The basic rules of Musharakah

Musharakah or Shirkat-ul-amwal is a relationship established by the parties through a mutual contract. Therefore, it goes without saying that all the necessary ingredients of a valid contract must be present here also. For example, the parties should be capable of entering into a contract; the contract must take place with free consent of the parties without any duress, fraud or misrepresentation, etc

But there are certain ingredients, which are peculiar to the contract of "Musharakah". They are summarized here:

Basic rules of Capital:

The capital in a Musharakah agreement should be:

  1. a) Quantified (Ma’loom): Meaning how much etc.
  2. b) Specified (Muta’aiyan): Meaning specified currency etc.
  3. c) Not necessarily be merged: The mixing of capital is not required.
  4. d) Not necessarily be in liquid form: Capital share may be contributed either in cash/liquid or in the form of commodities. In case of a commodity, the market value of the commodity shall determine the share of the partner in the capital.

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 partners may agree upon a condition that the management shall be carried out by one of 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.

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 matters of business. Any work done by one of them in the normal course of business shall be deemed as authorized by all partners.

Basic rules of distribution of Profit

  1. The ratio of profit for each partner must be determined in proportion to the actual profit accrued to the business and not in proportion to the capital invested by him. E.g. if it is agreed between them that ‘A’ will get 1% of his investment, the contract is not valid.
  2. It is not allowed to fix a lump sum amount for anyone of the partners or any rate of profit tied up with his investment. Therefore if ‘A’ & ‘B’ enter into a partnership and it is agreed between them that ‘A’ shall be given Rs.10,000/- per month as his share in the profit and the rest will go to ‘B’, the partnership is invalid.
  3. If both partners agree that each will get percentage of profit based on his capital percentage, whether both work or not, it is allowed.
  4. It is also allowed that if an investor is working, his profit share (%) could be more than his capital base (%) irrespective whether the other partner is working or not. Eg. if ‘A’ & ’B’ have invested Rs.1000/- each in a business and it is agreed that only ‘A’ will work and will get 2/3rd of the profit while ‘B’ will get 1/3rd. Similarly if the condition of work is also imposed on ‘B’ in the agreement, then also the proportion of profit for ‘A’ can be more than his investment.
  5. If a partner has put an express condition in the agreement that he will not work for the Musharakah and will remain a sleeping partner throughout the term of Musharakah, then his share of profit cannot be more than the ratio of his investment. However, Hanbali school of thought considers fixing the sleeping partners share more than his investment to be permissible. 6. It is allowed that if a partner is not working, his profit share can be established as less than his capital share.
  6. If both are working partners, the share of profit can differ from the ratio of investment. Eg. Zaid & Bakar both have invested Rs.1000/- each. However Zaid gets 1/3rd of the total profit and Bakar 2/3rd, this is allowed. This opinion of Imam Abu Hanifa is based on the fact that capital is not the only factor for profit but also labour and work. Therefore although the investment of two partners is the same but in some cases quantity and quality of work might differ.
  7. If only a few partners are active and others are only sleeping partners, then the share in the profit of the active partner could be fixed at higher than his ratio of investment eg. ‘A’ & ’B’ put in Rs.100 each and it is agreed that only ‘A’ will work, then ‘A’ can take more than 50% of the profit as his share. The excess he receives over his investment will be compensation for his services.

Basic rules of distribution of Loss

All scholars are unanimous on the principle of loss sharing in Shariah based on the saying of Syedna Ali ibn Talib that is as follows:

“Loss is distributed exactly according to the ratio of investment and the profit is divided according to the agreement of the partners.”

Therefore the loss is always subject to the ratio of investment eg. if ‘A’ has invested 40% of the capital and ‘B’ 60%, they must suffer the loss in the same ratio, not more, not less. Any condition contrary to this principle shall render the contract invalid.

Powers & Rights of Partners in Musharakah:

After entering into a Musharakah contract, partners have the following rights:

  1. a) The right to sell the mutually owned property since all partners are representing each other in Shirkah and all have the right to buy & sell for business purposes.
  2. b) The right to buy raw material or other stock on cash or credit using funds belonging to Shirkah to put into business.
  3. c) The right to hire people to carry out business if needed.
  4. d) The right to deposit money & goods of the business belonging to Shirkah as depositor trust where and when necessary.
  5. e) The right to use Shirkah’s fund or goods in Mudarabah.
  6. f) 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-Hasana, then paying it becomes liable on both.

Source: Dr. Muhammad Imran Ashraf Usmani, Meezan Bank’s Guide to Islamic Banking.
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