Musharakah is a word of Arabic origin which literally means sharing. In the context of business and trade it means a joint enterprise in which all the partners share the profit or loss of the joint venture. It is an ideal alternative for the interest-based financing with far reaching effects on both production and distribution. In the modern capitalist economy, interest is the sole instrument indiscriminately used in financing of every type. Since Islam has prohibited interest, this instrument can not be used for providing funds of any kind. Therefore, Musharakah can play a vital role in an economy based on Islamic principal.
The basic rules of Musharakah:
Musharakah or shirkat-ul- amwal is a relationship established by the parties through a mutual contract. There fore, it goes with out saying that all the necessary ingredients of a valid contract must be present here also. For example, the parties should be capable of entering in to a contract; the contract must take place with free consent of the parties’ with out any duress, fraud, or misrepresentation, etc.
Distribution of profit:
1- The proportion of profit to be distributed among the parners must be determined and agreed upon at the time of the contract, other wise the contract is not a valid contract under Shari'ah.
2- According to imam Malik and Imam Shafe'i, it is necessary that each partner’s share in the profit is exactly equal to the proportion of initial investment into the partnership.
3- According to Imam Ahmad, the ratio of profit distribution may vary, with out restriction, from the ratio of investment.
4- According to imam Ahmad, the ratio of profit distribution may vary, however, for silent partners (non-active partners, who only contribute capital) it can not higher than the ratio of investment.
Distribution of Loss:
All the Muslim jurists are unanimous that each partner’s share In loss must be exactly equal to the ratio of initial investment. Any thing to the contrary will render the contract invalid.
The nature of capital:
There are the following opinions on this subject,
1- According to imam Malik and some Hanbali jurists, the nature of capital is not a restriction in a Musharikah arrangement. There fore, in-kind (not-cash) contribution by partners are allowed. The share in partnership will be determined based on the market value of the commodity contributed.
2- According to Imam Abu Hanifah and Imam Ahmad, no in-kind contributions are allowed in a Musharakah arrangement. This is because they believe it poses problems if the partnership needs to be liquidated or redistributed.
3- Imam Shafe,I makes a distinction between replaceable commodities and irreplaceable commodities (Like cattle). The view is rather complex and not important for our purposes.
For the purposes of modern business, the view of Imam Malik has been widely accepted.
Management of Musharakah:
The normal principle of Musharakah is that every partner has a right to take part in its management and to work for it. However, the partner may agree upon a condition that the management shall be carried out by one on them, and no other partner shall work for the Musharakah. But in this case the sleeping partner shall be entitled to the profit only to the extent of his investment, and the ratio of profit allocated to him should not exceed the ratio of his investment, as discussed earlier in this article.
However, if all the partners agree to work for the joint venture, each one of them shall be treated as the agent of the other in all the matters of the business and any work done by one of them in the normal course of business shall be deemed to be authorized by all the partners.
Power and rights of partners in Musharakah:
After entering in to Musharakah contract, partners have the following rights,
1- The rights to sell the mutually owned property since all partners are representing each other in shirkah and all have right to buy and sell for business purposes.
2- The right to buy raw material or other stock on cash or credit using funds belonging to shirkah to put into business.
3- The right to hire people to carry out business if needed.
4- The right to use shirkah,s fund or goods in Mudarabah.
5- The right of giving shirkah,s funds as hiba (gift) or loan.
If one partner for purpose of investing in the business has taken a Qard-e- Hasan, then paying it becomes liable on both.
The difference between interest based financing and Musharakah:
Interest based financing:
1- A fixed rate of return on a loan advanced by the financier is predetermined irrespective of the profit earned or loss suffered by the debtor.
2- Results In injustice either to the creditor or to the debtor. If the debtor suffered a loss, it is unjust on the part of the creditor to claim a fixed rate of profit or return. Also if the debtor earns a very high rate of profit, it is injustice to the creditor to give him only small proportion of the profit leaving the rest for the debtor.
3- The financier can not suffer loss.
Musharakah:
1- Musharakah does not envisage a fixed rate of return. The return is based on the actual profit earned by the join venture.
2- The returns of the creditors are tied up with the actual profits accrued through the enterprise. The greater the profits of the enterprise, the higher the rate of return to the creditor. If the enterprise earns enormous profits, all of it can not be secured by the debtor exclusively but will be shared by common people e.g. depositors in the bank.
3- The financier can suffer loss, if the joint venture fails to produce fruits.
Termination of Musharakah:
It is agreed upon by the jurists that a partnership is terminated in the following cases if,
1- One of the partners terminates the partnership.
2- One of the partners dies (where the heirs get the choice to continue the partnership or liquidate it to draw their share from the partnership)
3- One of the partners becomes insane.
If the remaining partners want to continue the business under any of the above scenarios, it is achievable with mutual agreement. The remaining partners would have to purchase the share of the out-going partner.
Another question raised is whether the partners agree, at the time of contracting, that the partnership will not be terminated unless all partners agree to the termination. Though the earlier Fiqh books are silent on the issue, there is nothing in the shari’ah that would prohibit such an arrangement.