Musharakah Partnership – Basic rule of Musharakah

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Musharaka

Musharakah:

It is a structured joint venture or partnership in which profit and loss of enterprise is shared according to Islamic finance. The English meaning of Musharakah is “Sharing”. It means all partners will need to share loss as per ration of invested amount; however, profit may be shared as per mutual agreement. Although, all partners have equal right to participate in management, any partner may waive the right of participation in management for any other partner willingly. Another name of Musharakah is Shirkah.

Types of Musharakah:

There are two types of Musharakah:

  • Shirkat-ul-Milk – Any partnership agreement which is created for the commercial purpose is called Shirkat-ul-Aqd. It can come in existence by any of two ways:
    • Ikhtiari Shirkat-ul-Milk (Optional) – Party-A and Party-B jointly-purchased any asset.
      • For Example: Farhan and Mr. Mujtaba jointly purchased a warehouse for business purpose. This warehouse will be used to store imported electronic gadgets. Later these items will be sold in electronic market to fulfil order requirements.
    • Ghair-Ikhtiari Shirkat-ul-Milk (Compulsory) – Party-A and Party-B become jointly-owner of any inherent asset.
      • For Example: After the death of grandfather, his house become inherent property and jointly owned by his children.
    • Shirkat-ul-Aqd – Any joint venture which is based on non-commercial intention is called Shirkat-ul-Milk. This can be divided in further three types:
      • Shirkat-ul-Amwal – As it is showed by name “Amwal” means “Capital/Finance”. A partnership in which all partners invest capital in any venture for commercial purpose.
        • For Example: Farhan, Mr. Mujtaba, and Mr. Mirza started business with the equally invested capital of Rs.500,000.
      • Shirkat-ul-Aamal – “Aamal” means “Act”, any service related activity. Partnership in which two or more partners decide to provide services in against of profit/loss sharing.
        • For Example: Farhan and Mr. Mujtaba start any consultancy firm in which they will not produce anything to sell but will provide services.
      • Shirkat-ul-Wujooh – This is when partners need not to invest any amount of capital because goods are sold on spot but purchased on deferred payment. It is possible only when partners of company have very positive goodwill.
        • For Example: Knowthys & MM Enterprises purchase electronic gadgets from importers and sale in market on cash.

These all three (Shirkat-ul-Amwal, Shirkat-ul-Aamal, and Shirkat-ul-Wujooh) are further divided in to two more types, which are:

  1. Shirkat-ul-Mufawadah – Where all partners have equal contribution in profit & loss, capital & investment, and management & risk etc.
  2. Shirkat-ul-Ainan – This is the most common type. Where all partners have mutual agreement on different proportion of sharing profit & loss, capital & investment, and risk & management etc.

The Basic Rules of Musharakah:

  • It can take place between two or more parties through an agreement or contract.
  • This contract shall be with the intentions of profit & loss or/and capital sharing basis.
  • The ration of contribution and sharing shall be agreed at the time of contract between all parties.
  • All partners contribute in investment to create business relationship.
  • All partners shall be sane, mature, and able to enter in contract.
  • The contract shall be formed with the free consent of all parties.
  • The contract shall be free of any fraud or misrepresentation.
  • All assets shall be jointly owned by partners according to ratio of invested capital.
  • Invested capital shall be in the terms of money or any commodity agreed by all partners. Amount of commodity shall be estimated according to market value.
  • Value of invested capital shall also be mutually agreed by all partners.
  • Profit sharing ration shall be decided and agreed at the time of contract by all partners.
  • Profit ratio shall not depend on investment of partners but in the proportion of actual profit earning.
  • Sleeping partner shall not be entitled to claim profit ratio more than percentage of his investment.
  • The partnership shall become invalid if profit distribution agreed by parties like fixed amount of Rs.10,000 will go to Party-A and rest of the profit to Party-B.
  • This shall also become null and void if parties of the contract agree on that Party-A will get fixed percentage of his invested amount such as 10% of investment of his investment.
  • All partners will suffer loss according the ratio of their invested capital, no matter whatever the profit distribution ratio is.
  • Every partner has the right to terminate the Musharakah partnership with a notice to this effect.
  • On termination of Musharakah partnership, all the assets, either in the form of cash or illiquid, shall be distributed with the same ratio of investment.
  • Musharakah partnership shall also be terminated in the case of the death of any partner. However, his heirs will have the right to enter in Musharakah partnership or withdraw all investment.
  • In the case of any one partner become insane or incapable to perform commercial transactions, Musharakah partnership shall be considered terminated.
  • Other partners may continue Musharakah if anyone partner wants to discontinue. Other partners may buy his shares and Musharakah will continue with remaining partners.
  • A fixed salary of any partner is not allowed in any case.

Musharakah and Islamic Banks (Diminishing Musharakah):

Islamic banking is based on Musharakah. Musharakah in Islamic Banking can be formed in two forms, namely:

  • Permanent Musharakah – conventional form of partnership.
  • Diminishing Musharakah – it is the form where one partner promises to purchase the shares of other partners gradually until all equity transferred to him.

Diminishing Musharakah:

Bank enters in Musharakah contract (joint venture/ownership) when a customer reaches to bank with the request for any asset purchase such as machinery, plant, land or to invest in any project.

Banks and customer pay their respective amount of shares to the seller of the asset. The asset comes in the possession of costumer and he needs to pay rent to the bank for the usage of the bank’s share of ownership.

The ownership of bank’s share will be transferred as customer pays off on monthly basis or as decided in contract. This process will continue till all share of bank’s ownership pays off by the customer and costumer will become solely owner of that property after paying last unit of bank’s share. Customer will continue to pay rental payments as per rent agreement until 100% ownership of the property.

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