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Introduction Musharakah

Introduction Musharakah

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Published by Akeel Akram

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Published by: Akeel Akram on Oct 25, 2010
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11/03/2012

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Introduction
Musharakah
 The literal meaning of Musharakah is sharing. The root of theword "Musharakah" in Arabic isShirkah, which means being apartner. It is used in the same context as the term "shirk"meaning partner to Allah. Under Islamic jurisprudence,Musharakah means a joint enterprise formed for conducting somebusiness in which all partners share the profit according to aspecific ratio while the loss is shared according to the ratio of thecontribution. It is an ideal alternative for the interest basedfinancing with far reaching effects on both production anddistribution. The connotation of this term is little limited than theterm "Shirkah" more commonly used in the Islamic jurisprudence.For the purpose of clarity in the basic concepts, it will be pertinentat the outset to explain the meaning of each term, asdistinguished from the other. "Shirkah" means "Sharing" and inthe terminology of Islamic Fiqh, it has been divided into two kinds:
(Shirkat-ul-milk (Partnership by joint ownership):
It means joint ownership of two or more persons in a particular property. This kind of "Shirkah" may come into existence in two differentways:Optional (Ikhtiari): At the option of the parties e.g., if two or morepersons purchase equipment, it will be owned jointly by both of them and the relationship between them with regard to thatproperty is called "Shirkat-ul-Milk Ikhtiari" Here this relationshiphas come into existence at their own option, as they themselveselected to purchase the equipment jointly.Compulsory (Ghair Ikhtiari): This comes into operationautomatically without any effort/action taken by the parties. Forexample, after the death of a person, all his heirs inherit hisproperty, which comes into their joint ownership as a naturalconsequence of the death of that person. There are two more types of Joint ownerships (Shirkat-ul-Milk):
Shirkat-ul-AinShirkat-ul-Dain
A property in shirkat-ul-milk is jointly owned but not divided yet, iscalled Musha. In Shirkat-ul-milk undivided shares or other assetscan be used in the following manner:a)
Mushtarik Intifa’:
Mutually or jointly using an asset by taking
 
turns under circumstances where the partners or joint owners areon good terms.b)
Muhaya:
Under this arrangement the owners will set turns indays for example one may use the product for 15 days and thenthe other may use it for the rest of the month.c)
Taqseem:
Referring to division of the jointly owned asset. Thismay be applied for property where the asset that is owned can bedivided permanently for example jointly taking a 1,000 sq. yardsplot and making a house on 500 yards by each of the 2 owners.d) Under a situation where the partners are not satisfied withMuhaya arrangement, the property or asset jointly held can besold off and proceeds divided between the partners.(2)
Shirkat-ul-Aqd (Partnership by contract):
This is thesecond type of Shirkah, which means, "a partnership effected bya mutual contract". For the purpose of brevity it may also betranslated as "joint commercial enterprise." Shirkat-ul-Aqd isfurther divided into three kinds:(i)
Shirkat-ul-Amwal 
(Partnership in capital) where all thepartners invest some capital into a commercial enterprise.(ii)
Shirkat-ul-Aamal 
(Partnership in services) where all thepartners jointly undertake to render some services for theircustomers, and the fee charged from them is distributed amongthem according to an agreed ratio. For example, if two peopleagree to undertake tailoring services for their customers on thecondition that the wages so earned will go to a joint pool whichshall be distributed between them irrespective of the size of workeach partner has actually done, this partnership will be a shirkat-ul-aamal which is also called Shirkat-ut-taqabbul or Shirkat-us-sanai or Shirkat-ul-abdan.(iii)
Shirkat-ul-wujooh
(Partnership in goodwill). The word has itsroot in the Arabic word Wajahat meaning goodwill. Here thepartners have no investment at all. They purchase commoditieson deferred price, by getting capital on loan because of theirgoodwill and sell them at spot. The profit so earned is distributedbetween them at an agreed ratio.
Working with Capital finance
Where finances are required for the working capital of a runningbusiness, the instrument of Musharakahmay be used in thefollowing manner:
 
 The capital of the running business may be evaluated with mutualconsent: The value of the business can be treated as theinvestment of the person who seeks finance, while the amountgiven by the financier can be treated as his share of investment. The Musharakah may be affected for a particular period, like oneyear or six months or less. Both the parties agree on a certainpercentage of the profit to be given to the financier, which shouldnot exceed the percentage of his investment, because he shallnot work for the business. On the expiry of the term, all liquid andnon-liquid assets of the business are again evaluated, and theprofit may be distributed on the basis of this evaluation.Although, according to the traditional concept, the profit cannotbe determined unless all the assets of the business are liquidated,yet the valuation of the assets can be treated as "constructiveliquidation" with mutual consent of the parties, because there isno specific prohibition in Shariah against it. It can also mean thatthe working partner has purchased the share of the financier inthe assets of the business, and the price of his share has beendetermined on the basis of valuation, keeping in view the ratio of profit allocated for him according to the terms of Musharakah.For example, the total value of the business of 'A' is 30 units. 'B'finances another 20 units, raising the total worth to 50 units; 40%having been contributed by 'B', and 60% by 'A'. It is agreed that'B' shall get 20% of the actual profit. At the end of the term, thetotal worth of the business has increased to 100 units. Now, if theshare of 'B' is purchased by 'A', he should have paid to him 40units, because he owns 40% of the assets of the business. But inorder to reflect the agreed ratio of profit in the price of his share,the formula of pricing will be different. Any increase in the valueof the business shall be divided between the parties in the ratio of 20% and 80%, because this ratio was determined in the contractfor the purpose of distribution of profit.Since the increase in the value of the business is 50 units, these50 units are divided at the ratio of 20:80, meaning thereby that‘B’ will have earned 10 units. These 10 units will be added to hisoriginal 20 units, and the price of his share will be 30 units.

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