Mudarabah is an arrangement or agreement between the bank, or a capital provider, and an entrepreneur, whereby the entrepreneur can mobilize

the funds of the former for its business activity. The entrepreneur provides expertise, labor and management. Profits made are shared between the bank and the entrepreneur according to predetermined ratio. In case of loss, the bank loses the capital, while the entrepreneur loses his provision of labor. It is this financial risk, according to the Shariah, that justifies the bank's claim to part of the profit.[19] The profit-sharing continues until the loan is repaid. The bank is compensated for the time value of its money in the form of a floating rate that is pegged to the debtor's profits. Musharakah is a relationship between two parties or more, of whom contribute capital to a business, and divide the net profit and loss pro rata. This is often used in investment projects, letters of credit, and the purchase or real estate or property. In the case of real estate or property, the bank assess an imputed rent and will share it as agreed in advance.[19] All providers of capital are entitled to participate in management, but not necessarily required to do so. The profit is distributed among the partners in pre-agreed ratios, while the loss is borne by each partner strictly in proportion to respective capital contributions. This concept is distinct from fixedincome investing (i.e. issuance of loans).

Conditions for investment in Shares ( Top ) In the light of the foregoing discussion, dealing in equity shares can be acceptable in Shari‘ah subject to the following conditions: 1. The main business of the company is not violative of Shari‘ah. Therefore, it is not permissible to acquire the shares of the companies providing financial services on interest, like conventional banks, insurance companies, or the companies involved in some other business not approved by the Shari‘ah, such as companies manufacturing, selling or offering liquors, pork, harâm meat, or involved in gambling, night club activities, pornography etc. 2. If the main business of the companies is halâl, like automobiles, textile, etc. but they deposit their surplus amounts in an interest-bearing account or borrow money on interest, the share holder must express his disapproval against such dealings, preferably by raising his voice against such activities in the annual general meeting of the company. 3. If some income from interest-bearing accounts is included in the income of the company, the proportion of such income in the dividend paid to the share-holder must be given in charity, and must not be retained by him. For example, if 5% of the whole income of a company has come out of interest-bearing deposits, 5% of the dividend must be given in charity. 4. The shares of a company are negotiable only if the company owns some illiquid assets. If all the assets of a company are in liquid form, i.e. in the form of money they cannot be purchased or sold except at par value, because in this case the share represents money only and the money cannot be traded in except at par. What should be the exact proportion of illquid assets of a company for warranting the negotiability of its shares? The contemporary scholars have different views about this question.

Some scholars are of the view that the ratio of illiquid assets must be 51% in the least. They argue that if such assets are less than 50%, then most of the assets are in liquid form, and therefore, all its assets should be treated as liquid on the basis of the juristic principle:

The majority deserves to be treated as the whole of a thing. Some other scholars have opined that even if the illiquid asset of a company are 33%, its shares can be treated as negotiable. The third view is based on the Hanafi jurisprudence. The principle of the hanafi school is that whenever an asset is a combination of liquid and illiquid assets, it can be negotiable irrespective of the proportion of its liquid part. However, this principle is subject to two conditions: Firstly, the illiquid part of the combination must not be in ignore-able quantity. It means that it should be in a considerable proportion. Secondly, the price of the combination should be more than the value of the liquid amount contained therein. For example, if a share of 100 dollars represents 75 dollars, plus some fixed assets, the price of the share must be more than 75 dollars. In this case, if the price of the share is fixed as 105, it will mean that 75 dollars are in exchange of 75 dollars owned by the share and the balance of 30 dollars is in exchange of the fixed assets. Conversely, if the price of that share is fixed as 70 dollars, it will not be allowed, because the 75 dollars owned by the share are in this case against an amount which is less than 75. This kind of exchange falls within the definition of 'riba' and is not allowed. Similarly, if the price of the share, in the above example, is fixed as 75 dollars, it will not be permissible, because if we presume that 75 dollars of the price are against 75 dollars owned by the share, no part of the price can be attributed to the fixed assets owned by the share. Therefore, some part of the price (75 dollars) must be presumed to be in exchange of the fixed assets of the share. In this case, the remaining amount will not be adequate for being the price of 75 dollars. For this reason the transaction will not be valid. However, in practical terms, this is merely a theoretical possibility, because it is difficult to imagine a situation where the price of a share goes lower than its liquid assets. Subject to these conditions, the purchase and sale of shares is permissible in Shari‘ah. An Islamic Equity Fund can be established on this basis. The subscribers to the Fund will be treated in shari‘ah as partners inter se. All the subscription amounts will form a joint pool and will be invested in purchasing the shares of different companies. The profits can accrue either through dividends distributed by the relevant companies or through the appreciation in the prices of the shares. In the first case i.e. where the profits are earned through dividends, a certain proportion of the dividend, which corresponds to the proportion of interest earned by the company, must be given in charity. The contemporary Islamic Funds have termed this process as 'purification'. The shari‘ah scholars have different views about whether the 'purification' is necessary where the profits are made through capital gains (i.e. by purchasing the shares at a lower price and selling them at a higher price). Some scholars are of the view that even in the case of capital gains, the process of 'purification' is necessary, because the market price of the share may reflect an element of interest included in the assets of the company. The other view is that no purification is

required if the share is sold, even if it results in a capital gain. The reason is that no specific amount of the price can be allocated for the interest received by the company. It is obvious that if all the above requirements of the halâl shares are observed, then most of the assets of the company are halâl, and a very small proportion of its assets may have been created by the income of interest. This small proportion is not only unknown, but also ignore-able as compared to bulk of the assets of the company. Therefore, the price of the share, in fact, is against bulk of the assets, and not against such a small proportion. The whole price of the share therefore, may be taken as the price of the halâl assets only. Although this second view is not without force, yet the first view is more precautious and far from doubts. Particularly, it is more equitable in an open-ended equity fund, because if the purification is not carried out on the appreciation and a person redeems his unit of the Fund at a time when no dividend is received by it, no amount of purification will be deducted from its price, even though the price of the unit may have increased due to the appreciation in the prices of the shares held by the fund. Conversely, when a person redeems his unit after some dividends have been received in the fund and the amount of purification has been deducted therefrom, reducing the net asset value per unit, he will get a lesser price as compared to the first person. On the contrary, if purification is carried out both on dividends and on capital gains, all the unitholders will be treated at par with regard to the deduction of the amounts of purification. Therefore, it is not only free from doubts but also more equitable for all the unit-holders to carry out purification in the capital gains also. This purification may be carried out on the basis of an average percentage of the interest earned by the companies included in the portfolio. The management of the fund may be carried out in two alternative ways. The managers of the Fund may act as mudâribs for the subscribers. In this case a certain percentage of the annual profit accrued to the Fund may be determined as the reward of the management, meaning thereby that the management will get its share only if the fund has earned some profit. If there is no profit in the fund, the management will deserve nothing. The share of the management will increase with the increase of profits. The second option for the management is to act as an agent for the subscribers. In this case, the management may be given a pre-agreed fee for its services. This fee may be fixed in lump sum or as a monthly or annual remuneration. According to the contemporary Shari‘ah scholars, the fee can also be based on a percentage of the net asset value of the fund. For example, it may be agreed that the management will get 2% or 3% of the net asset value of the fund 1 at the end of every financial year. However, it is necessary in Shari‘ah to determine any one of the aforesaid methods before the launch of the fund. The practical way for this would be to disclose in the prospectus of the fund the basis on which the fees of the management will be paid. It is generally presumed that whoever subscribes to the fund agrees with the terms mentioned in the prospectus. Therefore, the manner of paying the management will be taken as agreed upon by all the subscribers.

The Laws of Partnership (Companies) in Islam uploaded 09 Jul 2003

The Islamic laws of Partnership were discussed widely by the past scholars of Islam and the books of fiqh bulged with their detail. However, with the loss of the Khilafah many of the Islamic thoughts and practices were also forgotten and the Islamic world came to be dominated firstly by the socialist and then by capitalist solutions. Until some even felt that Islam was incapable of addressing and solving contemporary issues. One of the areas that were severely impacted by this decline was in the understanding and in the practice of business organisation. It is with this in mind that this series of articles demonstrates the unique Islamic thoughts with regards to business structures and organization so that once again Islam is understood beyond the ritual conducts and not studied as a thought only but applied in practice. Linguistic Meaning The word for partnership is sharika and some jurists use the word shirkah. Ibn al-Humam in Fath al-Qadir describes sharika as meaning the mixing of the shares so that one of them cannot be distinguished from another. Shaikh Taqiuddin an-Nabhani states in Nidaam ul Iqtisaad fil Islam (Economic System in Islam) that Ash-Sharika linguistically means mixing two or more shares together such that neither can be distinguished from the other. Shariah Meaning Differences in the types of sharikah between the Mujtihideen has meant that there has been difficulty in producing a general shariah definition. The Maliki scholar Al-Khayyat quotes a definition from al-Dardir in his al-Sharikat that a partnership is “a contract between two or more owners of wealth for joint trade or it is a contract for shared labour and shared profits.â€‌ Ibn Qudamah the Hanbali scholar in al-Mughni defined it as “participation of two or more persons in transactions.

However perhaps the most comprehensive shariah definition is provided by Sheikh Taqiuddin an-Nabhani in Nidaam ul Iqtisaad where the company in Shar'a is defined as a contract between two or more persons, in which they agree to perform financial work with the intention of making profit. Daleel (Evidence) Partnership is allowed in Islam because when Muhammad was sent as a Messenger people were dealing with companies and he (salAllahu alaihi wasallam) did not forbid this. Al Bukhari narrated that Abu Al-Minhal said: "I and my partner bought something in cash and credit. Al-Bara ibn 'Azib came to us so we asked him about this. He said: 'My partner, Zaid ibn Al-Arqam, and I did the same and we asked the Prophet (salAllahu alaihi wasallam) about this.' He (salAllahu alaihi wasallam) said: 'That which is in cash you take, and that which is in credit you return it back."' Ad-Daraqutni narrated from Abu Hurairah that the Prophet (salAllahu alaihi wasallam) said: "Allah the Supreme said 'I am the third of the two partners as long as one of them does not betray his companion. If he betrayed, I would withdraw from them." Common Conditions According to the majority of the imams the following form the common elements of the contract of sharika. Two parties and an offer and acceptance between them The contract of the company requires the existence of both offer (ijab) and acceptance (qabul), as is the case with all Islamic contracts. An offer occurs when one party says to the other: 'I entered into partnership with you in such and such' and the other party replies by saying, 'I accepted.' These actual words are not necessary but the meaning is. Subject matter There must occur in the offer and acceptance something that indicates that one of the parties addressed the other orally or in writing on the matter of partnership over something, and the other accepted. Therefore, an agreement on partnership only does not represent a contract. An agreement to pay money or property for

partnership is also not considered a contract as well. Rather, the contract must include the concept of partnership in something. Right of Disposal The condition of validity of the partnership contract in Islam requires that the contracted matter be a right of disposal, suitable for representation (Wakala) and what is gained by the disposal is shared between the two partners. It follows that it is invalid to form a company with a person who is prevented from disposal of property e.g. a minor, insane etc. Dissolving the Company Dissolution of the company by one of the two partners is valid because it is a permissible contract allowed by Shar'a. It becomes void by the following:
• • •

the death of any partner a partner becoming insane if a partner was declared incompetent and put under guardianship, if it is a company consisting of two persons.

If one of the partners dies leaving behind a mature inheritor, he has the option to continue with the company and his partner has to permit him to dispose (Tassaruf) in the company. However, he also has the option to demand dissolution of the company. If one of the partners demands dissolution of the company then the other partner must accept his request. If they were more than two partners, and one of them demanded the dissolution of the company and the rest were happy to continue with the company, then the existing company would be dissolved and renewed between the remaining partners. Generally if one partner demanded division and the other demanded sale of the company, the demand of division is accepted rather than that of sale. Except in the Mudharaba company (discussed in a future article), where if the worker (Mudharib) demanded the sale of the company and the other partner demanded division, then the demand of the worker will be accepted because his right is in the profit which will not be known except when selling.

Capitalist Companies The necessity of understanding these Islamic rules has acquired all the more importance in light of the current dominance of capitalist company structures across the world, including the Islamic lands, many of which are invalid and prohibited for Muslims to participate in. Although it is not the subject matter of this series of articles, a cursory look at one of the most prominent capitalist company structure, the share company (the cornerstone of the modern capitalist economy), serves to highlight its invalidity with the shariah.

No Offer or Acceptance In the share stock company no agreement occurs between two or more persons. Rather it is a commitment made by an individual will from one side. Absence of Partnership in Something – No Subject Matter No concept of partnership in something as no agreement has occurred to carry out a work on something; instead one person commits himself to offer property only. Invalid Right of Disposal The share stock company is viewed as a corporate personality which has the right of disposal. In the share stock company those who carry out the actions in the company are the board of directors who are deputies for the shareholders, i.e. for the property partners. However the partner is not allowed in Shar'a, to deputise somebody with the right of disposal and action in the company on his behalf whether he was a property partner or a body partner. The contract of the company is concluded on him personally, so he has to act by himself. So entrusting the disposal to a corporate personality is not allowed. No Right of Dissolution The share stock company is permanent, and it continues to function despite the death or the incompetence of any of the partners. Thus the share company is void and it is prohibited for Muslims

to participate in them as a partner. A detailed study of the share company and other void capitalist company structures such as the unlimited liability company and the co-operative societies can be found in Nidaam ul Iqtisaad fil Islam (Economic System in Islam). Types of Company Partnership Ibn Qudamah states in al-Mughni (Vol 5) that partnership contracts are of five types; Al-'Inan, Al-Abdan, Al-Mudharaba, Al-Wujooh and Al-Mufawadha. Shaikh Taqiuddin an-Nabhani states in Nidaam ul Iqtisaad fil Islam “From the examination of partnership contracts in Islam, and the divine rules (Ahkam Shar'iyah) related to them it can be concluded that there are five types of company in Islam. These are Al-'Inan (equal), Al-Abdan (bodies), Al-Mudharaba (two or more), Al-Wujooh (faces) and Al-Mufawadha (negotiation).â€‌ The next article will discuss the Company of Equal (Al-'Inan) Insha 'Allah. Habib ur-Rahman, Khilafah.com Journal, 9 Jumaad al-Oola 1424 Hijri / 8 July 2003 ============================================================ …‫ط¨ظگط ³ظ’ظ…ظگ ط§ظ„ظ„ظ‡ظگ ط§ظ„ط±ظ‘ظژطظ’ظ‬ ‫ظ†ظگ ط§ظ„ط±ظ‘ظژطظگظٹظ…ظگظگ‬ The Company of Equal (Al-'Inan) uploaded 10 Jul 2003 The Company of Equal (Al-Inan) is one of the most common forms of partnerships in Islam. The Meaning of Inan Al Sarkhasi (May Allah have mercy on him) says in his Mabsut Vol 2: ….and it is said that it (Inan) is derived from the reins of a riding animal. Ibn Qudammah (May Allah have mercy on him) in al-Mughni Vol 5 state: The meaning is derived from the example of a man driving two horses when he gives equal rein to both.

Shaikh Taqiuddin an-Nabhani (May Allah have mercy on him) in his book The Economic System in Islam: 'Inan means two riders in a race if their horses are equal and their race is equal, so their bridles ('Inan) are equal. The Meaning of the Company of Equal (Al-'Inan) Ibn Qudammah in al-Mughni Vol 5 state: The meaning of (inan) partnership is that two persons should participate with their wealth and work on the condition that the generated profits will be shared by them. Shaikh Taqiuddin an-Nabhani in his book The Economic System in Islam stated that this is two bodies associating with their properties. Namely, two persons associating with their properties and share the work dividing the profit between them. It is therefore called a company of 'Inan because the partners are equal in their right of disposal. In this type of company, the capital is represented by money, because money represents the value of the properties and the sales. It is not allowed to enter into partnership over merchandise unless it was evaluated in monetary terms at the time of contract. The value of the merchandise at the time of the evaluation would represent the capital. An example of the Company of Inan is where person A makes an offer to person B to establish a health and fitness centre by each providing 10,000£‫ آ‬in capital and for both to participate in the day to day management and operation of the centre. Person B accepts. They in turn make an offer to another 3 people, who all accept as partners, to also provide capital and share in the work. Proofs The evidence for this type of partnership is that it was practised at the time of the Prophet and the Sahabah and allowed. Al-Kasani (May Allah have mercy on him) states in Badai al Sana’I Vol 7: …the Inan contract is valid by consensus of the jurists of the provinces and the practice of the people (i.e. the

Sahabah). …. He (the Prophet [salAllahu alaihi wasallam]) approved their actions insofar as he did not proscribe them or deny it to them, and taqrir (tacit approval) is one form of the Sunnah. Shaikh Taqiuddin an-Nabhani in his book The Economic System in Islam stated: This form of company is allowed by the Sunnah (of the Prophet) and Ijma'a of the Sahabah (consensus of the Companions). People have entered into this form of partnership since the time of the Prophet (salAllahu alaihi wasallam) and the Sahabah. Conditions relating to the Capital of the Company It is a condition that the capital is defined and available for disposal. The partnership cannot be formed over an unknown capital, absent property or a debt. Shaikh Taqiuddin an-Nabhani in his book The Economic System in Islam states that this is because …the capital has to be referred to at the time of division and because the debt cannot be disposed with immediately and this is the aim of the company. Al-Kasani states in Badai al Sana’I Vol 7 another reason for why the Capital must be defined and present: Among these conditions is the availability of the wealth in the form of an ayn (present thing). It should neither be a debt (dayn) or an absent wealth. If it is so, the partnership is not permitted as Inan or as mufawadah. The reason is that the purpose of the partnership is profit and this is achievable through transactions in the capital. Such transactions are not possible in a dayn or in wealth that is absent. It is a condition that the capital of the company is one property of all the partners such that neither partner can differentiate his property from the others. It is not necessary that the capital should be equal in value. Ibn Qudammah in al-Mughni Vol 5 mentioned: Equality in the amount of wealth is not stipulated, and Al-Marghinani (May Allah have mercy on him) says in al-Hidayah Vol 3: Because equality in wealth is not a condition for it as the word (inan) does not require this. It is also not necessary that the capital should be of the same kind. However, they must be evaluated by one measure so that both

shares become one property. It is, therefore, valid for two people to become partners with, for example, Egyptian Pounds and Pakistani Rupees, but these should be evaluated by one value (agreed between the partners) so that there is no difference between them and they become one of the same kind. It is also conditional that each of the partners has authority over the capital. The Inan (equal) company is based on delegation and trust. The partners trust each other through handing over properties, and by delegating permission to each other to dispose of property. Once the company has been formed it becomes one entity. Conditions relating to the work and responsibility of the partners It is obligatory for the partners to start work themselves as the company is established upon their bodies. As such a partner is not allowed to delegate another person to work for the company personally on his behalf. It is also permitted for partners to assign themselves roles such as Operations Director or Head of Finance etc. However, the company as a whole can employ whom it wants and uses the body of whom it likes as its employee to work for the company but not a partner. Any of the partners can trade in whatever way he feels is beneficial to the company. Each of the partners is also allowed to collect the price and make purchases, to take legal action for and request payment of debt, to pay and accept payment, and to return faulty goods. Each is allowed to hire and lease the capital of the company, as these are benefits to the company and this is similar to selling and buying. Conditions relating to Profit and Loss It is not conditional that the partners have equal shares, but it is necessary that they are equal in the right of disposal. With regard to the capital, it is permitted that the partners have different or equal shares, while the profit is divided according to what they agree between themselves. According to what 'Abdurrazzaq narrated in AlJami', 'Ali (May Allah be pleased with him) said: 'The profit is according to what they stipulated.'

And al-Sarkhasi mentions in his Mabsut Vol II: …the animal has two reins, one longer than the other and the other one shorter. Thus, it is permitted in this partnership to have equality in capital and profit or inequality. We therefore call it Inan. With regard to losses in the 'Inan company, it is according to the capital share only. If their shares are of equal value then the loss between them is divided equally, and if the capital is divided in thirds then the loss is divided in thirds. If they agreed on other than that, no value will be given to their stipulations. This is the rule on loss i.e. the loss is based upon the ratio of their capital shares. This is because a company is a form of representation (Wakala). The rule is that the deputy is not held responsible for the loss but the loss is carried upon the property of the deputising person. Abdurrazzaq narrated in Al-Jami' from 'Ali (May Allah be pleased with him): "The loss (Al-Wadhi'a) is upon the capital and the profit is according to what they stipulated."

Sign up to vote on this title
UsefulNot useful