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Al- Sadiq (A.

S) Institute of Islamic Banking, Finance &Takaful

By: Jawaid Iqbal

Rajab 11, 1429 Tuesday 15 July, 2008
 “Shirkah” / (Shirkat) means “Sharing” in the
terminology of Islamic Fiqh.

 Technically: Commingling by two or more

persons either their money or work or
obligations to earn a profit or a benefit or a
yield or appreciation in value and to share the
loss if any according to their proportionate
Basic Features

 Mixing of Capital

 Use of Capital in Enterprises

 Rights and Responsibilities

 Sharing
First point:
In interest based economic system, lender lends its
money to the borrower and feels free, as he asked
for risk free return on his investment. While
comparing it with Shirkah based lending both
parties share their risk and reward.

In Shirkah both parties remain conscious/ alert

regarding risk and return of the business.
Second point:
Interest based economic system is based on
injustice, because in this system lender never
consider facts if borrower fail to generate profits.
Borrower is totally bound to return principle among
interest, even he suffered loss.

In case if borrowers earn huge profit, they are only

liable to pay fixed return to the lenders (i.e. 5%
only); and whole profit can be enjoyed by
themselves (i.e 95% remaining)
Second point:

The Shirkah based on justice. Financer and

borrower both enjoy from earned profit and suffer
Third point:
In interest based economic system money
circulates in few ands that’s why poor becomes
poorer and vice versa (rich become richer)

While in Shirkah money disperses/ circulates in the

Fourth point:
In interest based lending system, some times
lender appreciates delay in repayment of loan
from the borrower. Like in Credit Cards.

While in Shirkah it not possible to think so.

Types of Shirkah

Shirkat-ul-Milk Shirkat-ul-Aaqd
Shirkat-ul-Milk (Joint ownership)
 Joint
ownership of two or more
persons in a particular property
with out any commercial
Types of Shirkat-ul-Milk

Shirkat-ul-Milk Shirkat-ul-Milk
Optional (Ikhtiary) Compulsory (Ghair Ikhtiary)
Types of Shirkat-ul-Milk
1. Shirkat-ul-Milk Optional (Ikhtiary)
This comes into operation by the option of
parties e.g., purchase of asset with mutual

2. Shirkat-ul-Milk Compulsory (Ghair

This comes into operation without any
action taken by the parties e.g., ownership
of heirs on the inherited property.
(Joint venture/Partnership)

 Jointventure of two or more

persons in a particular property
with commercial intention.
Types Of Shirkat-ul-Aaqd


Shirkat-ul-Aaqd Shirkat-ul-Aamal

 Shirkat-ul-Amwal (Partnership in capital)
Where all the partners invest some capital into a commercial

 Shirkat-ul-Aamal (Partnership in services)

Where all partners jointly undertake to render some services
for their customers.

 Shirkat-ul-Wojooh (Partnership in goodwill)

Where the partners have no investment at all, they purchase
commodities on deferred price by their goodwill and sell
them on spot.
Types Of Shirkat-ul-Aaqd
All the three are further divided in to two types:

Shirkat-ul-Amwal Shirkat-ul-Aamal Shirkat-ul-Wojooh

Shirkat-ul-Mufawadah Shirkat-ul-Ainan
Types Of Shirkat-ul-Aaqd
Where capital, profit, loss and management
are equal among the partners.

Equal Management Equal Management

Profit & Loss – 50% Profit & Loss – 50%

Capital – 100 Capital – 100

Types Of Shirkat-ul-Aaqd
Where partners are unequal in the one or
more of the following .

Mgt. Control 40% Mgt. Control 60%

Loss – 70% Loss – 30%

Profit – 50% Profit– 50%

Capital – 70 Capital – 30
 Permanent Musharaka:
Permanent Musharaka is a partnership of
permanent nature i.e. a going concern.

 Temporary Musharaka (redeemable)

Musharaka can be for a limited time period,
after that it will be redeemed. Redemption of
Musharaka will take place through sale of
shares from one partner to other partner or
third person.
 Diminishing Musharaka
It is a form of partnership in asset both
movable and immovable. In this Musharaka
one partner to buys the share of the other
partner gradually until the ownership of the
subject matter is completely transferred to

According to this concept, a financer (bank)

and its client participate in a joint commercial
enterprises or property or asset.
 It should be a money or asset
 The value should be agreed upon if it is a tangible
 Different currencies should be converted or valued
into the currency of Shirkah
 Should be known either in advance or before the
time of profit/loss determination.
 Should under the disposal of the manager

 Debt alone can not be contribution in Shirkah

 It can be varying among the partners

Management of Partnership
 In Principle each partner has right to take in Musharaka
 The partners may appoint a managing partner by
mutual consent.
 Some of the partners may decide not to work for the
Musharaka and work as sleeping partner.
 It is not allowed to specify a fixed remuneration to a
partner Musharaka who manages funds or provides
some form of other services, such as accounting.
 However, it is permissible to give him a greater share of
profit than he would receive solely on the basis of his
share in the partnership capital.
 According to a view it is also permissible to appoint his
as an employee and giving him remuneration for his
Profit Sharing Ratio
 Ratio or the basis for sharing profit should be decided
in the beginning of partnership.
 Profit should be allocated in percentages of earning and
not in a sum of money or a percentage of the capital or
 It is not necessary for sharing profit according to
proportionate capital contribution.
 A sleeping partner cannot share in the profit more than
the percentage of his capital.
 The partner may at the later stage agree to change the
profit sharing ratio, and on the date of distribution, a
partner may surrender a part of
 his profit to another partner.
 One partner can cap his share of profit -Tiers profit.
Sharing of Loss
 In case the business incurs a loss, all partners
will have to share the loss in exact proportion
to their investment
 This rule is based on a saying of Hazrat Ali
“Profit is based on agreement of the parties, but
loss is always subject to the ratio of investment”
Mudaraba Musharaka
The contribution comes from The contribution comes from
Rabbul Maal (the investor). all partners in form of cash,
commodities, services or
The Rabbul Maal (investor) is liability in the case of
not permitted to manage the reputation partnership.

The Mudarib will only manage The work, as a general rule, is to

the business. be done jointly by the parties.

A partner or some partners may be

The Mudarib can also invest in
the capital of Mudarabah.
Musharaka Model
Depositors Bank

Deposits Equity
Weightage System

Pool of Funds


 Musharaka could easily be used as a vast
mode of financing for almost every financial
need. Below are some fields where this mode
can easily be applied:
 Project Financing
 Long-term Finance
 Running Finance (limited scope)
 Investment Banking
 Redeemable capital investment
Partner Bank