Sharikah Musharakah and Modern Corporations - Appendix B (The Shariah Basis for the Standard)

Transcription

1. Shari ’ah Standard No. (12): Sharikah (Musharakah), and Modern Corporations Appendix (B) The Shari’ah Basis for the Standard Permissibility of Partnership The Fuqaha have classified partnerships into four categories, namely Sharikat al-’Inan (contractual partnership), Sharikat al-Abdan (skilled trade partnership), Sharikat al-Mufawadah (agency-like partnership) and Sharikat al-Wujuh (creditworthiness or reputation partnership). The most important of all is Sharikat al- ’Inan (contractual partnership). The permissibility of this form of partnership is established by the Qur`an, the Sunnah and practical consensus of the Fuqaha. The permissibility of Sharikah is supported by the Saying of Allah, the Almighty: {“…And, verily, many partners oppress one another, except those who believe and do righteous good deeds, and they are few…”}. few…”} (2) Among the Sunnah provisions that support the permissibility of partnership is the case of Al-Sa`ib Ibn Abu Al-Sa`ib Al-Makhzumi who was a partner of the Prophet (peace be upon him) in business at the beginning of Islam. On the day when the Prophet (peace be upon him) conquered Mecca, he met Al-Sa`ib, then he (peace be upon him) said: “Welcome my brother and my partner. He jokes not (i.e. he is serious in business) and do not argue (unnecessarily).”(3) Moreover, partnership is one of the main transactions in all societies since the advent of Islam. This constitutes, therefore, a practical consensus for the permissibility and validity of partnerships. The partnerships for which the jurists have clarified their rules are the origins of the modern corporations, such as joint-stock companies whose (2) [Sad: 24] (3) The Hadith had been related by Al-Hakim who deemed it authentic [2: 61]. AlDhahabi agreed with Al-Hakim. 352
2. Shari ’ah Standard No. (12): Sharikah (Musharakah), and Modern Corporations financial standing and obligations are related to the volume of the shares of the company and on its juristic personality, not on the personality of the shareholders. Therefore, the general rules for various partnerships in Shari’ah will govern modern forms of corporations. However, the procedural systems relating to representation of partnership companies and bureaucratic, administrative and accounting procedures are required by Maslahah (consideration of the public good or common need), which is an acceptable source for validating human actions provided it is employed in line with the principles of Shari’ah. The general basis of Sharikah is agency (Wakalah) because each partner is acting as a principal partner, on one hand, and acting in the interest of the partnership, on the other hand, as an agent for the remaining partners. Unlike other partnerships, Sharikat al-Mufawadah combines rules of agency and guarantee simultaneously. Conclusion of Sharikah Contract ■ It is permitted to conclude a partnership contract with non-Muslims or conventional banks for carrying out permissible operations in association with necessary guarantees that they will observe Shari’ah precepts and principles. The Shari’ah basis for this is the Hadith stating: “The Messenger of Allah has prohibited concluding partnership with Jews and Christians unless the selling and buying is in the hands of the Muslim”.”.(4) The cause of the prohibition is the fear of being involved in Muslim interest-based transactions or in concluding impermissible contracts and this fear is absent when there are guarantees to observe and apply Shari’ah rulings.(5) Al Baraka Forum has issued a resolution in support of partnership between Islamic banks and conventional banks.(6) ■ The basis for the permissibility of an agreement on amending the terms of partnership and the profit sharing ratio is that this action does not lead to a possibility of precluding a partner from getting a share of profit.(7) (4) “Musannaf Ibn Abu Shaybah” [6: 9]. (5) See: Ibn Qudamah, “Al-Mughni” [7: 110-111]. (6) See: Resolution No. (9/1): “Fatawa Nadwat Al Baraka” No. 9, (P. 151). (7) See: Resolution No. (11/8): “Fatawa Nadwat Al Baraka” No. 11, (P. 194). 353
3. Shari ’ah Standard No. (12): Sharikah (Musharakah), and Modern Corporations Capital of Sharikah ■ The basis for the permissibility that Sharikah capital may be contributed in the form of tangible assets other than cash, after valuation, is that the purpose of Sharikah is to give partners a right to use the contributed money freely and to share the profit. This objective is realisable even if the capital is contributed in the form of tangible assets just as it is in the case of a contribution in cash. Therefore, it is just as valid to present tangible assets for Sharikah investment as to present cash. At the liquidation, each one of the partners will be entitled to the equivalent value of the assets presented at the conclusion of the Sharikah.(8) This is the view of the Maliki and the Hanbali scholars.(9) ■ The basis for the requirement that a payment of contribution to Sharikah capital in a currency different from the designated currency of partnership must be valued according to the current exchange rate at the time of payment is that this action is a currency exchange between two currencies which is permitted provided it is carried out at the current exchange rate. This is evidenced by the Hadith in which Ibn Umar asked the Prophet (peace be upon him) concerning selling camels at (a place in Medina called Al-Baqi’) in a currency and collecting payment in a different currency. The Prophet (peace be upon him) endorsed the transaction provided it had taken place according to the current exchange rate.(10) ■ The basis for the requirement that the investments of parties in the capital should be properly determined is that failure to do so will lead to ambiguity in respect to the capital. It is not permissible that the capital of Sharikah be ambiguous since certainty as to the amount of the capital is a benchmark for sharing profit. The equitable distribution of profit is not possible if the amount of capital contributed by each party is ambiguous.(11) ■ The basis for rejecting payment of partnership capital in receivables alone is that debts owed to a partner by another partner cannot actually be used in partnership operations, as they are not assets in possession. (8) “Al-Mughni” [7: 124] (9) “Hashiyat Al-Dusuqi” [2: 517]; and “Al-Mughni” [5: 17]. (10) The source of the Hadith has been stated earlier. (11) “Al-Mughni” [7: 125]. 354
4. Shari ’ah Standard No. (12): Sharikah (Musharakah), and Modern Corporations Again, this may potentially lead to Riba when the partner is the one in debt.(12) However, if the receivables are combined with other assets and the ratio of debt to the total assets is negligible, then debt and the other assets can be presented as a contribution to partnership capital. The basis for this is the principle of Taba’iyyah (things dependent on another thing) as per the legal maxim: “A thing which in fact follows from another thing follows it also in law and judgment cannot be given separately for a thing that follows from another” and the legal maxim: “The law is flexible in things that follow from another”. ■ The basis for allowing current accounts as capital in partnership is that, in spite of their being considered as loan, they are presumed to be possessed by the accountholders because the funds are available on demand. This is because the Institutions are obliged by their regulations and directives of the supervisory bodies to pay the owner on demand or accept cheques against these accounts irrespective of the financial situation of the Institution. Managing a Partnership ■ The basis for the right of each partner to participate in the management of the partnership is that partnership is based on elements of agency and trust. The element of agency requires that each party be entitled to be involved in the operations in a manner that is in the interest of the partnership. The element of trust requires that each party act for the benefit of the partnership.(13) ■ The basis for not allowing a fixed remuneration for a partner who assists in the management is that this may lead to guaranteeing the capital of this partner, or to his not being exposed to risk of loss, if any, in proportion to his contribution in the capital. ■ The basis for the permissibility of appointing, by a separate independent contract, one partner to manage the partnership and the permissibility of paying him wages is that the partner becomes an employee of the company and he is not acting in the capacity of a partner. (12) “Hashiyat Al-Dusuqi” [3: 517]; and “Al-Mughni” [5: 17]. (13) See: “Al-Mughni” [7: 128]. 355
5. Shari ’ah Standard No. (12): Sharikah (Musharakah), and Modern Corporations Guarantees in Partnership ■ The basis of the requirement that a partner is not liable except in cases of misconduct or negligence, and of the im impermissibility permissibility of a stipulation to the effect that a partner guarantees the capital of another partner, is that partnership operates on the basis of trust, and to hold a trustee liable for losses (except in the case of misconduct or negligence) is impermissible.(14) ■ The basis for allowing a party to a partnership to require a guarantee or a mortgage from another party as security against cases of misconduct and the like is that this requirement does not conflict with the rules for partnership. Again, the general principle of contracts and partnerships is that parties are required to observe stipulated terms as far as possible.(15) ■ The basis for the permissibility of a “promise to guarantee” by a third party whose financial liability is independent from the parties to a partnership is that this action is a mere charitable act and an undertaking that is independent of the partnership contract. In other words, a fulfilment of a promise by a third party is not a condition for the permissibility of the contract. In addition, the third party’s guarantee does not adversely affect the established Shari’ah principle against guaranteeing capital or profit. A resolution was issued by International Fiqh Academy in support of the permissibility of a third party’s promise to guarantee.(16) ■ The basis for the requirement that the guaranteeing Institution should not be the owner of the guaranteed Institution or vice versa is that by ownership the transaction becomes in substance a guarantee by a partner of the capital of another partner. Outcome of Partnership Investment (Profit and Loss) ■ The basis for the impermissibility of an agreement to determine the profit share on the basis of a lump sum or a percentage of the capital is because this is inconsistent with the sharing of profit and because profit is not realised unless the capital is maintained intact. (14) See: Ibn Qudamah, “Al-Kafi” [2: 230]; and “Al-Mubdi” [4: 256]. (15) See: Fatwa (1/5) of Al Baraka First Forum, 1403 A.H.: “Qararat Wa Fatawa Nadwat Al Baraka” (P. 18). (16) International Fiqh Academy resolution No. 30 (5/4). 356
6. Shari ’ah Standard No. (12): Sharikah (Musharakah), and Modern Corporations ■ The basis for the impermissibility of deferring the statement of the profit ratio of each party until profit is realised is because such a procedure involves uncertainty which may potentially lead to dispute. However, the parties are entitled to amend the profit ratio or to relinquish a right to profit on the date of distribution. This is because the profit belongs to them; hence, it is permissible for them to make amendments or relinquishments. ■ The basis for the requirement that the profit share may be either proportionate or disproportionate to the contribution of each party in the capital is that an individual deserves a share in profit on the basis of the funds contributed, the work done or the risk borne. If an individual is involved in any of these three, then it is allowed for the parties to agree on a profit ratio accordingly. This is the opinion of the Hanafi and Hanbali schools.(17) ■ The basis for the impermissibility of one party bearing losses or that each party bear a portion of losses that may not be proportionate to the share of each party in the capital is the saying of Ali Ibn Abu Talib (may Allah be pleased with him): “Profit distribution is according to agreement of the partners and loss must be borne in proportion to the contribution in the capital.”(18) Therefore, it is a void condition that one party should bear the loss of other parties and such a condition facilitates misappropriation of the property of others. ■ The basis for the permissibility of the partners agreeing on any method for allocation of profit, whether fixed or variable during a particular period, is that this agreement is circumscribed with a condition that the method adopted should not contravene any Shari’ah principle, which means the method should not preclude a party from sharing in profit. ■ The basis for not allowing final distribution of profit before deduction of expenses and expenditure is that there is no profit unless the capital is maintained intact. (17) See: Al-Mirghinani, “Al-Hidayah Sharh Al-Bidayah” [3: 7-8], Al-Maktabah Al-Islamiyyah edition; Al-Kasani, “Bada`i’ Al-Sana`i’” [6: 62-63]; and Ibn Muflih, “Al-Mubdi” [5: 4], AlMaktab Al-Islami edition (18) This Athar has been reported by Ibn Abu Shaybah in his “Musannaf ” [4: 268], Riyadh: Maktabat Al-Rushd. 357
7. Shari ’ah Standard No. (12): Sharikah (Musharakah), and Modern Corporations ■ The basis for the impermissibility of specifying a lump sum profit amount for one partner is that this action is inconsistent with sharing in profit. ■ The basis for not allowing a partner to earn a share of profit and a fee simultaneously is that this fee is a lump sum that may preclude sharing in profit due to the possibility that the partnership business may not realise enough profit to cover it. The basis for allowing a partner to receive, based on a separate contract, a fee is that the contract that entitles a partner to a fee is not part of the partnership contract and because this fee is not inconsistent with sharing in profit, as the partner in this case is considered to be a third party. ■ The basis for the permissibility of an agreement that if the profit realised is above a certain ceiling, the profit over such ceiling belongs to a particular partner, is because this constitutes a valid condition that is not inconsistent with profit sharing.(19) Moreover, the capital provider is the one who will bear losses, if any. ■ The basis for the permissibility of distributing profit based on constructive valuation is that the use of this method is permitted by Shari’ah(20) and was used in a number of cases, such as Zakah and theft. The basis for the permissibility of constructive valuation is also the saying of the Prophet (peace be upon him): “If a co-owner of a slave frees his part, the slave will be set free against his property if he has property; otherwise, it will be valued by fair value and freed.”(21) ■ The basis for the permissibility of distributing funds to partners on account, i.e. subject to settlement and refund of any additional profit acquired over the contribution to the capital on the date of actual liquidation, is because this action causes no damage to any of the partners since the distributed funds on account are subject to settlement at a later stage. (19) “Al-Bahr Al-Zakhkhar” [5: 83], Dar Al-Kitab Al-Islami edition. (20) See: Resolution No. (4) of the Islamic Fiqh Academy under the auspices of Muslim World League that was issued in the 16th session held in Mecca on 21-26/10/1422 A.H.; the International Islamic Fiqh Academy resolution No. 30 (5/4) and Fatwa No. (8/2) issued during the Al Baraka’s 8th Forum on Islamic Economics in “Fatawa Al Baraka” (P. 134). (21) This Hadith has been related by Muslim, See: “Sahih Muslim” [2: 1140]. 358
8. Shari ’ah Standard No. (12): Sharikah (Musharakah), and Modern Corporations ■ The basis for allowing distribution of partnership revenues, including the capital assets, prior to liquidation of the partnership is that the partners suffer no damage from this and also the distribution is subject to review and reimbursement when liquidation is actually effected.(22) Termination of Partnership ■ The basis for the rule that termination of partnership will not affect obligations and actions that took place before it is protection of the remaining partners against any potential damage. ■ The basis for the impermissibility of a promise by one of the partners to buy assets of the partnership at face value is that this constitutes a guarantee of the capital which is prohibited by Shari’ah. The basis for the permissibility of a promise to buy the assets of partnership at the market value is that this does not constitute a guarantee of capital. Modern Corporations ■ The permissibility of modern corporations is dependent on the principle of Shari’ah that human transactions are, in principle, permissible (Mubah Mubah)) as long as there is no clear injunction against them, especially in view of the fact that the categorisation of any one or more of these corporations had parallels in Shari’ah-nominate contracts, such as ’Inan partnership, Mudarabah and the like.(23) Stock Companies ■ The basis for the permissibility of underwriting issues of shares without taking consideration is that this is an undertaking that does not involve an impermissible act, such as taking a commission for a guarantee. The International Islamic Fiqh Academy has issued a resolution in this respect.(24) ■ The basis for the impermissibility of buying shares using an interestbased loan provided by a stockbroker or other party against a mortgage of the shares is that this is an interest-based transaction secured by (22) See: International Islamic Fiqh Academy Resolution No. 30 (5/4), and resolution of Islamic Fiqh Academy under the auspices of Muslim World League during its 16th session. (23) See: Abdul-Aziz Al-Khayyat, “Al-Sharikat” [2: 158-159]. (24) See: The International Islamic Fiqh Academy Resolution No. 63 (1/7). 359
9. Shari ’ah Standard No. (12): Sharikah (Musharakah), and Modern Corporations ■ ■ ■ ■ ■ (25) (26) (27) (28) shares.(25) In this case, both transactions are prohibited by an explicit source that indicates that Allah, the Almighty, has cursed a person who lives on interest-based transactions, a person who pays such interest, and a person who notarises or acts as a witness for such transactions. The basis for the impermissibility of selling shares that the seller does not own is that this constitutes selling of an item that one does not own or an involvement in a transaction without bearing a risk which is prohibited by Shari’ah. The basis for allowing a mortgage of shares is that mortgaging is permissible. Moreover, anything that can be sold may be presented as a mortgage as in the case of shares unless the bylaws of the company state otherwise in which case the conditions stated must be observed. The basis for the permissibility of “shares to the order of ” (nominative shares) is that this is a form of transferring ownership of shares to another investor. The acceptance by the remaining shareholders of the bylaws of the company that give a right to transfer is an implied consent to the transfer of ownership.(26) The basis for the permissibility of “bearer shares” is that it is a sale of shares by a shareholder to another investor. The acceptance by the remaining shareholders of the bylaws of the company that give a right to sell is an implied consent to the sale. The fact that the identification and personality of the new shareholder (the purchaser) is not known to other shareholders will not affect the sale as they may be provided with this information if need be.(27) The basis for the impermissibility of issuing preference (preferred) shares is that preference shares are inconsistent with profit sharing and involve depriving other partners of their fair share of profit.(28) The basis for the impermissibility of issuing shares that entitle the holder a participation in the net profit and entitles the company to gradually redeem the participation through the distribution of profits before the termination of the company, is because the funds the certificate holders receive constitute profit in respect of their shares. The claim that the See: International Islamic Fiqh Academy Resolution No. 63 (1/7). See: International Islamic Fiqh Academy Resolution No. 63 (1/7). See: International Islamic Fiqh Academy Resolution No. 63 (1/7). See: International Islamic Fiqh Academy Resolution No. 63 (1/7). 360
10. Shari ’ah Standard No. (12): Sharikah (Musharakah), and Modern Corporations participations are redeemed in consideration for the distributed profit is invalid. Therefore, the certificate holders remain owners of the shares and are entitled to proceeds when the company is liquidated.(29) Joint Liability Company ■ The basis for the permissibility of the undertaking of partners in a joint liability company to be jointly responsible is that the joint liability in this way is subject to the rules for guarantees. The permission granted by each of them to the others to act on behalf of the company is subject to the rules of agency as in the case of Mufawadah partnership which combines elements of guarantee and agency. The partners have consented to be liable jointly because there is no gain at the expense of any of the partners and no one is to be cheated.(30) ■ The basis for the impermissibility of bringing in a substitute partner in a joint liability company when the other partners did consent to it is that the personality of the partner is significant for the partners because the liability of the company includes his personal assets and the substitute may not be in the same financial position as the partner. Partnership in Commendum ■ The basis for the impermissibility of sleeping partners of partnership in commendum or company limited by shares being entitled to interfere in the management of the company is that they have agreed not to do so and this agreement does not affect the rules of partnership. ■ The reason why the financial liability of the sleeping partners in partnership in commendum is limited to their shares is that they are in the position of capital providers in a Mudarabah contract. Allotment (Particular) Partnership The basis for the permissibility of unilateral termination of participation in this kind of partnership by any of the partners is that, in principle, unilateral termination of participation is allowed provided such action inflicts no damage to any of the partners as per the saying of the Prophet (peace be upon him): “No harm to be inflicted and no reciprocal harm.”(31) (29) See: International Islamic Fiqh Academy Resolution No. 63 (1/7). (30) See: Abdul-Aziz Al-Khayyat, “Al-Sharikat” [2: 235]. (31) The Hadith has been related by Ibn Majah in his “Sunan” [2: 784]. 361
11. Shari ’ah Standard No. (12): Sharikah (Musharakah), and Modern Corporations Diminishing Partnership ■ The basis for saying that all the general rules for partnerships, especially the rules for ’Inan partnership, are applicable to diminishing partnerships is to safeguard this new form of partnership from becoming a mere interest-based financing transaction in which a client undertakes to pay another party for his finance in addition to a share in the partnership income. ■ The basis for the impermissibility of one partner being responsible for the expenses of insurance or maintenance is that this condition is in conflict with the nature of the partnership contract.(32) (32) See: Fatwa No. (219) of the Fatwas of Kuwait Finance House. 362