Lecture # 09

Musharakah and Diminishing

Musharakah
 Outlines
• Terminology & Definition of Musharakah
• Types of Musharakah
• Structure of Musharakah
• Basic Rules in Musharakah
• Termination of Musharakah
• Constructive Liquidation of Musharaka
• Security / Collateral in Musharaka
• Musharaka Management and Liability
• Application of Musharaka As a Mode
• Diminishing Musharakah
• Basic Structure
• Shariah Principles
• DM- Illustration
 Musharakah

Hadees-e-Qudsi:

‫ فإن خانه خرجت من‬.‫خن أحدهما صاحبه‬

ُ َ‫ ما لم ي‬،‫ أنا ثالث الشريكين‬:‫يقول اهلل تعالى‬
".‫ رواه أبو داود‬.‫بينهما‬

“Allah (SWT) has declared that he will become a partner in a business

between two Mushariks until they indulge in cheating or breach of
trust”
 Musharakah
Terminology & Definition of Musharakah

• “Musharakah ” means “Sharing” and in the terminology of Islamic Fiqh.

• The word Musharakah has been derived from “Shirkah” which means being
a partner.

• Musharakah is basically a kind of partnership in which the partners join

together with different contributions, work or obligation for the common
objective of undertaking business and trade in accordance with the principles
of Shariah.

• It is an ideal alternative for the interest based financing with far reaching
effects on the economy
 Musharakah

Contract of Musharakah

The contract of Musharakah can take place between two or

more persons with the capital contributed by the
partners/shareholders and the profit to be distributed among
them according to the rates agreed upon by the
shareholders.
 Types of Musharakah

SHIRKAH

SHIRKAT-UL-MILK SHIRKAT-UL-AQD

IKHTIARI GAIR IKHTIARI

(Optional) (compulsary)

SHIRKAT- SHIRKAT- SHIRKAT-

UL-AMWAL UL-AAMAL UL-WUJOOH

SHIRKAT- SHIRKAT-
UL-Mufawaza UL-Ainan
 Types of Musharakah
Shirkat has been divided into two kinds:

1. SHIRKAT-UL-MILK
It means joint ownership of two or more persons in a particular
property/asset not for the purpose of earning profit.

2. SHIRKAT-UL-AQD
This is the second type of Shirkah which means “a partnership
effected by a mutual contract for the purpose of earning profit”.
 Shirkat ul Milk
-It means joint ownership of two or more persons in a particular
property.
-This kind of “Shirkah” may come into existence in two different
ways:
1. OPTIONAL SHIRKAT-UL-MILK (Ikhtiari)
If two or more person purchase an equipment, it will be owned
jointly by both of them and the relationship between them with regard
to that property is called “Shirkat-ul-milk.”

Here this relationship has come into existence at their own option, as
they themselves elected to purchase the equipment jointly.
 Shirkat ul Milk
2. COMPULSORY SHIRKAT-UL-MILK (Ghair Ikhtiari)

-There are cases where this kind of “Shirkah” comes to operate

automatically without any action taken by the parties.

-For example, after the death of a person, all his heirs inherit his
property which comes into their joint ownership as an automatic
consequence of the death of that person.
 Shirkat ul Aqd
• This is the second type of Shirkah which means:

• “A partnership effected by a mutual contract in which the partners join

together with different contributions, work or obligation for the purpose
of earning profit”.

• In short it may also be translated as “Joint commercial enterprise.”

10
 Types of Shirkat ul Aqd

Shirkat-ul-‘Aqd is further divided into three kinds:

1)Shirkat-ul-Amwal (contractual partnership)

2)Shirkat-ul-A’mal (liability partnership)

3)Shirkat-ul-wujooh (vocational partnership)

 Types of Shirkat ul Aqd

(1)Shirkat-ul-Amwal:
Where all the partners invest some Capital into a Commercial
enterprise.
It is the most important & commonly used form of Shirkat
 Types of Shirkat ul Aqd

(2) Shirkat-ul-A’mal:
-Where all the partners jointly undertake to render some services for their
customers.
-The fee charged from them is distributed among them according to an
agreed ratio.
-If two persons agree to undertake tailoring services for their customers on
the condition that the wages so earned will go to a joint pool which shall be
distributed between them irrespective of the size of work each partner has
actually done.
 Types of Shirkat ul Aqd
(3) Shirkat-ul-wujooh

-The word Wujooh comes from Wajahat meaning goodwill.

-Hence this is a partnership in Goodwill

-Here the partners contribute in the business not through capital but through
their goodwill and share profit at an agreed ratio.

-All they do is that they purchase the commodities on a deferred price and sell
them at spot. The profit so earned is distributed between them at an agreed
ratio.
 Musharakah
• Each mentioned three types of Shirkat-ul-Aqd are further divided into
two types:
1. Shirkat-Al-Mufawada (Capital & labour at par):
• All partners share capital, management, profit, and risk in absolute
equals. It is a necessary condition for all four categories to be shared
amongst the partners.
• Every partner who shares equally is a Trustee, Guarantor and Agent on
behalf of the other partners

2. Shirkat-ul-Ainan :
• A more common type of Shirkat-ul-Aqd where equality in capital,
management or liability might be equal in one case but not in all respect
meaning either profit is equal but not labor or vice versa.
 Rules of Musharakah
• Musharakah means relationship established under a contract by the
mutual consent of the parties for sharing of profits and losses, arising
from a joint enterprise or venture.

• Investments come from all partners / shareholders hereinafter referred to

as partners.

• Profits shall be distributed in the proportion mutually agreed in the

contract.
 Rules of Musharakah
The existence of Muta’aqideen(Partners):

Capability of Partners:

• Must be sane & mature and be able of entering into a contract.

• The contract must take place with free consent of the parties without any
fraud or misrepresentation.
 Rules of Musharakah
Management of Musharakah:

• Each partner has a right to take part in Musharakah

Management.
• The partners may appoint a managing partner by mutual
consent
• One or more of the partners may decide not to work for the
Musharakah and work as a sleeping partner.
 Rules of Musharakah
Asset of Musharakah:

• All assets of Musharakah are jointly owned in proportion

to the capital of each partner.

Capital of Musharakah

• Share capital in a Musharakah can be contributed either in

cash or in the form of commodities. In the latter case, the
market value of the commodities shall determine the share
of the partner in the capital.
 Rules of Musharakah
Rule for distribution of Profit:

• The ratio of profit distribution must be agreed at the time of execution of

the contract
• The ratio must be determined as a proportion of the actual profit earned
by the enterprise
-Not in lump sum amount
-Not as percentage of partner’s investment
• A sleeping partner cannot share the profit more than the percentage of his
capital.
 Rules of Musharakah
Rules for Loss:

• In the case of a loss, all the Muslim jurists are agreed on the point that
each partner shall suffer the loss exactly according to the ratio of
investment.
• There is a complete consensus of jurists on this principle.
• Profit is based on the agreement of the parties, but loss is always
subject to the ratio of investment.
 Termination of Musharakah
Musharakah is deemed to be terminated in any one of the following
events:
1) Every partner has a right to terminate the Musharakah at any time
after giving his partner a notice to this effect, whereby the
Musharakah will come to an end.
 
• In this case, if the assets of the Musharakah are in cash form, all of
them will be distributed pro rata between the partners.

• But if the assets are not liquidated, the partners may agree either on
the liquidation of the assets, or on their distribution or partition
between the partners as they are.
 Termination of Musharakah
2) If any one of the partners dies during the Musharakah, the contract
of Musharakah with him stands terminated. His heirs in this case,
will have the option either to draw the share of the deceased from
the business, or to continue with the contract of Musharakah.

3) If any one of the partners becomes insane or otherwise becomes

incapable of effecting commercial transactions, the Musharakah
stands terminated.
 Termination of Musharakah
• If one partner wants to terminate the Musharakah but other partners want
to continue this can be done by mutual Agreement
• Termination of Musharakah with one partner does not mean termination
with other partners
• Price of leaving partner’s share must be determined
• If assets are not liquid their valuation must be done to distribute shares
 Security & Collateral in Musharakah

• All partners in a Sharika contract maintain the assets of the Sharika on a

trust basis. Therefore, no one is liable except in cases of misconduct,
negligence or breach of contract.

• A third party may provide a guarantee to make up a loss of capital of some

or all partners. This guarantee is circumscribed with the conditions that

-The legal capacity and financial liability of such a third party as a

guarantor are independent from the Sharika contract.

-The guarantee should neither be provided for consideration nor linked in

any manner to the Sharika Contract.
 Application

Musharakah can be successfully used to in the following areas:

• Project financing
• Working capital financing
• Import Financing
• Export Financing
• Running finance
• Saving/Deposit account
• Certificates of Investments
• Term finance certificates
• Inter bank financing
Diminishing Musharakah
 Diminishing Musharakah

•
DM created under the Shirkatul Milk

•
It is a form of partnership in which one of the partners promises to buy the
equity share of the other partner gradually until the title to the equity is
completely transferred to him.
 Diminishing Musharakah

Three components of Diminishing Musharaka

1.(Shirkatul Milk) Joint ownership of the Bank and customer

2.(Ijarah Agreement) Customer as a lessee uses the share of the bank

3.(Sale Agreement) Redemption of the share of the Bank by the customer

 Application

Mode of Fixed Asset Financing

Diminishing Musharakah is commonly used for the purpose of financing of

fixed assets by various Islamic banks.
•
House financing
•
Car Financing
•
Plant and machinery financing
•
All other fixed Assets
 Diminishing Musharakah

Basic Structure
 Diminishing Musharakah

Joint
BANK Ownership CUSTOMER
Rent
Musharaka
 The customer approaches the Bank with the request for
Project/Machinery/House financing

 The Bank enters into a Musharakah (Joint Ownership) agreement with the
customer and both of them pay their respective shares to the seller of the asset.

 Customer pays rent for the use of banks share in the property
 Diminishing Musharakah
Joint
Ownership
BANK Gradual Transfer of Ownership CUSTOMER

Musharaka

 The value of Bank’s share in Musharakah property is divided into units, which it sells to the
customer. Ownership of the asset is gradually transferred to the customer upon payment of
asset price.
 Units will be worked out by dividing Bank’s financed amount by number of months for which
finance to be allowed.

 With each purchase of unit by the customer, the Bank’s share in the Musharakah property starts
diminishing, whereas customer’s share starts increasing, correspondingly.

 Finally, the customer becomes the sole owner of the property after having purchased all units
from the Bank, along with the rentals thereon.
Shariah Principles

34
 Shariah Principles

•
To create joint ownership in property is called Shirkat-ul-Milk and is
expressly allowed by all schools of Islamic Jurisprudence.
•
All Muslim Jurists agree on the permissibility of the Financier leasing his
share in property to client and charging him rent i.e. the permissibility of
leasing one’s share to his partner.
•
There is difference of opinion among leasing one’s share to a third part
But there is no difference on permissibility on leasing to a partner.
 Shariah Principles

•
Promise of client to purchase units of share of financier is also allowed.
•
The Transactions cannot be combined in a single arrangements and they
have to be executed independently.
•
This is because it is a well settled rule of Islamic Jurisprudence that one
transaction cannot be made a condition for another.
•
Instead of making the transactions a pre-condition for one another there
can be one-sided promises from one party to another
Illustration

37
 DM- Illustration

1. Customer request financing for a fixed Asset costing Rs. 300 million.

2. Islamic Bank agrees to provide financing up to 90% of the cost.

3. Joint Ownership Agreement is executed between the bank and the

Customer.

4. Bank will purchase 90% share in the asset by paying Rs. 270 million to
supplier.

5. Customers pays its share of Rs. 30 million.

 DM- Illustration

6. Bank’s share is divided into five units.

7. Customer agrees to buyout Bank’s share (units) on yearly basis and the
Undertaking is executed by the customer.

8. Customer pays the rent for the usage of the Bank’s units.

9. Rental reduces after purchase of each unit by the customer.

10. After five years ownership of the asset is completely transferred to the
customer.
Any Question
?
?

40