SBSM 1343

FIQH MUAMALAH II

MUSYARAKAH

NAME OF GROUP MEMBERS:

NO NAME NO. MATRIC
1 NUR SYAHADA BINTI MAHAT 21BB05020
2 NAJIHAH BINTI MAZLAN 21BB05025

BACHELOR OF ISLAMIC FINANCE (BANKING)

(HONS)
INTERNATIONAL ISLAMIC UNIVERSITY
SELANGOR

LECTURER:
NAWAL BINTI SHOLEHUDDIN

SESSION I 2022/2022
 TABLE OF CONTENTS

NO TITLE PAGE
1 DEFINITION OF MUSYARAKAH 3

2 TYPES OF MUSYARAKAH 4-5

3 VALIDITY OF MUSYARAKAH 6

4 CONDITION OF MUSYARAKAH 7-8

5 PILLARS OF MUSYARAKAH 9

6 OPINION OF THE SCHOLARS 10

THE APPLICATION IN ISLAMIC

7 11
BANKING
8 EXAMPLE OF MUSYARAKAH 12

9 CONCLUSION 13

10 REFERENCES 14

2
DEFINITION
The literal meaning of Musyarakah is to sharing, participation and mixing
shares of two or more parties. The root of the word Musyarakah in Arabic is Shirkah,
which means to be a partner. Technically, it refers to a partnership between two or
more parties, where all parties will share the profits and bear the losses from the
partnership.
Musyarakah is basically a type of partnership where partner join together with
different contributions, work or obligations for the common objective of conducting
business and trade according to Shariah principles. The nature of Musyarakah is also a
profit and loss sharing partnership where the profit-sharing ratio must be determined
beforehand. If a partner is paid a fixed remuneration, he will not be considered a
partner. Each partner may dissolve the partnership at will provided he gives sufficient
notice to the others.
In Islamic jurisprudence, Musyarakah means a joint venture established to run
a business where all partners share profits according to a certain ratio while losses are
shared according to the contribution ratio. Musharakah plays an important role in
financing business operations based on Islamic principles. For example, say
individual A wants to start a business but has limited funds. Individual B has surplus
funds and wants to be a financier in musharakah with A. The two people agree on the
terms and start a business where both share part of the profits and losses. This negates
the need for A to receive a loan from B.1

1
StuDocu (2021) Musharakah (Universiti Teknologi Mara)

3
TYPES OF MUSYARAKAH
In general, there are two types of musharakah, the first is Shirkah al-Milk
(Partnership in joint ownership). Refers to the ownership of assets by two or more
people with or without prior agreement to enter into partnership in joint ownership.
Under the al-milk partnership, the ownership of each partner is mutually exclusive. In
this case, one partner cannot deal with the other partner's assets without the consent of
the other party. It means the joint ownership of two or more people in a certain
property. The basic feature of shirkah al-milk is mixing ownership either optional or
mandatory. If two or more people buy an asset jointly, they become the owner of the
asset. This partnership exists as a matter of their own choice because they chose to
purchase the asset jointly. In the second type of shirkah al-milk, the partnership is
established on a mandatory or automatic basis without any effort or action by the
parties. For example, after the death of a person, all his heirs become the new owners
of his property. They become co-owners through the law of inheritance without any
effort or action.
Next is Shirkah al-Aqd (Partnership by contract). This is the second type of
Shirkah which means a partnership influenced by a mutual contract. For brevity
purposes, it can also be translated as joint commercial enterprise. Syrkah al-Aqd is a
type of partnership established by a mutual contract between the parties. It is most
commonly used in business transactions and can be translated as contractual
partnership or joint commercial enterprise. Basically, it is an agreement between two
or more people to combine their assets, labor or liabilities for the purpose of making a
profit. All parties enter into a partnership contract willingly and share the joint
venture's profits and losses. In a contractual partnership, partners may contribute
capital, reputation or services. From this perspective, contractual partnerships can be
further divided into three categories.
First is Shirkah al-Amwal, an average partnership in capital where all partners
invest some capital into a commercial enterprise. It is a type of partnership where all
partners contribute some capital into the commercial enterprise. Second, Shirkah al-
Aamal means a partnership in services where all partners together promise to provide
some services for their clients and charge fees from them.
distributed among them according to the agreed ratio. For example, if two
people agree to carry out tailoring services for their clients on the condition that the

4
wages earned will go to a joint pool that will be distributed between them regardless
of the size of the work that each partner has done. This partnership will be shirkah al-
amwal which is also called Shirkah at-taqabbul or Shirkah as-sanai or Shirkah al-
abdan. Finally, Shirkah al-wujooh means sharing in goodwill. This word is rooted in
the Arabic word wajahat which means goodwill. Here the partners have no investment
at all. They buy commodities at deferred prices by obtaining loan capital because of
their goodwill and sell them on the spot. The profit earned is distributed among them
at an agreed ratio. It is a type of partnership where the partners have no investment at
all. They buy commodities at lower deferred prices based on their reputation or
creditworthiness and sell them on the spot. Profits are shared between the partners
according to their agreement. In this type of partnership, partners do not need to invest
in the form of capital. But they need to determine the liability of each partner and the
profit-sharing ratio.
Each of the three types of Shirkat-ul-Aqd above is further divided into two types. First
is Shirkah al-Mufawada, which means equal capital and labor. All partners share
capital, management, profits and risks equally. It is a necessary condition for all four
categories to be shared among partners. If any one category is not shared, then the
sharing becomes Shirkah al-Ainan. Each partner who shares equally is a Trustee,
Guarantor and Agent on behalf of the other partners. Next is the al-Ainan company. It
is a more common type of Shirkatul-Aqd where equality in capital, management or
liability may be equal in one case but not in all aspects meaning either profit is equal
but not labor or vice versa.2

2
https://blossomfinance.com/posts/introduction-to-musharakah-partnership

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VALIDITY OF MUSYARAKAH
The validity of the contract of musyarakah is based on Al-Quran and As-Sunnah Nabi
Muhammad S.A.W. First is the Qur'an where it can be seen through the following
verses of the Qur'an that show the validity of musyarakah
‫َفِإن َك اُنٓو ْا َأْك َثر ِم ن َذَأِلَك َفُهم ُش َر َك ٓاُء ِفى ُااُّثُلِث‬
…but if they are more than two, they share in a third...‛ (Al-Nisa’:12)
The verse specifically outlines the rules of Islamic inheritance. However, in a
general context, Muslim jurists consider the text to contain a general authorization of
any form of sharing.
‫َو ِإَّن َك ِثيًر ا ِم َن ْالُخ َلَطاِء َلَيْبِغ ي َبْعُضُهْم َع َلى َبْع ٍض ِإال اَّلِذ يَن اَم ُنوا َو َع ِم ُلوا الَّص اِلَح اِت َو َقِليٌل َم ا ُهْم‬
While Al-Sad: 24 stated that “Verily many are the partners (in business) who
wrong each other except those who believe and work deeds of righteousness and how
few of them….”
In those verses, Allah SWT explains about the sharing of property. If a person
dies without leaving any offspring or descendants; but he had brothers and sisters
more than two in number, then they will share a third of the human wealth. So based
on that, the sharing of the property is legal from the side of Sharia. Sharia scholars
generally agree on the validity of a sale and purchase contract combined with a lease
contract. Also, there is no clear passage in sharia that prohibits Musyarakah.
The second, the proofs of Musyarakah can be seen in the Hadith reported by
Abu Hurairah: The Messenger of God, may God bless him and grant him peace, said:
Allah s.w.t. said: "I made a third [pair] with two pairs for one of them does not betray
the other, but when one of them betrays the other, I went away from them. Here this
hadith shows that betrayal in the party is highly condemned and if one of the parties
does so, Allah will withdraw from them. "Besides, reported by As–Saib Al–
Makhzumi R.A that he used to be a partner of the prophet S.A.W (in business) before
his prophet-hood. During the opening of Mecca, he said to the prophet S.A.W:
“Welcome my brother and partner!”. Here, it encourages sharing in this hadith3.

3
StuDocu (2021) Musharakah (Multimedia University)

6
CONDITION OF MUSYARAKAH
There are several conditions of Musyarakah which are the conditions of
shareholders and partners, conditions of capital, conditions of the project and
conditions of profit. For the condition of shareholders and partners, every shareholder
and partner must be eligible to appoint a representative and be a representative. This
condition becomes mandatory because in running Al-Musyarakah business there is
the concept of al-Wakalah. Each shareholder is a joint owner of the company and has
the right to manage the company’s business on his own behalf as well as on behalf of
the other shareholders as representatives. Besides, Al-Musyarakah can be conducted
between individuals and also between organizations.
Secondly, the condition of capital is that the capital must consist of money and
goods that can be valued with money. Capital must be fixed into common property
among the shareholders without distinguishing between the ownership rights of one
person and another. Share rates are not necessarily the same among all shareholders.
Each shareholder can transfer ownership of his shares to another person. In addition,
the Al-Musyarakah contract can be terminated to become an ownership contract. For
example, a bank has agreed to finance a project together with a housing developer.
When the project is completed, the bank can sell its share to the developer so that it
will be the sole owner of the property. This can be found in Musyarakah Mutanaqisah
(reduced Musyarakah).
Thirdly, the conditions of profit are that all Al-Musyarakah projects must be
halal according to syarak. The term “Shariah Compliance” is widely used in the
current situation. The work carried out by the shareholders for the company should be
assessed separately and may be mixed during the distribution of profits. A shareholder
can delegate the task of running the company’s projects to his partner. Assignment of
duties to certain people can be made a condition for the establishment of a company.
A shareholder who is given the task of running a company project can carry out all
matters related to the project except for things that may cause other shareholders to
doubt him, such as mixing the company’s property with his property, making al-
Musyarakah contracts with other parties without permission from other shareholders
or give debt to any party from the company’s property without permission. Therefore,
if he does any of those things then his responsibility changes from a trust (Yad
Amanah) to a guarantee (Yad Dhamanah).

7
 Lastly, the conditions of profit are that the profit-sharing rate must be
determined during the contract profit sharing can be according to the rate agreed upon
during the contract. Liability for accidental or negligent losses shall be in proportion
to the respective shares. In addition to Murabahah, Musyarakah is also one of the
forms of products under partnership contracts listed in Islamic banking institutions. In
the application of the Islamic banking system, the bank acts as a partner to its
customers by providing financing based on the concept of Musyarakah without
charging interest rates. The bank can finance the enterprise in full or in part only. This
means that, if the company makes a profit, the bank is entitled to receive a share of
the company’s future profits. The profit earning rate among the partners must be
agreed upon when the contract is signed. While his customers get a share of the
profits due to the personal funding injected into the company and also the work and
management, he does himself. On the other hand, if the company suffers a loss, then
each party has to bear the loss according to the amount of financing highlighted.4

4
https://www.bnm.gov.my/documents/20124/938039/Musyarakah.pdf/e99baaa9-
d7cd-a61f-8d0a-9c9f2521dd4d?t=1592218252160

8
PILLARS OF MUSYARAKAH
Musyarakah consists of five pillars. First of all, the shareholders are called
Shuraka is a person, company or institution that owns at least one share of a company
or in a mutual fund. Shareholders essentially own the company, which comes with
certain rights and responsibilities. This type of ownership allows them to benefit from
the success of the business. These rewards come in the form of increased stock
valuation or financial gains distributed as dividends. On the other hand, when a
company loses money, the stock price always goes down, which can cause
shareholders to lose money or experience a decline in their portfolio.
Furthermore, the capital is Ra’sul Mal. The Money or property that an
investor (rabb al-mal) invests in pursuit of profit, often in a partnership (musyarakah)

such as a mudarabah or shirkah agreement. Thirdly, Mashru’ means the project or

business venture. Forth, Ribh means that the profit is fixed and predetermined.
Musyarakah profit is the value created over and above Musyarakah capital determined

based on a methodology that is acceptable by convention or market practice. Lastly,

Sighah which is Ijab (Offer) & Qabul (Acceptance). Musyarakah contracts must be
made through offer and acceptance between partners. Offers and acceptances may be
expressed verbally, in writing or otherwise other methods that can be proven with
appropriate documentation or records.5

5
https://www.studocu.com/my/document/multimedia-university/islamic-banking/6-
musharakah-uib2612-20202021/16773006

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OPINION OF THE SCHOLARS
The term Musyarakah, as used in modern financing is limited to a contract
partnership. The jurists have given various meanings of the term for Musyarakah.
Here is the definition of Musyarakah based on four Islamic scholars where Hanafi
scholars define Musyarakah as “a contract between partners on both capital and
profit.” Maliki scholars define Musyarakah as “permission to transact where each of
the partners permits the other to transact with the partnership property while at the
same time retaining his right to transact with the same property.” Shafi’i scholars
define it as “a confirmation of the rights of two or more people over a common
property.” Hanbali scholars define as “it is the amalgamation of the rights or freedom
to use.” According to Imam Syafi’i, the ratio of the share in profit and loss both must
confirm to the ratio of his investment.
But according to Imam Hanifa and Imam Ahmad, the profit ratio may differ
from the investment ratio according to the agreement, but the loss should be divided
between them exactly according to the ratio of the capital invested by each of them.
This principle has been mentioned in a famous proverb: "Profit is based on the
agreement of the parties, but loss is always subject to the investment ratio." (Maulana
Taqi Usmani).
While according to AAOIFI in Syariah Standard No. 12, Clause 2/1, it defines
Musyarakah as "an agreement between two or more parties to combine their assets,
labor or liabilities for the purpose of making a profit which are shared among parties"
So from the definition above we can conclude. that Musyarakah is a partnership
between two or more people who combine their property, funds, assets, goodwill and
even their reputations for profit. If they make a profit, they will share according to the
share agreed by the parties, and if they make a loss, they will share according to the
share of the parties' capital.6

6
INCEIF (2008) Literature Review (University Malaya)

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EXAMPLE OF MUSYARAKAH
Although a Musyarakah partnership structure can be, and is used for carrying
on ordinary commercial activities, the basic concept of a Musyarakah has also been
used as a technique for Islamic financial institutions to provide finance to commercial
enterprises. For example, the concept of Musyarakah can be used to structure a
working capital facility for a company, where that company has had a record of
profitability.
A Musyarakah working capital facility would operate much like a
conventional working capital facility. The Islamic financial institutions would provide
the funds to its customer, usually by the deposit of the funds to the customer’s account
with the financial institution. The customer would access those funds in the ordinary
course of its business. The difference, however, is that instead of debiting the
customer’s account with a predetermined rate of profit, subject to adjustment on a
regular basis, usually quarterly.
At the end of the financial year, the profits are calculated. If the amount due to
the Islamic financial institution exceeds the provisional profit already debited from
the account, the amount not paid to the Islamic institution will be credited to a special
reserve account which the company will create in its books. Conversely, if the amount
due to the financial institution is less than the provisional profit already collected by
the Islamic institution, the special reserve account will be reduced by the amount of
the excess payment to the Islamic institution. Upon the termination of the Musyarakah
financing, a final profit and loss account is prepared and at that time, any balance in
the special reserve account is shared by the financial institution and the customer in
accordance with the ratio they have agreed upon on at the inception of the contract.
If during a financial year, the company generate losses, the special reserve
account is reduced by the amount of those losses. If the balance of the special reserve
account is insufficient to make good such losses, the customer may ask the Islamic
financial institution for a refund (in whole or in part) of the provisional profits
previously paid to the Islamic institution. The agreement between the financial
institution and its customer lays down a time limit for this refund request.7

7
Muhammad T.U (2005) An Introduction to Islamic Finance (Karanchi Pakistan)

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THE APPLICATION OF MUSYARAKAH IN
ISLAMIC BANKING (MAYBANK)
An Islamic financial institution had made a proposal to provide a product for
Islamic home financing based on the idea of musyarakah mutanaqisah. In general, the
modus operandi of the house financing product based on musyarakah mutanaqisah is
as follows.
Firstly, a customer who wants to buy a real property applies for financing from
the Islamic financial institution. Second, the Islamic financial institution and the
customer will jointly purchase the real property based on a determined share (for
example 90:10) depending on the amount of financing requested. Third, the deposit
paid by the customer is deemed as his initial share of ownership. Forth, the Islamic
financial institution’s share of ownership will be leased (based on Ijarah) to the
customer. Lastly, the monthly instalment by the customer will be used to gradually
purchase the share of the Islamic financial institution until the entire share of the
Islamic financial institution is fully purchased by the customer.8

8
https://www.maybank.com/islamic/en/coe/fatwa/islamicbanking/
financing_based_on_musyarakah_mutanaqisah.page?
9
https://www.bnm.gov.my/documents/20124/938039/Musyarakah.pdf/e99baaa9-
d7cd-a61f-8d0a-9c9f2521dd4d?t=1592218252160

12
CONCLUSION
Musyarakah is still regarded as one of the purest types of finance permitted by
Sharia, despite not being as widely used as other Islamic financial products. Islamic
scholars have stated their belief that new profit and loss sharing instruments should be
created and employed in light of the issue that some financing instruments used by
Islamic financial institutions closely resemble benefit instruments. Due to such
actions, the usage of Musyarakah as a financial instrument in Islamic finance will
only grow in the future.
Additionally, by depending on Musyarakah to fund projects, Islamic financial
institutions can dispel any worries that they essentially provide helpful items while
charging a premium, harming their reputation. The future survival and expansion of
Islamic finance depend on this.
The justification supported in Al Quran can be seen "And for you is half of
what your wives leave if they have no child. But if they have a child, for you is one
fourth of what they leave, after any bequest they made or debt. And for the wives is
one fourth if you leave no child. But if you leave a child, then for them is an eighth of
what you leave, after any bequest you [may have] made or debt. And if a man or
woman leaves neither ascendants or descendants but has a brother or a sister, then for
each one of them is a sixth. But if there are more than two, they share a third, after
any request which was made or debt, as long as there is no detriment caused. This is
an ordinance from Allah, and Allah is Knowing and Forbearing''(Surah AnNisa:
4:12).
The Shariah Advisory Council of Bank Negara Malaysia in its 56th meeting
decided that MM is a recognized contract in the Shariah and the current practice. The
contract is permissible as well based on the report of (Bank Negara Malaysia, 2007)10

10
https://www.academia.edu/10254834/The_definition_of_Musharaka_Mutanaqisah

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REFERENCES

Muhammad T.U (2005). An Introduction to Islamic Finance. Karanchi Pakistan.

StuDocu (2021). Musharakah. Multimedia University. Online:

https://www.studocu.com/my/document/multimedia-university/islamicbanking/6-
musharakah-uib2612-20202021/16773006

BNM (2015). Guidelines on Musharakah and Mudarabah. Central Bank of Malaysia.

Online:
https://www.bnm.gov.my/documents/20124/938039/musharakah.pdf/e99baaa9-
d7cda61f-8d0a-9c9f2521dd4d?t=1592218252160

StuDocu (2020/2021) Pillars of Musharakah. Multimedia University. Online:

https://www.studocu.com/my/document/multimedia-university/islamicbanking/6-
musharakah-uib2612-20202021/16773006

Financing Based on Musyarakah Mutanaqisah. (2021). Maybank. Online:

https://www.maybank.com/islamic/en/coe/fatwa/islamicbanking/
financing_basedon_musyarakah_mutanaqisah.page?

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