Musharakah

(Partnership and Joint Stock

Companies)
“Shirkah” means “Sharing” in the terminology of
Islamic Fiqh.


Technical meaning of the Shirkah is that, two or

more persons take part either in a property
without business intention or in a business to
generate profits.
 FROM HADITHS
 FROM HADITHS:
 FROM HADITHS:


 Conclusion of a Sharika Contract According to AAOIFI

1.A Sharika contract can be concluded by agreement between the

parties concerned on the basis of offer and acceptance.
2.It is permissible for the institution to enter in a partnership
contract with non Muslims or conventional banks to carry out
operations acceptable by Sharia unless it has become evident
that the funds or items presented by these entities for the
purpose of the partnership are from non-permissible sources.
3. According to AAOIFI, it is permissible for the
partners to amend at any point of time the
terms of a partnership contract. They may
make changes to the ratio of profit-sharing ,
taking into account that any losses are shared
according to the share of each partner in the
partnership capital.
It has been divided into two kinds:
 SHIRKAT-UL-MILK
It means joint ownership of two or more persons in a
particular property without any commercial intention.

 SHIRKAT-UL-’AQD
Joint venture of two or more persons in particular
property/equity with commercial intention.
SHIRKAT-UL-MILK

Thiskind of Shirkah may come in to existence in

two different ways:

A. Optional Shirkat-ul-Milk (Ikhtiari)

B. Compulsory Shirkat-ul-Milk (Ghair Ikhtiari)

SHIRKAT-UL-AQD

Shirkat-ul-Aqd is simply a partnership which has come in to

existence through a mutual contract for commercial purpose.

Shirkat-ul-Aqd is divided in to three parts: ways:

a. Shirkat-ul-Amwal

b. Shirkat-ul-Aamal

c. Shirkat-ul-Wujooh
All the three are further divided in to two types:

SHIRKAT-UL- MUFAWADAH
SHIRKAT-UL- AINAN
SHIRKAT-UL- MUFAWADAH

Where capital, profit, loss and management are

equal among the partners.

SHIRKAT-UL- AINAN
The partners share capital, management, profit,
and risk in an agreed proportion which may not be
equal.
This is the most common type of Shirkah.
 FORMS OF MUSHARAKAH – REDEMPTION PERSPECTIVE:

 Permenant Musharakah
 Diminishing Musharaka
 Permenant Musharakah is the conventional form of
partnership.
Diminishing Musharakah is a mode evolved by the Islamic
Banks.
The basic difference between the two is the continuity of the
contract.
 DIMINISHING MUSHARAKAH

Diminishing Musharakah is a form of partnership in which one

of the partners promises to purchase the share of other partners


in Musharakah property from time to time until the title of

Musharakah property/ equity is completely transferred to him.

RULES OF PROFIT DETERMINATION:
Different partners may be given different
weightages according to amount and period of
their investment.
According to AAOIFI, partners can agree that
first 6-month profit for example, will be
distributed at ratio of 50%: 50% and next 6-
month profit will be distributed at ratio of 30%:
70%.
RULES OF PROFIT DETERMINATION:

Partners can also agree that for example, if profit

is Rs. 1.000 million, it will be distributed at ratio of
50%: 50% and excess profit above Rs.1.000 million
will be distributed at ratio of 70%: 30%.


RULES OF PROFIT DETERMINATION:

It is not permitted to start the allocation

of profit among the partners unless the
operation costs, expenses and taxes are
deducted in calculating the profit and
the capital of the Sharika is maintained
intact.
MUSHARAKAH TERMINATION

At the time of termination of Shirk’at, if some part

of capital is in shape of Illiquid (Fixed Assets) form,
it will be sold to convert into Liquid or its market
value will be taken and on the basis of market value
both liquid and illiquid assets will be distributed.
MUSHARAKAH TERMINATION

If illiquid asset is sold and transferred in liquid form,

it is called “Physical Liquidation”.

If market value of illiquid asset is taken, it is called

“Constructive Liquidation.”
MUSHARAKAH TERMINATION
If dispute arises among the partners in physical or
constructive liquidation then constructive liquidation
will be preferable.

After physical or constructive liquidation, all direct

and indirect expenses will be deducted from the total
capital and Net Profit will be distributed.
MUSHARAKAH TERMINATION

It is also permissible that only direct expenses be

deducted and Gross Profit be distributed, indirect
expenses will be borne by any one partner.
MUSHARAKAH TERMINATION
After deduction of expenses, every partner will be
given his
 principal amount. The remaining amount will be
profit, which will be distributed according to
agreed ratio of profit.
MUSHARAKAH TERMINATION
If there are some partners in a business and one of
them decides to leave the Shirkah (Partnership) and
other partners want to continue the business, then
the remaining partners may purchase the share of
outgoing partner or a new person from outside may
enter into the Shirkah (partnership) by purchasing
the share of outgoing partner.
MUSHARAKAH TERMINATION
How to evaluate the price of leaving partner’s
share? There are four Scenarios:

1. If the business is in liquid form (cash); then

the leaving partner’s share may be purchased
only paying his principal and actual profit.
MUSHARAKAH TERMINATION

2. If business is in shape of cash and there are

some receivables, then the leaving partner’s
share may be purchased only paying his
principal and actual profit, therefore final price
of his share can not be decided. However he may
be given provisional price at the time of
purchasing, after receiving receivables final price
of share will be decided.
MUSHARAKAH TERMINATION

3. If business is in the shape of cash, receivables

and fixed assets but fixed assets are less than
10%, then the leaving partner’s share may be
purchased only paying his principal and actual
profit, therefore final price of his share can not
be decided. However, he may be given
provisional price at the time of purchasing, after
liquidation final price of share will be decided.
MUSHARAKAH TERMINATION

4. If business is in shape of cash, receivables

and fixed assets but fixed assets are more than
the 10%; then, the share of outgoing partner can
be purchased at any final price with mutual
consent, subject to the agreed price must be
more than the ratio of cash and receivables in
his share.
PROBLEMS/ OBJECTIONS -Constraints

Risk of Loss
Dishonesty

Secrecy of Business
Client's unwillingness to Share Profits
 Termination of Musharakah
Musharakah as a Mode of Financing

Musharakah can be successfully used to in the

following areas:

• Project financing
• Working capital financing
• Import Financing
• Export Financing
• Running finance
• Saving account
• Certificates of Investments
• Term finance certificates
• Treasury Bills
• Inter bank lending/borrowing
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Jazak a Allah al khair