PARTNERSHIP CONTRACT

PARTNERSHIP CONTRACT (UQUD AL-SYARIKAT)

Musharakah
Mudharabah
Muzara’ah
Musaqah
MUSHARAKAH
 DEFINITION

• Musharakah is also known as al-sharikah

• LITERALLY:
• Intermingling of properties whereby one cannot be differentiated from the other.
• Mixing of two properties so that they could not be distinguished from each other

• TECHNICALLY:
• An agreement between two or more properties to combine their assets, labor or liabilities
for the purpose of making a profit.
 NATURE OF MUSHARAKAH

• It’s basically a profit and loss sharing partnership whereby the ratio for the
distribution of profits must be determined and specified in advance.

• If one partner is to be paid a fixed remuneration he will not be deemed a

partner.

• Each partner may dissolve the partnership at his/her pleasure provided he

gives ample notice for the others.
Surah Sad: 24
Allah SWT says:
“…truly many partners (in all walks of life) are unjust to one another; but not so
those who believe and do good works, and they are few…”

The term in the above verse means partnership. Based on the verse, musyarakah is a
part of the previous practices of Messengers of Allah SWT
before Prophet Muhammad SAW that has not been abrogated. This practice existed
since the time of Prophet Daud and had never been forbidden by Prophet Muhammad
SAW. However, musyarakah shall be practised in a just manner and in accordance
with the Shariah.
 EVIDENCE
• HADITH
When Rasulullah SAW was appointed as the Messenger of Allah SWT, the Arab
community had already been conducting transactions based on musyarakah, and
Rasulullah SAW allowed it as shown in his saying:
“The aid of Allah SWT will always be upon two persons who are having partnership as
long as one of them does not betray his partner. If one of them betrays his partner, then
Allah SWT will uplift His aid from both of them.”

Al-Daraqutni, Sunan al-Daraqutni, Mu’assasah al-Risalah, 2004, v. 3, p. 442, hadith no.

2934.
• It was reported that a companion of Rasulullah SAW indicated the
permissibility of musyarakah as follows:
• “The profit is based on what has been stipulated and the loss is based on the amount of
the capital (contributed by the partners).”
• “The loss is based on the amount of the capital, and the profit is based on what has been
stipulated.”
• Al-Zaila`i, Nasb al-Rayah li Ahadis al-Hidayah, Mu’assasah al-Rayyan, 1997, v. 3, p. 475. & Abdul Razzaq al-San`ani,
Musannaf Abdul Razzaq, Al-Maktab al-Islami, 1403H, v. 8, p. 248.

• Generally, scholars are in consensus in permitting partnership or musyarakah,

even though they are of different opinions on the permissible types of
musyarakah.
 PILLARS PF MUSHARAKAH
• SHURAKA’
• Shareholders

• RABBUL MAL
• Capital

• MASHRU’
• Project or business venture

• RIBH
• Pre-determined profit allocation

• SIGHAH
• Ijab (offer)
• Qabul (acceptance)
TYPES OF MUSYARAKAH
 TYPES OF MUSHARAKAH
• SYARIKAT Al-IBAHAH
• Common rights of individuals to gather possesses and own free commodities

• SYARIKAT AL-MILK
• Co-ownership of two or more persons in a particular property.
• Optional ownership or Compulsory ownership (automatically exists)

• SYARIKAT AL-’AQD
• A partnership created through contract as opposed to co-ownership that may be the result of a joint
purchase or agree-ment or it may result from inheritance or from some other legal situation.
• Partnership in capital
• Partnership in labour
• Partnership in goodwill/credit
• Profit sharing partnership
• MUSHARAKAH INAN (EQUIVALENT TO JOINT STOCK)
• MUSHARAKAH MUFAWADA (FLEXIBLE PARTNERSHIP)
• MUSHARAKA ‘AMAL (BASED ON WORK DONE JOINTLY)
• MUSHARAKA AL-WUJOOH (REPUTATION BASED CREDIT
PARTNERSHIP)
 CONDITION OF MUSHARAKAH
• THE CONDITIONS OF SHAREHOLDERS AND PARTNERS
• The shareholders and partnes must be qualified person to appoint an agent or to be
appointed as an agent under the principle of Wakahalah. Each shareholder is considered
as a joined owner of the company and has a right to run the business for him and the
other shareholders when appointed as an agent.
• Al-Musharakah i.e. partnership and company based business can be made between
individuals or organizations.
 CONDITIONS OF MUSHARAKAH
• THE CONDITIONS OF CAPITAL
• The capital must be cash or things that can be valued by money.
• The capital must be pooled together and are not segregated so that it cannot be identified
the owner of actucal share.
• The amount of share is not determined to be of the same.
• The shareholder can transfer his share to other person.
• The contract of Musharakah can be terminated to become a contract of ownership. As
for example, a Bank has agreed to finance to project together with a housing developer.
At the time when the project has completed, the bank can sell his share to the developer
so that it will become a sole owner of the property.
 CONDITIONS OF MUSHARAKAH
• THE CONDITIONS OF PROFIT
• The ratio of profit sharing between all parties should be determined and mutually agreed
at the conclusion of the contract in the form of percentage of profit, not a sum of money
or percentage of capital. This is very important to avoid any element of gharar.

• Loss sharing, except in the case of deceit or negligence, is according to percentage of

shareholding.
 DISSOLUTION OF MUSHARAKAH
• When a partnership fulfils its obligation or when its duration is expired.
• By mutual consent of the parties.
• By a request made by one of the parties which is subsequently approved by
other parties.

• By death or incapacity of one of the parties whose heirs or their guardian

decide to discontinue the partnership.

• The bankruptcy of the partners.

MUDHARABAH
• Mudarabah is a contract between two parties to conduct a
particular joint venture.

• It involves the rabbul mal as investor who provides the

capital, and the mudarib as entrepreneur who manages the
joint venture.

• Any profits generated from the joint venture will be shared

between the investor and the entrepreneur based on the
agreed terms and ratio, whereas any losses will be solely
borne by the investor.
 Mudharabah

Capital Provider Manager

Rabbul Mal Mudharib
100%

Agreed Ratio
Work
$ Profit

Shariah Compliant
-$ Loss Business Activity

The parties are a Rabbul Mal (investor) who solely provides the capital and a Mudharib
(entrepreneur) who solely manages the project. If the venture is profitable, the profit will
be distributed based on a pre-agreed ratio (profit sharing ratio). However, losses will be
borne solely by the Rabbul Mal unless due to negligence/ misconduct by Mudharib
TYPES OF MUDHARABAH
 TERMINATION OF MUDHARABAH

• The contract of mudharabah can be terminated at any time

by either of the two parties.
• The only condition is to give a notice to the other party.

• If all the assets of the mudharabah are in cash form at the

time of termination, and some profit has been earned on the
principal amount, it shall be distributed between the parties
according to the agreed ratio.

• However, if the assets of the mudarabah are not in the cash

form, the mudarib shall be given an opportunity to sell and
liquidate them, so that the actual profit may be determined.
 In addition to the principles of al-mudarabah
and al-musharakah that are widely discussed
under partnership contract in Islamic banking
and finance, there are also partnership contracts
that are strictly related to the agricultural land
development, which are al-muzara’ah and
almusaqah.
MUZARA’AH & MUSAQAH
 In Islamic law, almuzara’ah and
al-musaqah can be considered
as forms of partnership contract in
farming
 Muzara`ah
• Al-muzara’ah is derived from the word zara’a, which means crop.
• Share-cropping; an agreement between two parties in which one
agrees to allow a portion of his land to be used by the other in return
for a part of the produce of the land.
 MUSAQAH
• Al-musaqah contract is derived from saqa, which means to water or
irrigate the land.

• Technically, this principle can be defined as a contract between the

landowner of some trees and the farmer, who treats, services,
irrigates and cares for the shade trees, and stipulates that the crop
produced is to be shared between them.
 Comparing al-Muzara’ah and al-Musaqah
• Principally, the contract of al-muzara’ah is similar to al-musaqah. The
contract of almuzara’ah can be described as a partnership in farming,
whereby the landlord provides the land and the farmer provides work
and management from early work until harvesting.

• In contrast, al-musaqah is in the case of trees that have already

sprouted (before the contract) and have grown strong, and the
landlord is unable to irrigate the plants and is incapable of working
the land.
• Therefore, it can be concluded that al-muzara’ah is a contract in
partnership between the landlord and the farmer in developing an
agricultural land from the beginning until cultivation process.

• On the other hand, al-musaqah is more on the partnership in

cultivating an orchard.

• In short,the only difference between these two contracts is the

substances of ‘land’ (in al-muzara’ah) and ‘trees’ (in al-musaqah).