah Termination of the Musharakah Every partner has a right to terminate the musharakah at any time after giving his partner a notice to this effect. 2) If any one of the partners die during the currency of musharakah, his heirs will have the option to terminate 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 can be terminated. 1)

Diminishing Musharakah A financier and his client participate either in the joint ownership of a property or an equipment, or in a joint commercial enterprise. n The share of the financier is further divided into a number of units. It is understood that the client will purchase the units of the financier’s share, one by one, periodically. n

Mudarabah The word mudarabah comes from the Arabic root (Dharabahfi al ard), which means going and working to obtain livelihood. n Mudarabah is a special kind of partnership where on partner provides work in trade and the other side provides the capital. n The first partner is called “mudarib, ” and the second partner is called “rabb ul-mal. ” n

Difference between Musharakah and Mudarabah 1. The investment in 2. musharakha comes form all the partners, while in mudarabah the investments comes from rabb-ul-mal only. This means that the musharakah is a partnership in profit and capital, while mudarabah is a partnership in profit not in capital. In mushararkah all the partners can participate in the management of the business, and can work for it. While in musdarabah the rabb ulmal has no right to participate in the management, which is carried out by the mudarib only.

Difference between Musharakah and Mudarabah 3. In musharakah all the partners share the loss. While in the mudarabah, only rabb-ul-mal suffers the loss, while the mudarib suffers the loss of his labor.

Types of Mudarabah n Al-mudarabah aln Al mudarabah al muqayyadah (restricted muttaqah (unrestricted mudarabah): where rabb-ul-mal specifies a rabb-ul-mal leaves the particular business for door open for the mudarib, in which mudarib to undertake case he shall invest the whatever business he money in that particular whishes, the mudarib shall be authorized to business only. invest the money in any business he deems fit.

Distribution of the Profit It is necessary for the validity of mudarabah that the parties agree right at the beginning on a definite proportion of the actual profit to which each one of them is entitled. They can share the profit in equal proportions, and they can also allocate different proportions for the rabb-ul-mal and the mudarib.

Termination of Mudarabah The mudarabah contract can be terminated at any time by either of the two parties. The only condition is for notice to be given to the other party. n If all the assets of the mudarabah are in cash form at the time of termination, n and some profit has been earned on the principal amount, it shall be distributed between the parties according to the agreed ratio. n If the assets of the mudarabah are not in cash form, the mudarib shall be given an opportunity to sell and liquidate them, so that the actual profit may be determined.

Combination of Musharakah and Mudarabah A contract of mudarabah normally presumes that the mudarib has not invested anything to the mudarabah. He is only responsible for the management, while all the investment comes from the rabb-ul-mal. Sometimes the Mudarib wants to invest some of his money into the business of the mudarabah, in such case the musharakah and the mudarabah are combined together.

Combination of Musharakha and Mudarabah Example: A gives B $100, 000 in a contract of mudarabah. B then added $50, 000 with the permission of A. This type of partnership will be treated as a combination of musharakah and mudarabah. The mudraib is a sharik, so he gets s a certain percentage of profit on account of his investment as a sharik and another percentage for his management and work as a mudarib.

Murabahah (Set Profit Sale) Definition of Murabahah: It is a sale contract, with a set increment on the original price, agreed upon by the two parties. n It is a particular kind of sale where the seller expressly mentions the cost of the sold commodity he has incurred, and sells it to another person by adding some profit. n

Rules of Murabahah 1. The original price should be made known to the second buyer 2. The profit should be made known 3. All the expenses incurred by the seller in acquiring the commodity like freight, custom duty, etc. Shall be included in the cost price, and the mark up can be applied on the aggregate cost. 4. No usurious dealing is involved, as the increment of money in usurious dealings is prohibited in Islam.

Rules of Murabahah 5. The first contract should be legal. This is because the second (set profit) sale is based on the first contract, so if the first contract is illegal the second contract is also illegal. 6. The first buyer must own the commodity before he sells it to the second buyer. 7. The commodity must come into the possession of the first buyer whether physical or constructive, in the sense that the commodity must be in his risk, though for a short period.

Ijarah (hire) Definition of Aqd al. Ijarah: n It is a contract on using the benefits or services in return for compensation.

Ijarah (hire) In the Islamic jurisprudence the term Ijarah is used for two different situations: It means to employ the services of a person on wages given to him as a consideration for his hired services. n The employer is called Mustajir, the employee is called Ajir n If A has employed B in his office as a manager or as a clerk on a monthly salary, A is the mustajir and B is an ajir. 1.

Ijarah (hire) In the Islamic jurisprudence the term Ijarah is used for two different situations: 2. n n n Relates to the usufructs of assets and properties Ijarah in this sense means to transfer the usufruct (using the benefit) of a particular property to another person in exchange for a rent claimed from him. The term Ijarah is analogous to the English terms leasing The lesser is called mujir The lessee is called Mustajir. The rent payable to the lesser is called Ujrah.

Ijarah (hire) n The rules of Ijarah in the n The only difference sense of leasing is very between Ijarah and sale mush similar to the rule is that in the sale case of sale, because in both the corpus of the cases something is property is transferred to another to the purchaser. While person for a valuable in the case of Ijarah the consideration. corpus of the property remains in the ownership of the transferor, and only its usufruct, the right to use it, is transferred to the lessee.

Basic Rules of Leasing 1. 2. 3. 4. 5. Leasing is a contract whereby the owner of something transfers its usufruct to another person for an agreed period and at an agreed consideration. The subject of lease must have a valuable use. Therefore things having no usufruct at all con not be leased. It is necessary for a valid contract of lease that the corpus of the leased property remains in the ownership of the seller, and only its usufruct is transferred to the lessee. The period of lease must be determined in clear terms. The lessee cannot use the leased asset for any purpose other the purpose specified in the lease agreement

Basic Rules of Leasing 6. 7. 8. 9. The lessee is liable to compensate the lesser for any harm to the leased asset cased by any misuse or negligence of the part of the lessee. The leased asset shall remain in the risk of the lesser through out the lease period in the sense that any harm or loss caused by the factors beyond the control of the lessee shall be borne by the lesser. It is necessary for a valid lease that the leased asset is fully identified by the parties. If the leased property is insured it should be at the expense of the lesser and not at the expense of the lessee.

Basic Rules of Leasing 10. The Ijarah itself should not contain a condition of gift or sale at the end of the lease period, because due to the Islamic jurisprudence one transaction cannot be tied up with another transaction. – However the lesser may enter into a unilateral promise to sell the leased asset to the lessee at the end of the lease period.

Bai Mu’ajjal (Sale on Deferred Payment Basis) n n 1. 2. A sale in which the parties agree that the payment of price shall be deferred. The Rules: Bai Mu’ajjal is valid if the due date of payment is fixed in an unambiguous manner. The due time of payment can be fixed either with reference to a particular date or by specifying a period like three months if the time of payment is unknown or uncertain, the sale is void.

Bai Mu’ajjal (Sale on Deferred Payment Basis) 3. 4. 5. The deferred price may be more than the cash price, but it must be fixed at the time of sale. Once the price is fixed it cannot be decreased in case of earlier payment nor can it be increased in case of default. If the commodity is sold on installments, the seller may put a condition on the buyer that if he fails to pay any installment on its due date, the remaining installments will become due immediately.

Bai Mu’ajjal (Sale on Deferred Payment Basis). 6. 7. In order to secure the payment of price the seller may ask the buyer to furnish a security whether in the form of a mortgage or in the form of a lien or a charge on any of his existing assets. The buyer can also be asked to sign a promissory note or a bill of exchange but the note or the bill cannot be sold to a third party at a price different from its face value.