19/07/2017 Essential Elements for the Validity of an Islamic Business Partnership & Contract | Seed Investments

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Essential Elements for the Validity of an Islamic Business Partnership &
Contract

"A Muslim who makes up his mind to adopt trade as a profession, or to set up his own business, should first acquire a thorough understanding of the rules of business
transactions codified in the Islamic Shariah. Without such understanding, he will go astray and fall into serious lapses, making his earning unlawful." (Imam Ghazali)

Those who have been in business for a while may have come across stories of people falling out with each other over business-related matters. At the heart of every
dispute lies a contract that is either invalid (according to Islam), incomplete, or ambiguous.

This article will, insha'Allah, cover the essential aspects of Islamic business partnership contracts.

THE ESSENTIALS

1. Decide on a halal business model and making sure that it will be run according to the Shariah (Islamic law) in all
its details.

"Whoever adopts any other way (of life, other) than this way of submission (Islam), it will not be accepted from him." Qur'an 3: 85

"Whoever commits an act which is not a part of our matter (Islam) will have it (his act) rejected." Hadith Muslim

What is legal in a country is not necessarily legal in Islam. Hence, many of us wrongly assume that everything other than riba (interest) and khamr (alcohol) is allowed in
business.

This is not only incorrect, but it can even lead to problems for Muslims who are trying their best to earn a halal income and keep it that way.

2. Know the identity of your partners.

This is just one of the many reasons that trading stocks in stock markets violates shariah, as the owners of the stocks don’t really know who is buying their shares.

In Islam, each partner or shareholder must know the other, regardless of the size of his/ her equity share.

Therefore, it is not allowed for someone to enter into a contract with a man or woman who is unknown to him/her. There are many ways identity can be established
without actually meeting the other person. Email me if you want to learn more about this.

3. Make the agreement in one sitting (or one agreement) - the “offer and acceptance.”

It can take weeks or months to negotiate the various points in a partnership, especially if it involves many partners.

However, when all individuals come to a decision, and they’ve committed to a contract, then that contract becomes binding on all, but only if the contract is completed in
that final sitting or on the final contract. Until the final sitting/ contract, all individuals have the right to change their minds,even if they only choose to meet at a later time
on the same day.

"Both parties in a business transaction have the right to annul it, so long as they have not separated; and, if they speak the truth and make everything clear, they will be
blessed in their transaction; but, if they tell a lie and conceal anything, the blessing on their transaction will be blotted out." (Hadith, Muslim)

Disagreements between partners can arise when they hold each other accountable for promises made during the negotiation period that were never incorporated into the
contract.

Therefore, make sure that notes are kept during negotiation, and if there is anything important that needs to be included in the contract, then make sure it’s there in the
final copy at the final sitting; otherwise, there is no obligation for any of the partners to honour them.

Forgetfulness and intentions do not have any weight in Islamic contracts!

https://www.seed.org.uk/essential-element-islamic-business-partnership-contract 1/6

In the West. then? Anyway. who then made the investment on their behalf.” https://www. It’s a good idea to write down a general plan of what the business is and how the partnership will work. anything that can potentially violate the rights of a partner requires unanimous decision making. Allah (swt) has blessed us with a deen (Islam) that is comprehensive. For example. and there is no sign of the business making much progress .e. or even signing the contract in a lawyer's office. when it comes to decisions related to running the business on the ground. investors start demanding their money back! Some of the partners made non-Islamic promises to their investors. but it does not invalidate the contract: 1. the partner who only invests his money) have more right to go with what they feel is right. the other brother asks for his money back. This is also known as a 'constitution' or 'charter. What is the exact business being agreed over? 2. This includes the following: (i) What is being offered by each individual (money/ property/expertise/ consultancy/reputation/ time/ labour) (ii) The size of the share (business share and profit share) (iii) The nature of the business (iv) The agreement period (the period after which there will be the right to exit or renew or amend the contract) (v) Anything extra that is stipulated by the partners. Before long. This means that there is no majority rule in Islamic Company structure. What is the length of the partnership period? Additional Points to Note: It's not a requirement in Islamic law for contracts to be put down in writing.uk/essential-element-islamic-business-partnership-contract 2/6 . but these investors never actually met the other business partners. just profits!” Or. we will definitely give you this much profit. in Islam. Then when months turn to years. A contract can be as short as this: “I have agreed to partner with £100.” Well. then they cannot add the 10th partner! So. and you make a loss of £10. it’s normal for those who have the largest share of the business to drive the direction of the company.as the lead partner seems to have encountered some unanticipated problems . (There are valid ways to resolve this stalemate.000 on a 50/50 partnership. 5. especially as it’s encouraged in the Qur’an! The bigger the investment. business partnerships are all viewed with partnership over profit and loss. Who runs the business? 3. some of these investors entrusted their investments to their relatives. if there were nine partners. regardless of the size of their shares. The following makes the business contract incomplete. no serious businessman should proceed with any partnership without a written agreement. What's more.000.000 of my money for a 50% ownership with you to open a grocery shop that you will run for at least ten years. was the money taken as loan or investment? These things must be made clear right at the beginning. if you invest £100.000 from your pocket (if the business can’t pay that back). as he feels his partner is to blame for mismanagement! So.19/07/2017 Essential Elements for the Validity of an Islamic Business Partnership & Contract | Seed Investments 4. such as. but they haven’t agreed on a time period or met with one another or agreed on anything in writing. In Islam. Who pays the zakat? 4. other than discussing the equity share. there must be unanimous consent when it comes to deciding what to do with business profits.pressure for the return of the investment starts coming to him from every direction.) However. “There will be no loss. if only the ninth partners votes against the deal. all partners have equal say with regards to the essentials elements of the agreements that Shariah stipulates (from which no one can voluntarily opt out).seed. Contact me if you’re interested in knowing how. doesn't he? However. For example. Basically. Other stories go like this: A group of Muslims decide to invest in a business. the more you should formalise this process. The most common one goes like this: A brother takes some money from another brother for a share of a new business. All partners have equal rights to the business. i. and eight are happy to bring in another partner to raise some investment capital. It gives us detailed guidance in all aspects of life.' I’ve heard of many horror stories regarding businesses that fail to follow these quidelines. All core and critical matters of the business should be made clear. nothing to lose. then you must pay £5. the partners who are physically involved in the business (as opposed to the silent partner/s. then this is invalid in Islam. When the business collapses. including getting witnesses.. isn't this riba? Who is liable for the loss. he did invest the most and has the most to lose. “For this much of investment. or when it comes to adding another partner or buying out a partner. after all. If one takes an investment by promising indemnity against loss. Although. It only seems fair to give the biggest share holder more say.org. as well as anything additional to which the partners have agreed.

All of these points are correct to the best of my knowledge and understanding.. Please email me if you find anything incorrect. while keeping the percentage ownership of the company the same.): It is not permitted for business partners to pay each other a salary. Please guide us according to Shariah.. but I tend to add this term in case doubts and temptations start entering our hearts in the years down the line.19/07/2017 Essential Elements for the Validity of an Islamic Business Partnership & Contract | Seed Investments There’s no need to add the phrase ”according to shariah.seed. Jazakumallahu khairan Read More Articles (seed-articles)or sign-up in the footer for the latest articles. Send “ Posted by Johar Ali Shah on 31-12-2015 Respected Sir ! I with some of my friends decided to start a business of construction due to the shortage of funds we decided to get funds by two modes first by one off investment to start works and the second to collect from some friend on monthly installment and invest the amount when it pre-decided amount is collected.  SHARE Your Comments Your comments will be displayed here without your contact information. This concept goes against the company set-up most of us are familiar with. (Contact me if you want more details regarding this.org. Replied by Abid https://www.uk/essential-element-islamic-business-partnership-contract 3/6 . 6 comments/ questions/ replies Name: Telephone: Email Address: Comment: Enter the below code: Code. then this partner can have a larger share of profit. Conditional contracts 4. Indemnifying one or more partner for loss Personal Comments: I have discussed with several knowledgeable people before finalising this article.” since that's a implied statement. Offering prohibited products and services 2. Offering prohibited types of sales and transactions 3.) Others: 1. as there is no 'offer and acceptance' possible (How can you offer yourself a job and then accept?). What is Prohibited (This is not an exhaustive list. If one partner is to expend more time in the business than the other partner.

40. A . 40%. D 10% https://www. then there's nothing wrong with that. 40% out of 200 so out of 100 = 20. so isn't it fare to go for a percentage of Capital Share from 400K . The shares that was allocated considering the money and effort was.org. C and D will be conducting the daily operation and sales. 80%. C 10%. B 40%. B 40%.A 40%. C 10%. B will do the purchasing once in 3 months or once in 6 months or as the stock finishes. whether they are friends or family members. B . D 10% Effort Share .20% D .20. I am a little unsure what the question is. (coming to SL on End of February 2016) C is inputting 40K D is inputting 40K A has no roles and responsibilities.40% C . and being a sleeping partner. ” “ Posted by Azraar Azward on 21-12-2015 Assalamu Alaikum. % so the 2 problems that raised are.A . so I'll give some general advice insha'Allah.0%. The industry was Islamic clothing and capital is 400k.D A is inputting 160k.A 40%.seed.B.C. and at Saudi. so they are demanding for more than purchasing or to reduce the purchasing share. All this means is that the investor will own a little more of the business every time he deposits his monthly investment! That's of course if this is how you have agreed to give away the share to the investor. Islamically they become your business partners even if they release the money in tranches (stages).20. C and D says Operation and Sales task are daily on going work and time consuming. I am seeking for a Mashoora on a issue raised due to allocating shares in a partnership business among 4 best friends.uk/essential-element-islamic-business-partnership-contract 4/6 .40%. With regards to investment from any investors.19/07/2017 Essential Elements for the Validity of an Islamic Business Partnership & Contract | Seed Investments Assalamu'alaikum. Please get back to me if I haven't addressed your issue. 1/ B is only doing purchasing once in 3 months or 6 months or as soon as stocks finish. D%30 so Capital + Effort share = 40%. C 30%. (from London) B is inputting 160K. If an investor invests money on a monthly instalment basis.20% B . so how can someone working in once in 3 months or 6 momnths have a greater effort share than Daily on going time consuming tasks. I shall name the business partners as A.20% And it came in the following manner Capital Share from 400K . It's essential that you let the investor/s know how much of the business they will own if they pay an x amount of money.

Again. the surgeon gets paid more. We should be gentle on our partners. You see. compare the work of a brain surgeon with that of a nurse. I would be grateful if I could receive a call or email from yourself's. but it's up to the partners to negotiate who gets how much.seed. 30%. I am based in Birmingham West midlands. is worth a lot more percentage than he is being given. especially because of what I am going to say next. if the business is sold then only business owners get a share of the sale value not those who have profit share.org. Masha'Allah. It might be that you haven't considered his perspective. But. You asked. it's up to the partners to negotiate what would be best for them.uk/essential-element-islamic-business-partnership-contract 5/6 . Jazakallah Azraar Azward Replied by Abid Dear br Azraar. E.0%. so everybody get a chance to refer and update their knowledge also to avoid minor problems will be helpful. share on loss is only on those who have business ownership not on profit share.20%. a business partner can argue that he has more business experience and hence deserve higher share even if his effort and investment is the same.g. 25%. to him. if a person who has specialist knowledge about purchasing then he can argue for a bigger share. Finally. how one would handle this situation Islamically. One important point to note is that the Islamic method of quantifying effort is done by looking at the 'time the work takes' and the 'type of work' it is. through mercy and understanding. jzk for your question. the partners must come to an agreement through negotiation. My advice is for all partners to meet or do teleconference and discuss it in a brotherly manner explaining their view. Islamically. They both have valid points. I love the way you guys have quantified the effort in terms of percentages as this is something overlooked by a lot of business partners. Whatever you negotiate and agree on is your partnership. For example.19/07/2017 Essential Elements for the Validity of an Islamic Business Partnership & Contract | Seed Investments Effort Share . Although they both spend the same amount of time in the operation theatre. Or you could have someone who invests his lifesavings which. There are pros and cons to consider. D% 40 so final profit/loss share will be 20%.A . Remember though. Ameen ” “ Posted by Arfan Ulhaq on 14-12-2015 Good evening To whom it may concern I am looking for business partner or investor for my business idea. May Allah swt bless this partnership of yours and help you grow an amazing business. having separate shares for ownership and profit or merge them into just ownership. https://www. The answer is simple. 25% ? 2/ having two separate shares for Ownership & Profit. there's nothing wrong with one asking for a greater share of business in return for a small amount of money and little effort. both ways are fine. So. C 40%. B . the other 2 are saying only capital is counted for Ownership share so there should be both Ownership share and Profit/Loss Share I would like to know how Islamically one should handle this situation? I would also appreciate if you take the effort to post a article on acju website about Musharaka and Mudaraba. 2 partners are saying to merge it and keep only Ownership share.

uk/essential-element-islamic-business-partnership-contract 6/6 .uk/submit-proposal ” Home (/) Contact Sitemap (/sitemap. > Get a FREE copy of our book >>> The Muslim Entrepreneur The Muslim Entrepreneur (RRP £5.99) https://www.19/07/2017 Essential Elements for the Validity of an Islamic Business Partnership & Contract | Seed Investments Replied by Abid Please contact us via the contact form or Submit A (Business) Proposal here insha'Allah: https://www.seed. > Private networking sessions with Seed investors and entrepreneurs.org. > First to preview Seed investment initiatives.php) Join Muslim Seed Network Name (*) Your Email Address (*) Your Mobile Number Referred By (*)   Join Why Join Seed Network? > Benefit from being part of an exclusive membership network.org.seed.