Presentation Mudharabah and Musyarakah Final

8/11/2019 Presentation Mudharabah and Musyarakah Final

1/29

1

HAIZAM FITRI BIN ABDUL JALIL

2008268206

SITI NURAMANI BINTI ABDUL MANAB

2008261672

SITI NUR HANIM BINTI ISMAIL

2008268228


2/29

2

Islamic Law of Transactions (Law 737)

Research Topic:

Mudharabah and Musyarakah are among the

products introduced in Islamic Law in order to

avoid the practice of riba (interest). Compare

and contrast these two contracts.


3/29


4/29

4

Definition (cont..)

Riba (interest): the extra money that you pay for borrowing

money from bank or the money that you earn when you keep

money in a bank. (Oxford Wordpower Dictionary, new 3rd

edition)

Prohibited in Islam through Al-Quran verse (3.130) You whobelieve, devour not usury, double and multiplied; but fear God

that you may [really] prosper. (Article by Hussein Hassan;

Contracts in Islamic Law: The Principles of Commutative

Justice & Liberality (2002))

The Prophet p.b.u.h said: Gold for gold, silver for silver,wheat for wheat, barley for barley, date for date, salt for salt, of

the same quantity and quality, from hand to hand. If there is a

surplus, this is usury. If the article are of different nature, sell

as you please, but from hand to hand. (from same article)


5/29

5

Cont..

Furthermore, Al-Quran verse 2:275; Allah permitted

bay (sale and purchase) and prohibited riba (interest

or usury). [The Practices of Shariah Principles in

Instrument of Islamic Financial System : An

Overview by Fadillah Mansor)

In applying the above verse, muslim scholar as wellas the practitioners established principles of

mudharabahand musyarakah.


6/29

6

FEATURES OF MUDHARABAH

Agreement between at least 2 parties known as lender/investor (I)

(ras al-mal) & entrepreneur (E)(mudarib).

Ientrust money to Ewho will manipulate for profit in the agreed

manner. If any, Iwill receive principles and profit on pre agreed

proportion and remaining balance will be kept by E.

Profit will be on proportional basis not on lump sum or guaranteed

return. It revealed no unfair terms to be shouldered by E.

Uncontrollable loss by E, Iwill face it consequence of financial losses

(tangible) but Eonly losses time, effort or may be reputation in the

eye of future investor (intangible).

Itend to act as sleeping partner.

Only Icontribute the capital. (all from Fadillah Mansors article)


7/29

CONT

Ali bin Abi Talib empahsised that all losses must be paid for out ofcapital.

If the profits are divided equally as per their agreement, no losses will

be charged to the mudarib.

If the investor has stipulates the conditions that the mudarib should

not enter into any transaction involving certain conditions and the

investor did not follow the instruction then the investor is not liable to

any repayment or replacement of the capital

7


8/29

8

FEATURES OF MUSHARAKAH

2 broad categories:

Sharikah al-mulk i.e property partnership

Sharikah al-aqd i.e contractual partnership

5 types of Sharikah al-aqd:

Sharikah al-mal or finance partnership

Sharikah al-amal or labour partnership

Sharikah al-wujuh or credit partnership

Sharikah al-inan or limited investment partnership

Sharikah al mufawadah or unlimited investment


9/29

9

cont,.

Joint-venture agreement involves 2 parties for specific businessactivity for the sake of profit.

Timely based agreement or fulfillment of certain objective

Both parties will contribute capital and involve in the management ofthat business activity. Capital can be in any form of immovableproperty or cash.

Profit sharing based on specified agreed ratio.

Consequence of any loss, parties shoulder the loss in proportion totheir share of financing.


10/29

SHARIKAHAL-MULK

The origin of the partnership is the joint ownership of property.

Joint ownership is its only qualification, and no joint exploitation of

property is necessary.

It occurs when two or more people are partners in the possession of

property.

The rule governing this type of sharikah is that any increase in the

property shall be shared by the co-owners in proportion with the

extent of their ownership.

Each of them is in the category of a stranger in regard to any action

on the part owned by his colleague.

It is unlawful for either partner to perform any act with respect to the

othersshare except with the lattersexpress permission.

10


11/29

CONT

In terms of liability of the partners, they are quite independent of each

other, except for actions based on express authorizationby any of the

partners.

Their partnership is only in terms of ownership and potential sharing

of any profit or increase in the co-owned property, not in term of

sharing the liabilities arising from the partnersactions.

This type of sharikah may not be known in the common law or

Malaysian law. In fact mere joint-ownership is generally insufficient to

constitute a partnership in common and Malaysian law

11


12/29

SHARIKAHAL-AQD

The origin of the partnership is the contract between the parties.

The structure of this type of sharikah may have more similarities with

the normal partnership in common law and Malaysian law.

For sharikah al `aqd, joint ownership is not an element necessary for

the establishment of the partnership.

The emphasis is rather on the joint exploitation of capital and the joint

participation in profits and losses, based on the terms of the

partnership contract.

Joint ownership is one possible consequence, and not a prerequisite

for the formation of sharikah al `aqd

12


13/29

CONT

The jurists further sub-divide Sharikah Al Aqd into various other

categories.

The subdivisions depend on a number of factors. If the underlying

factor is the subject matter of capital contribution, sharikah al `aqd

can be sub-divided into three main categories:-

(1) sharikah al amwal,

(2) sharikah al a`mal

(3) sharikah al wujuh.

When the subject matter of the capital is money, it becomes sharikah

al amwal (monetary partnership).

If the capital is in the form of labour, it becomes sharikah al a`mal

(labour partnership).

If the capital is in the form of reputation or creditworthiness, it

becomes sharikah al wujuh (reputation partnership).13


14/29

CONT

The jurists also make further sub-divisions to sharikah al `aqd based

on the terms of the contract, i.e., whether the partners are required to

contribute equally to the capital and enjoy full equality in exploiting

the capital and sharing the profit or not.

Based on this consideration, sharikah can be divided into two types,

sharikah al mufawadah and sharikah al inan. Sharikah al mufawadah means an unlimited investment partnership,

whereby each partner must contribute equally to the capital, and

enjoys full and equal authority to transact with the partnership capital

or property.

The Hanafis consider each partner as an agent (wakil) for thepartnership business and stands as surety (kafil) for the other

partners. Thus, the partners can be made jointly and severally

responsible for the liabilities of their partnership business provided

that such liabilities have been incurred in the ordinary course of

business.14


15/29

CONT

This type of sharikah clearly implies unlimited liability on the part of

partners since they are both agents and guarantors of each other.

Sharikah alinancan be defined as a limited investment partnership.

Whereby each partner may only transact with the partnership capital

according to the terms of the partnership agreement and to the

extent of the joint capital. Hence, their liability towards third parties isseveral but not joint.

The liability of partners in Sharikah Al`inan resembles that of modern-

day limited liability partnerships.

Both Sharikah Al-Mufawadah and Sharikah Al`inan can occur in all

the three earlier types of sharikah, i.e., Sharikah Al Amwal (monetorypartnership), Sharikah Al A`mal (labour partnership) and Sharikah Al

Wujuh (reputation partnership).

15


16/29

CONT

Sharikah Al Mufawadah is rarely opted for due to the higher degree

of responsibility and the practical difficulty to achieve full equality

between the partners in all aspects of the partnership

16


17/29

COMPAREANDCONTRAST

Definition

Profit sharing.

Sunnah

It was narrated by Ibn Majah that

the Prophet was reported to

have said:

Threethings done which have a

blessing in it, namely, credit sale,

Mudharabah, and a mixture of

flour and barley for the purpose

of invitation, and not for the

purpose of sale

Definition

Partnership. Literally it means a

joint venture agreements

between 2 parties to engage in

a specific business activity with

an aim making profit.

MUDHARABAH MUSYARAKAH

17


18/29

Mudharabah capital represents

savings for the owner or

investor but is generally a

source of livehood for theworking partner or

entrepreneur.

Method

It the basis of reorganizing

banking activity in an interest

free framework. This can be

done by entering into 2 tier

Mudharabah Agreement.

Method

The Islamic investment

company and the client agree

to participate in a joint venture

to be completed within an

agreed period of time.

18


19/29

First Tier

Between the bank and thedepositor who agrees to put

money in the banks investment

account and to share profit with

it.

In this case, the Depositors are

the providers of the capital and

the Bank functions as the

Manager of funds.

Both parties contribute to thecapital of the operation in

varying degrees and agree to

divide the net profit in

proportion to the amounts

invested by each.

19


20/29

Second Tier

Between the bank and the

entrepreneurs who seek

finance from the Bank on the

conditions that profit accruing

from their business will be

shared between them and the

bank in previously agreedproportion, but the lost shall be

borne by the financier only.

In this case, the Bank functions

as provider of capital and the

Entrepreneur work as the

Manager.

20


21/29

In case there is more than one

financier of the same project i.e

one project is jointly financed

by several Banks, profits are tobe shared in mutually agreed

proportion previously

determined but lost is to be

shared in the proportion in

which the different financiers

have invested the capital.

21


22/29

Principle

As a basis of financial

intermediation in the Islamiceconomy is offered as a viable

basis for an interest free

banking system.

The creditor does not earninterest on the fixed rate in this

system but participate in the

business risks and earn the

share of the profit.

Thus, under an Islamic Banking

system, the cost of capital is

not zero, i.e, analogous to a

zero interest rate, as some

people assume it to be.

Principle

Both parties will provide capital

and the investor or lender mayalso participate in the

management.

22


23/29

The only difference between

Islamic banking and the

interest banking in this respect

is that the cost of capital ininterest based banking is

expressed in terms of a

predetermined fixed rate, while

in Islamic Banking, it is

expressed in absolute amount

which may also be expressedas a ratio of profit.

The distribution of profit

between two parties must

necessarily be on a

proportional basis and cannot

be a lump sum or a guaranteed

amount.

23


24/29


25/29

Whenever the Mudharabah

incurred losses, such losses

stand to be compensated by

the profits of future operationincurs losses, such losses

stand to be compensated by

the profits of future operations

of the Mudharabah.

The losses brought forward

should be set again the future

profits.

All in all, the distribution of

profit depends on the finalresult of the operations at the

time of liquidation of the

Mudharabah contract.

25


26/29

If losses are greater than the

profits at the time of liquidation,

the balance (net loss) must be

deducted from the capital.

If the total Mudharabah

expenses are equal to the total

Mudharabah revenues, the

capital provider will receive his

capital back without either profitor loss, and there will be no

profit in which the entrepreneur

is entitled to share. If profit

realized, it must be distributed

between parties as per

Agreement.

26


27/29

Liability

Entrepreneur shall not be liable

for any loss of the venture.

Thus, if the Mudharabah

business runs into a loss, only

the investor will have to bear

the loss.

Liability

In the event of loss, all parties

bear the loss in proportion tothe share of financing

27


28/29

Period

Continues as such for as long

as the entrepreneur does not

contribute his own funds to the

business.

Period

Each partner is entitled to

terminate the partnership aftergiving his partner(s) due notice to

the effect, in which the case he

shall be entitled to his share in the

partnership, and the withdrawal

would not necessitate the

termination of the partnership ofthe remaining partners.

It come to an end at the expiry date

or before the expiry date if the

partners agree to terminate it

prematurely, or, in the case ofpartnership in a particular

business, by actual liquidation of

the assets that constitute the

subject matter.28


29/29

CONCLUSION

Although equity financing was not dealt with th Quran, the Sunnah affirmed that

Uqud al Ishtirak (profit sharing contracts of Al Mudharabah and Al- Musharakah

practised by pre-Islamic Arab society are allowed in Islam.

As stated earlier, this would extend to the profit sharing contracts practised by

Pre-Islamic Arab society. On this basis, equity financing was allowed in islam as

well.

Surah An-Nisa(4), verse 32 :

Do not convert the bounties which God has bestowed more abundantly on

some of you than on others. Men are allowed what they earn, and women are

alloted what they earn. Ask God for something of His bounty.

- The above verse reiterates the principle that no one may claim more than he

has earned.

29

Documents

Presentation Mudharabah and Musyarakah Final