Civil Partnership in Islamic Finance

This contract involves mixing the capital of one or more partners with the capital of the Islamic bank on a joint-venture basis for the performance of a specific job in the fields of production, trade, and services for a limited period. This is an optional partnership in that, unless a specific duration is stated at the signing of the contract, any one of the partners may withdraw from it at anytime. Again, this is a very flexible contract that can be used and applied to a wide variety of activities. One good example is in constructing a house, an apartment, or business premises, for that matter. The duration of any of these is when construction has been completed. The mode of settlement of accounts should be known and may adopt one of the following arrangements:

1. A non-bank partner may purchase the finished ‘product’ at the end of the agreement, at the current sale price;
2. A non-bank partner may purchase the finished ‘product’ at the end of the agreement, at a price to be fixed with the concurrence of partners.

In either case, the share of each partner may be paid at different times and on the basis of the progress reports. The buyer can purchase on an installment basis, the period of which must have been stated in the contract. In the first option, the Islamic bank, which is not the final buyer, protects its depositors by enjoying the likely increase in the general price level. The bank might choose the second option in order to encourage the real or legal person in need of the ‘product.’ Finally, the banks are prevented from buying the finished product and thus from becoming big owners of the property. They must adhere to their ultimate goal of maintaining social welfare by meeting the demands of as many clients as they can. The following notes are important to take into account:

1. Unlike a commercial partnership, which is formed and works within the framework of the laws and regulations of the commercial code, the civil partnership works with the laws and regulations of the civil procedure code and is forbidden for commercial activities;
2. Unlike a commercial partnership, a civil partnership does not possess an identity independent from the identity of the partnership;
3. In some commercial partnerships, a partner cannot transfer his share to anyone without the concurrence of the other partners. In a civil partnership, any partner can transfer all or part of his share to a third party without the concurrence of the other parties.
4. In a civil partnership, if the partners are unable to pay their debts, insolvency regulations are applied. But in a commercial partnership, bankruptcy regulations apply.

Source: Prof. Iraj Toutounchian, Thoughts from Iraj Toutounchian’s Islamic Money & Banking: Narrated by Camille Paldi. Republished with permission.