Musharakah Definition and Early Development
Musharakah Definition and Early Development
Islam being a “way of life” affects all facets of human existence including economics - Musharakah Definition and Early Development introduction. Thus, Muslims incorporate Islam in their business principles such as in banking and finance. The Islamic law necessitates that raising and recruitment of financial resources will be free of interest financing instruments and the established financing instruments should involve cost and profit sharing. This practice in the Islamic economy emerged from the moral sanctions of the Holy Quran and the Sunnah or the Guidance of Prophet Muhammad(Choudhury, 2001). The fundamentals of Muslim economics that are rooted from Islam include the Musharakah. In the non-Islamic economy, Musharakah is known as partnership.
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In the terminology of Islamic Figh, Shirkah pertains to all the forms of sharing or partnership. In Islamic jurisprudence, Shirkah that literally means sharing is widely used. The Shirkah has two main divisions: Shirkat-ul-milk and Shirkat-ul-‘aqd. A specific property being jointly owned by two or more persons is the meaning of Shirkat-ul-milk. The relationship of the people that owned the single property is termed as Shirkat-ul-milk. The Shirkat-ul-‘aqd on the other hand, is the second main division of Shirkah that means a mutual contract affects any certain partnership. In the non-Islamic economy, Shirkat-ul-‘aqd translates as the joint commercial enterprise. The Shirkat-ul-‘aqd have further subdivisions: Shirkat-ul-amwal, Shirkat-ul-A’mal, and Shirkat-ul-‘aqd/ Shirkat-ul-wujooh. The true synonym of Musharakah (partnership) in the Islamic economy is the shirkat-ul-amwal which is under the scope of Shirkat-ul-‘aqd, one of the main divisions of Shirkah. The Shirkah then in a sense has a wider scope than the Musharakah which has a rather limited scope as utilized in the Islamic jurisprudence(Usmani).
The learning on Musharakah today in the non-Islamic economy though exhibits the interchanging property of the Musharakah and the Shirkah, meaning the whole concept of sharing and partnership is considered as Musharakah. The term Musharakah was established just recently by scholars studying on the different modes of Islamic financing. Musharakah pertains to a specific type of Shirkah, the shirkat-ul-amwal – a kind of partnership between two or more individuals wherein there is a combination of their capital and labor, sharing of profits, and the partners share similar rights and liabilities(Usmani). Various scholars consider Musharakah as the purest Islamic financial instrument that serve as the proper representation of the Islamic spirit and cooperation(Beik, 2006).
The Holy Quran, Ijma or consensus of scholars, and Sunnah serve as the basis for the legality and feasibility of Musharakah according to the Islamic jurists. The law of contract in the Islamic economy rooted from the verses in the Quran that already states several kinds of contracts and general import contractual maxims. The verses in Quran served as the foundation of the business traditions in the Islamic economy. The principles of contract were drawn by the jurists of Islamic schools of law based on Quran verses and Islamic tradition. The Quran verses state that individuals should keep faith with contracts and promise to adhere to it. The Quran believers were encouraged not to consume their assets in vanity among themselves except if there is consent involved. Others will not enjoy the properties of any Muslim without the consent of that Muslim individual(Bakar).
Since Musharakah is a form of mutual contract among two parties, it is bound by the basics of a valid contract between two entities. The contract to be valid includes the premise that both of the contracting parties have the consent to enter into the contract and there is no duress, misrepresentation, or fraud involved in the contract. Musharakah have unique characteristics that pertain to the contract of two separate entities. Among these unique characteristics of Musharakah is the profit distribution. In the Shar’iah, the Musharakah will only be valid if the proportion distribution of the profit has been agreed upon by the two contracting parties. Unlike in the common form of partnership wherein the profit distribution is dependent on the amount of investment, the Musharakah profit distribution is based on the actual profit earned by the business. The distribution of the total profit between the contracting parties or partners depends on the amount of profit gained by the business(Usmani).
There are two types of Musharakah: shirkah al-milk or the non-contractual partnership and shirkah al-uqood or the contractual partnership. The shirkah al-milk is the co-ownership that involves two or more individuals having a joint-ownership of assets without having a formal agreement of partnership. Shirkah al-milk has two sub-types which are the ikhtiari or voluntary form and the jabriyyah or involuntary form. In the ikhtiari type of Shirkah al-milk, the joint purchase of partners of equipment result into the joint ownership of the acquired equipment. The compulsory of Ghair Ikhtiari type of Shirkah al-milk on the other hand involves the inheritance of the heirs of the partner of their ancestor’s part of the business after the death of the ancestor whom is a business partner(“Al – Musharakah,”).
Another peculiar characteristic of the Musharakah is the ratio of the profit. Various Muslim jurists have differing opinions regarding the ratio of the profit that is legal in the Shar’iah. According to Imam Malik and Imam Shafi’i, the proportion of the partner’s investment must be considered in the profit ratio computation. This means that if a partner invested 70% of the capital, it is necessary that he will receive 70% of the profit obtained by the business. The belief of Imam Ahmed on the other hand contradicts that of Imam Malik and Imam Shafi’i. Imam Ahmed believes that the ratio of investment can be not taken into consideration in the profit ratio as long as the contracting parties agree to it. His view means that a partner that invested 70% of the business capital does not necessarily mean that he will receive the 70% of the incurred profit. He can either have a lesser than 70 percent or higher than 70% of the profit(Usmani).
The third unique attribute of Musharakah is the sharing of the loss in the business. Both the contracting parties in the Musharakah will suffer any loss in the business based on the ratio of their investment unless there is an agreement in their contract that states a different amount of sharing of loss. The validity of the Musharakah contract thus necessitates that the partners will share the profits according to agreement but any loss will be divided according to the ratio of the investment(Usmani).
The nature of the capital in the Musharakah partnership requires that the capital to be considered is only in monetary form thus excluding the commodities. The Muslim jurists though also have differing views regarding the nature of the capital. Some Hanbali jurists and Imam Malik believe that there is no limitation of the capital to money only. The non-cash contributions among partners in the Musharakah as they believe are part of the investment. The contribution’s determined market value will be added to the investment of the contributing partner. Abu Hanifah and Imam Ahmed contradict to this because they believe that the nature of the capital in the Musharakah should only include the monetary form. The problem that arises in the liquidation and redistribution of commodity capital serve as their basis for their contradictory belief(Mirza, 2006).
The contracting partners of the Musharakah are entitled to the following rights after the signing of the contract: the right to sell properties that are mutually owned for business purposes; the right to purchase raw materials and other business necessities using the finances of the business; the right to hire workers according to the need of the business; the right to deposit finances; and the right to distribute the partnerships funds as loan or gifts. The rights of the partners will end if the Musharakah is terminated. The conditions wherein the Musharakah will be terminated are the following: upon accomplishment of the Musharakah’s goal; when one partner will decide to end the contract; during cases of death of the contracting parties; and damage to the share capital of one partner prior to mixing the total investment(“Al – Musharakah,”).
In cases of Musharakah being terminated because a partner decides to end it, the assets of the business will be liquidated and distributed to the partners on a pro rata basis. The assets that are in non-liquid form such as machinery and the likes will be sold and the proceeds of the sale will be dispensed to the partners. The Musharakah involves the joint ownership of all the assets and properties of the business thus everything will be properly inventoried and dispensed equally to the partners(“Al – Musharakah,”).
In Islamic banking, the application of the Musharakah is also observed. The Islamic banks are not mere leasers of capital but rather are also partners in business established with their financial support. The Islamic banks as partners contribute to the capital, share the profits, suffer financial losses according to agreement, and participate in the management of the businesses depending on the agreement between parties. There are two kinds of Musharakah that the Islamic banks are involved with. These are the permanent Musharakah and the diminishing Musharakah. Under the permanent or continued Musharakah, the bank shares the losses of a company as well as receives the annual profit share on a pro rata terms. There is no specification of termination of contract. On the contrary, the diminishing or digressive Musharakah is an exceptional kind of Musharakah wherein the client of the bank will eventually own the asset or the project established in partnership with the bank. There is the presence of an agreement between the client and the bank that as a partner the bank will receive its share of profit and the bank through a portion of the net income generated by the business receives payments for the financial capital provided by the bank. Along the process, there is reduction of the bank’s shared equity and the client will become the sole owner of the business(Ahmad, 1993).
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