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MusharakahMusharakah

KhairuddinKhairuddin ZakariaZakaria

khairuddinzakaria@gmail.comkhairuddinzakaria@gmail.com

INTRODUCTIONINTRODUCTION

The Islamic economy promotes equityThe Islamic economy promotes equity--based financing whereby the returns forbased financing whereby the returns forthe investors will be based on the actualthe investors will be based on the actualprofits of the enterprise.profits of the enterprise.

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Definition ofDefinition of MusyarakahMusyarakah The wordThe word musyarakahmusyarakah in Arabic is a derivative fromin Arabic is a derivative from syarakasyaraka oror to shareto share..

AlAl--ShirkahShirkah covers bothcovers both shirkahshirkah alal--mulkmulk a joint ownership of a commona joint ownership of a commonproperty as well asproperty as well as shirkahshirkah alal--aqadaqad or a partnership in a business as aor a partnership in a business as aconsequence of a mutual contract.consequence of a mutual contract.

The termThe term musyarakahmusyarakah,, as it is used in modern financing, is confined toas it is used in modern financing, is confined tothe second type ofthe second type of alal--shirkahshirkah only, that is, contractual partnership.only, that is, contractual partnership.

TheThe HanafiHanafi scholars definescholars define musyarakahmusyarakah as a contract between partnersas a contract between partnerson both capital and profit.on both capital and profit.

TheThe ShafiShafi’’ii scholars define it as the confirmation of the rights of two orscholars define it as the confirmation of the rights of two ormore people over a common property.more people over a common property.

HanbaliHanbali scholars, it is the amalgamation of rights and freedom to use.scholars, it is the amalgamation of rights and freedom to use. MalikisMalikis define it as permission to transact where each of the partnersdefine it as permission to transact where each of the partners

permits the other to transact with the partnership property whilpermits the other to transact with the partnership property while at thee at thesame time retaining his own right to transact with the same propsame time retaining his own right to transact with the same property.erty.

The definition given byThe definition given by HanafisHanafis, however, explains the essence of a, however, explains the essence of amodern partnership as a type of contract.modern partnership as a type of contract.

This definition seems to be more appropriate with reference to tThis definition seems to be more appropriate with reference to thehemodern connotation of the wordmodern connotation of the word musyarakahmusyarakah as a partnership whereas a partnership whereprofits are shared as per an agreed ratio whereas the losses areprofits are shared as per an agreed ratio whereas the losses are sharedsharedin proportion to the capital/investment of each partner.in proportion to the capital/investment of each partner.

SOURCES OF LAWSOURCES OF LAW QuranQuran:: TThere are several verses usually quoted in support ofhere are several verses usually quoted in support of musyarakahmusyarakah.. One of them is the verse that encourages mutual assistance or joOne of them is the verse that encourages mutual assistance or joint effortint effort

for good purposes:for good purposes: ““Help one another in righteousness and pietyHelp one another in righteousness and piety””.. (Al(AlMaidahMaidah:: 2).2). ( اإلثم والعدوان اإلثم والعدوانوتعاونوا على البر والتقوى وال تعاونوا علىوتعاونوا على البر والتقوى وال تعاونوا على"" ") ).).22::المائدةالمائدة"

MusyarakahMusyarakah is one of the forms of mutual assistance for the sake of gaininis one of the forms of mutual assistance for the sake of gaininggprofits in business by permitted means, therefore it is encouragprofits in business by permitted means, therefore it is encouraged in Islam.ed in Islam.AnotherAnother QuranicQuranic verse which is normally quoted to supportverse which is normally quoted to support musyarakahmusyarakah isisthe verse that specifically mentions about business partnershipthe verse that specifically mentions about business partnership ininwhich,which, Allah says:Allah says: ““Truly many are partners in business who wrong eachTruly many are partners in business who wrong eachother: not so do those who believe and work deed of righteousnesother: not so do those who believe and work deed of righteousnesss’’ andandhow few are they?how few are they?”” –– (Al(Al--Sad: 24)Sad: 24)

""ما ھمما ھمعض إال الذین آمنوا وعملوا الصالحات وقلیل عض إال الذین آمنوا وعملوا الصالحات وقلیل وإن كثیرا من الخلطاء لیبغي بعضھم على بوإن كثیرا من الخلطاء لیبغي بعضھم على ب"").).2424::صص((

The above verse reminds the partners to bind themselves to ethicThe above verse reminds the partners to bind themselves to ethical valuesal valuesin dealing with each other. This verse indirectly indicates thein dealing with each other. This verse indirectly indicates theacknowledgement of theacknowledgement of the QuranQuran for partnerships.for partnerships.

SunnahSunnah: T: The Prophet (he Prophet (pbuhpbuh) said that Allah) said that Allah s.w.ts.w.t. said in the form of. said in the form of HadithHadithqudsiqudsi::

““I am the third in the partners as long as there is no defector.I am the third in the partners as long as there is no defector. If one of theIf one of thepartners does betray the other, I cease to be the partner to thepartners does betray the other, I cease to be the partner to them.m.”” عن أبي عن أبي

خانھ خرجت من خانھ خرجت من إن اهللا تعالى یقول أنا ثالث الشریكین ما لم یخن أحدھما صاحبھ فإذا إن اهللا تعالى یقول أنا ثالث الشریكین ما لم یخن أحدھما صاحبھ فإذا ::ھریرة رفعھ قالھریرة رفعھ قال..33833383::، رقم، رقم276276، ص، ص22وراه أبو داود، جوراه أبو داود، ج..بینھمابینھما

ThisThis HadithHadith indicates that Allah will safeguard the partners and the trade.indicates that Allah will safeguard the partners and the trade. ItIttherefore, encourages the Muslims to enter into partnerships, prtherefore, encourages the Muslims to enter into partnerships, provided thatovided thateach of the parties is honest in respect of the rights of the oteach of the parties is honest in respect of the rights of the other.her.

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ELEMENTS & CONDITIONSELEMENTS & CONDITIONS

The elementsThe elements ofof musyarakahmusyarakah include:include:offer and acceptance, contracting parties (two or more contractioffer and acceptance, contracting parties (two or more contractingngparties), subject matter of the agreement (capital and work).parties), subject matter of the agreement (capital and work).

Condition of subject matter of the contract:Condition of subject matter of the contract:The subject matter of the contract, which is the capital, has toThe subject matter of the contract, which is the capital, has to fulfilfulfil thethefollowing conditions:following conditions:

1:1: Capital contributed shall be in cash, gold, silver or their equCapital contributed shall be in cash, gold, silver or their equivalent inivalent invalue. There is no difference among the jurists in this respect.value. There is no difference among the jurists in this respect.

2:2: Capital may consist of trading assets such as goods, property aCapital may consist of trading assets such as goods, property andndequipment.equipment.

It may also be in the form of intangible rights, such as trademaIt may also be in the form of intangible rights, such as trademark, andrk, andsimilar rights, provided they are valued at their cash equivalensimilar rights, provided they are valued at their cash equivalent accordingt accordingto what the partners have agreed upon.to what the partners have agreed upon.

3:3: TheThe ShafiShafi’’isis andand MalikisMalikis require capital provided by partners to berequire capital provided by partners to becommingled in order that no privilege is given to the share of ecommingled in order that no privilege is given to the share of either ofither ofthem.them.

TheThe HanafisHanafis do not stipulate this condition provided the capital was indo not stipulate this condition provided the capital was incash, while thecash, while the HanbalisHanbalis do not require commingling of capital at all.do not require commingling of capital at all.

THE BASIC RULES OFTHE BASIC RULES OF MUSYARAKAHMUSYARAKAH

1: Distribution of Profit1: Distribution of Profit1.1. The proportion of profit to be distributed between the partnersThe proportion of profit to be distributed between the partners must be agreedmust be agreed

upon at the time of affecting the contract.upon at the time of affecting the contract.2.2. The ratio of profit for each partner must be determined in propoThe ratio of profit for each partner must be determined in proportion to the actualrtion to the actual

profit accrued to the business and not necessarily in proportionprofit accrued to the business and not necessarily in proportion to the capitalto the capitalinvested by him.invested by him.

3.3. It should not be fixed as a lump sum amount for any one of the pIt should not be fixed as a lump sum amount for any one of the partners or anyartners or anyrate of profit tied up with his investment.rate of profit tied up with his investment.

4.4. The distribution of profit is whether it is necessary that the rThe distribution of profit is whether it is necessary that the ratio of profit for eachatio of profit for eachpartner to conform to the ratio of capital invested by him?partner to conform to the ratio of capital invested by him?TheThe MalikisMalikis and theand the ShafiShafi‘‘isis view that it is necessary for the validity ofview that it is necessary for the validity ofmusyarakahmusyarakah that each partner gets the profit exactly in the proportion ofthat each partner gets the profit exactly in the proportion of hishisinvestment.investment.However, theHowever, the HanbalisHanbalis held a contrary view by saying that the ratio of profit mayheld a contrary view by saying that the ratio of profit maydiffer from the ratio of investment if it is agreed between thediffer from the ratio of investment if it is agreed between the partners based onpartners based onfree consent.free consent.

TheThe HanafisHanafis opined that the ratio of profit may differ from the ratio of inopined that the ratio of profit may differ from the ratio of investmentvestmentin normal conditions. However, if a partner has put an express cin normal conditions. However, if a partner has put an express condition in theondition in theagreement that he will never work for theagreement that he will never work for the musyarakahmusyarakah and will remain a sleepingand will remain a sleepingpartner throughout the term of thepartner throughout the term of the musyarakahmusyarakah, then his share of profit cannot, then his share of profit cannotbe more than the ratio of his investment.be more than the ratio of his investment.

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Cont. Basic rulesCont. Basic rules2: Sharing of Loss2: Sharing of LossAll Muslim jurists are unanimous on the point that each partnerAll Muslim jurists are unanimous on the point that each partner shall bear the lossshall bear the lossexactly according to the ratio of his investment.exactly according to the ratio of his investment.

3: Management of3: Management of MusyarakahMusyarakahIn aIn a musyarakahmusyarakah venture, all partners have a right to take part in its managemenventure, all partners have a right to take part in its managementtand to work for it since all of them contributed capital for sucand to work for it since all of them contributed capital for such an enterprise.h an enterprise.

4: Termination of4: Termination of MusyarakahMusyarakahthethe musyarakahmusyarakah can be terminated in any one of the following instances:can be terminated in any one of the following instances:

1:1: Every partner has a right to terminateEvery partner has a right to terminate musyarakahmusyarakah at any time after giving hisat any time after giving hispartner a notice to this effect, whereby thepartner a notice to this effect, whereby the musyarakahmusyarakah will end.will end.

if the assets are not liquidated, the partners may agree eitherif the assets are not liquidated, the partners may agree either on the liquidation ofon the liquidation ofthe assets or on their distribution or partition between the parthe assets or on their distribution or partition between the partners.tners.

If there is a dispute between the partners on this matter i.e. oIf there is a dispute between the partners on this matter i.e. one partner seeksne partner seeksliquidation while the other wants partition or distribution of tliquidation while the other wants partition or distribution of the nonhe non--liquid assets,liquid assets,the latter shall be preferred.the latter shall be preferred.because after the termination ofbecause after the termination of musyarakahmusyarakah, all assets are in the joint ownership, all assets are in the joint ownershipof the partners, and a coof the partners, and a co--owner has a right to seek partition or separation, and noowner has a right to seek partition or separation, and noone can compel him on liquidation.one can compel him on liquidation.

Cont. Basic rulesCont. Basic rules2:2: If any one of the partners passes away.If any one of the partners passes away.3:3: If any one of the partners becomes insane or incapable of effecIf any one of the partners becomes insane or incapable of effectingtingcommercial transactions.commercial transactions.

5: Termination of5: Termination of MusyarakahMusyarakah without Closing the Businesswithout Closing the Business If one of the partners wants termination of theIf one of the partners wants termination of the musyarakahmusyarakah, while the other, while the other

partner or partners would like to continue with the business, thpartner or partners would like to continue with the business, this purpose can beis purpose can beachieved by mutual agreement.achieved by mutual agreement.

The partners who want to run the business may purchase the shareThe partners who want to run the business may purchase the share of theof thepartner who wants to terminate his partnership.partner who wants to terminate his partnership.

In this respect, one of the pertinent questions is whether the pIn this respect, one of the pertinent questions is whether the partners can agree,artners can agree,while entering into the contract ofwhile entering into the contract of musyarakahmusyarakah, on a condition that the liquidation, on a condition that the liquidationor separation of the business shall not be effected unless all tor separation of the business shall not be effected unless all the partners or thehe partners or themajority of them wants to do so.majority of them wants to do so.

In addition, a single partner who wants to come out of the partnIn addition, a single partner who wants to come out of the partnership shall haveership shall haveto sell his share to the other partners and shall not force themto sell his share to the other partners and shall not force them to liquidate orto liquidate orseparate.separate.

Most of the classical literature ofMost of the classical literature of fiqhfiqh seems to be silent on this question.seems to be silent on this question.However, it appears that there is no objection on such an agreemHowever, it appears that there is no objection on such an agreement from theent from theShariahShariah point of view provided that the partners agree to such a conditpoint of view provided that the partners agree to such a condition at theion at thebeginning of thebeginning of the musyarakahmusyarakah agreement.agreement.

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MUSYARAKAHMUSYARAKAH AS MODE OF FINANCINGAS MODE OF FINANCING

MusyarakahMusyarakah is applicable in different modes of financing. Some of theis applicable in different modes of financing. Some of themodes are as follows:modes are as follows:1: Project Financing1: Project FinancingMusyarakahMusyarakah is one of the tools that can be used in project financing. Thisis one of the tools that can be used in project financing. Thisconcept can beconcept can be utilisedutilised particularly if investment comes from differentparticularly if investment comes from differentparties.parties.2: Financing of a Single Transaction2: Financing of a Single TransactionMusyarakahMusyarakah can also be used for financing a single transaction.can also be used for financing a single transaction.this instrument can bethis instrument can be utilisedutilised for financing imports and exports.for financing imports and exports.

The banks can also use this instrument for import financing.The banks can also use this instrument for import financing. If the letter of credit is opened with some margin, the form ofIf the letter of credit is opened with some margin, the form of musyarakahmusyarakah

can be used.can be used. Similarly,Similarly, musyarakahmusyarakah is also applicable in export financing.is also applicable in export financing. The exporter has a specific order from abroad. The price on whicThe exporter has a specific order from abroad. The price on which theh the

goods will be exported is wellgoods will be exported is well--known beforehand, and the financier canknown beforehand, and the financier caneasily calculate the expected profit.easily calculate the expected profit.

He may finance on the basis ofHe may finance on the basis of musyarakahmusyarakah and may share the amountand may share the amountof export bill on a preof export bill on a pre--agreed percentage.agreed percentage.

Cont.Cont. 3: Financing of the Working Capital3: Financing of the Working Capital The instrument ofThe instrument of musyarakahmusyarakah may be used where finances aremay be used where finances are

required for the working capital of a running business in the forequired for the working capital of a running business in the followingllowingmanner:manner:

The capital of the running business may be evaluated with mutualThe capital of the running business may be evaluated with mutualconsent.consent.

As stated earlier, apart from cash, nonAs stated earlier, apart from cash, non--liquid assets can also form part ofliquid assets can also form part ofthe capital on the basis of evaluation. This view can be adoptedthe capital on the basis of evaluation. This view can be adopted here.here.

In this way, the value of the business can be treated as the invIn this way, the value of the business can be treated as the investmentestmentof the person who seeks finance, while the amount given by theof the person who seeks finance, while the amount given by thefinancier can be treated as his share of investment.financier can be treated as his share of investment.

TheThe musyarakahmusyarakah may be affected for a particular period, like one year ormay be affected for a particular period, like one year orsix months or less.six months or less.

Both parties agree on a certain percentage of the profit to be gBoth parties agree on a certain percentage of the profit to be given to theiven to thefinancier, which should not exceed the percentage of his investmfinancier, which should not exceed the percentage of his investment,ent,because he shall not work for the business.because he shall not work for the business.

On the expiry of the term, all liquid and nonOn the expiry of the term, all liquid and non--liquid assets of the businessliquid assets of the businessare again evaluated and the profit may be distributed on the basare again evaluated and the profit may be distributed on the basis of thisis of thisevaluation.evaluation.

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Some Issues inSome Issues in MusyarakahMusyarakah FinancingFinancing

There are some who have raised concern aboutThere are some who have raised concern about utilisingutilising musyarakahmusyarakah as a modeas a modeof financing. The following discussion will concentrate on someof financing. The following discussion will concentrate on some objections raisedobjections raisedfrom the practical point of view against usingfrom the practical point of view against using musyarakahmusyarakah as a mode ofas a mode offinancing.financing.A. Risk of LossA. Risk of Loss

The depositors being constantly exposed to the risk of loss, soThe depositors being constantly exposed to the risk of loss, so they will not wantthey will not wantto deposit their money in the banks and financial institutions ato deposit their money in the banks and financial institutions and thus theirnd thus theirsavings will either remain idle or will be used in transactionssavings will either remain idle or will be used in transactions outside of theoutside of thebanking channels, which will not contribute to economic developmbanking channels, which will not contribute to economic development.ent.

B. Dishonesty and Moral HazardB. Dishonesty and Moral Hazard Dishonesty is another hesitation againstDishonesty is another hesitation against musyarakahmusyarakah financing in the sense thatfinancing in the sense that

dishonest clients may exploit the instrument ofdishonest clients may exploit the instrument of musyarakahmusyarakah by not paying anyby not paying anyreturn to the financiers.return to the financiers.

They can always show that the business did not earn any profit.They can always show that the business did not earn any profit. thethe solutionsolution to this problem is If the banks in a country are run on a pureto this problem is If the banks in a country are run on a pure IslamicIslamic

pattern with excellent regulation from the Central Bank and thepattern with excellent regulation from the Central Bank and the government, thegovernment, theproblem of dishonesty is not hard to overcome.problem of dishonesty is not hard to overcome.

a wella well--designed system of auditing should be implemented whereby thedesigned system of auditing should be implemented whereby theaccounts of all clients are fully maintained and properly controaccounts of all clients are fully maintained and properly controlled and the profitslled and the profitsmay be calculated on the basis of gross margins only.may be calculated on the basis of gross margins only.

Cont.Cont. C. Secrecy of the BusinessC. Secrecy of the Business Another concern againstAnother concern against musyarakahmusyarakah is that, by making the financier a partner inis that, by making the financier a partner in

the business of the client, it may disclose the secrets of the bthe business of the client, it may disclose the secrets of the business to theusiness to thefinancier, and through him to other traders.financier, and through him to other traders.

This concern can be overcome by requesting the insertion of certThis concern can be overcome by requesting the insertion of certain conditionsain conditionsin thein the musyarakahmusyarakah agreement.agreement.

the client, while entering into thethe client, while entering into the musyarakahmusyarakah, may place a condition that the, may place a condition that thefinancier will not interfere with the management affairs, and thfinancier will not interfere with the management affairs, and that he will notat he will notdisclose any information about the business to any person withoudisclose any information about the business to any person without priort priorpermission from the client.permission from the client.

D. ClientsD. Clients’’ Unwillingness to Share ProfitsUnwillingness to Share Profits the clients are not willing to share with the banks the actual pthe clients are not willing to share with the banks the actual profits of theirrofits of their

business.business. This reluctance is based on two reasons:This reluctance is based on two reasons: 1.1. They think that the bank has no right to share in the actual proThey think that the bank has no right to share in the actual profit, which mayfit, which may

be substantial, because the bank has nothing to do with the manabe substantial, because the bank has nothing to do with the management orgement orrunning of the business and why they should share the fruits ofrunning of the business and why they should share the fruits of theirtheir labourlabour withwiththe bank that merely provides funds.the bank that merely provides funds.

2.2. the clients are afraid to reveal their true profits to the banthe clients are afraid to reveal their true profits to the banks, lest theks, lest theinformation is also passed on to the tax authorities, and as sucinformation is also passed on to the tax authorities, and as such clientsh clients’’ taxtaxliability increases.liability increases.

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DiminishingDiminishing MusyarakahMusyarakah

DiminishingDiminishing musyarakahmusyarakah oror musyarakahmusyarakah mutanaiqisahmutanaiqisah isisanother form ofanother form of musyarakahmusyarakah which was developed recentlywhich was developed recentlyby the scholars.by the scholars.

It is aIt is a musyarakahmusyarakah in which the Islamic bank agrees toin which the Islamic bank agrees totransfer gradually to the other partner its (the Islamic banktransfer gradually to the other partner its (the Islamic bank’’s)s)share in theshare in the musyarakahmusyarakah,, so that the Islamic bankso that the Islamic bank’’s shares sharedeclines and the other partnerdeclines and the other partner’’s share increases until thes share increases until thelatter becomes the sole proprietor of the venture.latter becomes the sole proprietor of the venture.

According to this concept, a financier and his clientAccording to this concept, a financier and his clientparticipate either in the joint ownership of a property or anparticipate either in the joint ownership of a property or anequipment, or in a joint commercial enterprise.equipment, or in a joint commercial enterprise.

The share of the financier is further divided into a number ofThe share of the financier is further divided into a number ofunits and it is understood that the client will purchase theunits and it is understood that the client will purchase theunits of the share of the financier one by one periodically,units of the share of the financier one by one periodically,thus increasing his own share until all the units of thethus increasing his own share until all the units of thefinancier are purchased by him so as to make him the solefinancier are purchased by him so as to make him the soleowner of the property or the commercial enterprise.owner of the property or the commercial enterprise.

DOCUMENTATION OFDOCUMENTATION OFMUSYARAKAHMUSYARAKAH

As for the documentation of the contract ofAs for the documentation of the contract of musyarakahmusyarakah,,the following are some important elements that shall bethe following are some important elements that shall beincluded in the documentation and the samples of salientincluded in the documentation and the samples of salientimportant features in the contract are as follows:important features in the contract are as follows:

1.1.The Parties: An Islamic bank as the first partner andThe Parties: An Islamic bank as the first partner andthe client as the second partner.the client as the second partner.

2.2. The Institution hereby agrees, at written request of theThe Institution hereby agrees, at written request of theClient, to provide financing up to a sum of RM XX on theClient, to provide financing up to a sum of RM XX on theterms and conditions hereinafter contained (whichterms and conditions hereinafter contained (whichfinancing is hereinafter referred to asfinancing is hereinafter referred to as ““InstitutionInstitution’’ssInvestmentInvestment””).).

3.3.This Agreement shall be valid for a period of XX yearsThis Agreement shall be valid for a period of XX yearsfrom the date of first disbursement of the Institutionfrom the date of first disbursement of the Institution’’ssInvestment.Investment.

And so on till the end of the agreement.And so on till the end of the agreement.

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Thank youThank you

شكرا جزیالشكرا جزیال