Mudarabah is an arrangement or agreement between the bank, or a capital

provider, and an entrepreneur, whereby the entrepreneur can mobilize the funds of
the former for its business activity. The entrepreneur provides expertise, labor and
management. Profits made are shared between the bank and the entrepreneur
according to predetermined ratio. In case of loss, the bank loses the capital, while
the entrepreneur loses his provision of labor. It is this financial risk, according to the
Shariah, that justifies the bank's claim to part of the profit.[19] The profit-sharing
continues until the loan is repaid. The bank is compensated for the time value of its
money in the form of a floating rate that is pegged to the debtor's profits.

Musharakah is a relationship between two parties or more, of whom contribute

capital to a business, and divide the net profit and loss pro rata. This is often used in
investment projects, letters of credit, and the purchase or real estate or property. In
the case of real estate or property, the bank assess an imputed rent and will share it
as agreed in advance.[19] All providers of capital are entitled to participate in
management, but not necessarily required to do so. The profit is distributed among
the partners in pre-agreed ratios, while the loss is borne by each partner strictly in
proportion to respective capital contributions. This concept is distinct from fixed-
income investing (i.e. issuance of loans).

Conditions for investment in Shares ( Top )

In the light of the foregoing discussion, dealing in equity shares can be acceptable in Shari‘ah
subject to the following conditions:

1. The main business of the company is not violative of Shari‘ah. Therefore, it is not permissible
to acquire the shares of the companies providing financial services on interest, like conventional
banks, insurance companies, or the companies involved in some other business not approved by
the Shari‘ah, such as companies manufacturing, selling or offering liquors, pork, harâm meat, or
involved in gambling, night club activities, pornography etc.

2. If the main business of the companies is halâl, like automobiles, textile, etc. but they deposit
their surplus amounts in an interest-bearing account or borrow money on interest, the share
holder must express his disapproval against such dealings, preferably by raising his voice against
such activities in the annual general meeting of the company.

3. If some income from interest-bearing accounts is included in the income of the company, the
proportion of such income in the dividend paid to the share-holder must be given in charity, and
must not be retained by him. For example, if 5% of the whole income of a company has come
out of interest-bearing deposits, 5% of the dividend must be given in charity.

4. The shares of a company are negotiable only if the company owns some illiquid assets. If all
the assets of a company are in liquid form, i.e. in the form of money they cannot be purchased or
sold except at par value, because in this case the share represents money only and the money
cannot be traded in except at par.

What should be the exact proportion of illquid assets of a company for warranting the
negotiability of its shares? The contemporary scholars have different views about this question.
Some scholars are of the view that the ratio of illiquid assets must be 51% in the least. They
argue that if such assets are less than 50%, then most of the assets are in liquid form, and
therefore, all its assets should be treated as liquid on the basis of the juristic principle:

The majority deserves to be treated as the whole of a thing.

Some other scholars have opined that even if the illiquid asset of a company are 33%, its shares
can be treated as negotiable.

The third view is based on the Hanafi jurisprudence. The principle of the hanafi school is that
whenever an asset is a combination of liquid and illiquid assets, it can be negotiable irrespective
of the proportion of its liquid part. However, this principle is subject to two conditions:

Firstly, the illiquid part of the combination must not be in ignore-able quantity. It means that it
should be in a considerable proportion.

Secondly, the price of the combination should be more than the value of the liquid amount
contained therein. For example, if a share of 100 dollars represents 75 dollars, plus some fixed
assets, the price of the share must be more than 75 dollars. In this case, if the price of the share is
fixed as 105, it will mean that 75 dollars are in exchange of 75 dollars owned by the share and
the balance of 30 dollars is in exchange of the fixed assets. Conversely, if the price of that share
is fixed as 70 dollars, it will not be allowed, because the 75 dollars owned by the share are in this
case against an amount which is less than 75. This kind of exchange falls within the definition of
'riba' and is not allowed. Similarly, if the price of the share, in the above example, is fixed as 75
dollars, it will not be permissible, because if we presume that 75 dollars of the price are against
75 dollars owned by the share, no part of the price can be attributed to the fixed assets owned by
the share. Therefore, some part of the price (75 dollars) must be presumed to be in exchange of
the fixed assets of the share. In this case, the remaining amount will not be adequate for being the
price of 75 dollars. For this reason the transaction will not be valid. However, in practical terms,
this is merely a theoretical possibility, because it is difficult to imagine a situation where the
price of a share goes lower than its liquid assets.

Subject to these conditions, the purchase and sale of shares is permissible in Shari‘ah. An Islamic
Equity Fund can be established on this basis. The subscribers to the Fund will be treated in
shari‘ah as partners inter se. All the subscription amounts will form a joint pool and will be
invested in purchasing the shares of different companies. The profits can accrue either through
dividends distributed by the relevant companies or through the appreciation in the prices of the
shares. In the first case i.e. where the profits are earned through dividends, a certain proportion of
the dividend, which corresponds to the proportion of interest earned by the company, must be
given in charity. The contemporary Islamic Funds have termed this process as 'purification'.

The shari‘ah scholars have different views about whether the 'purification' is necessary where the
profits are made through capital gains (i.e. by purchasing the shares at a lower price and selling
them at a higher price). Some scholars are of the view that even in the case of capital gains, the
process of 'purification' is necessary, because the market price of the share may reflect an
element of interest included in the assets of the company. The other view is that no purification is
required if the share is sold, even if it results in a capital gain. The reason is that no specific
amount of the price can be allocated for the interest received by the company. It is obvious that if
all the above requirements of the halâl shares are observed, then most of the assets of the
company are halâl, and a very small proportion of its assets may have been created by the
income of interest. This small proportion is not only unknown, but also ignore-able as compared
to bulk of the assets of the company. Therefore, the price of the share, in fact, is against bulk of
the assets, and not against such a small proportion. The whole price of the share therefore, may
be taken as the price of the halâl assets only.

Although this second view is not without force, yet the first view is more precautious and far
from doubts. Particularly, it is more equitable in an open-ended equity fund, because if the
purification is not carried out on the appreciation and a person redeems his unit of the Fund at a
time when no dividend is received by it, no amount of purification will be deducted from its
price, even though the price of the unit may have increased due to the appreciation in the prices
of the shares held by the fund. Conversely, when a person redeems his unit after some dividends
have been received in the fund and the amount of purification has been deducted therefrom,
reducing the net asset value per unit, he will get a lesser price as compared to the first person.

On the contrary, if purification is carried out both on dividends and on capital gains, all the unit-
holders will be treated at par with regard to the deduction of the amounts of purification.
Therefore, it is not only free from doubts but also more equitable for all the unit-holders to carry
out purification in the capital gains also. This purification may be carried out on the basis of an
average percentage of the interest earned by the companies included in the portfolio.

The management of the fund may be carried out in two alternative ways. The managers of the
Fund may act as mudâribs for the subscribers. In this case a certain percentage of the annual
profit accrued to the Fund may be determined as the reward of the management, meaning thereby
that the management will get its share only if the fund has earned some profit. If there is no profit
in the fund, the management will deserve nothing. The share of the management will increase
with the increase of profits.

The second option for the management is to act as an agent for the subscribers. In this case, the
management may be given a pre-agreed fee for its services. This fee may be fixed in lump sum
or as a monthly or annual remuneration. According to the contemporary Shari‘ah scholars, the
fee can also be based on a percentage of the net asset value of the fund. For example, it may be
agreed that the management will get 2% or 3% of the net asset value of the fund 1 at the end of
every financial year.

However, it is necessary in Shari‘ah to determine any one of the aforesaid methods before the
launch of the fund. The practical way for this would be to disclose in the prospectus of the fund
the basis on which the fees of the management will be paid. It is generally presumed that
whoever subscribes to the fund agrees with the terms mentioned in the prospectus. Therefore, the
manner of paying the management will be taken as agreed upon by all the subscribers.
The Laws of Partnership (Companies) in Islam
uploaded 09 Jul 2003
The Islamic laws of Partnership were discussed widely by the past
scholars of Islam and the books of fiqh bulged with their detail.
However, with the loss of the Khilafah many of the Islamic thoughts
and practices were also forgotten and the Islamic world came to be
dominated firstly by the socialist and then by capitalist solutions.
Until some even felt that Islam was incapable of addressing and
solving contemporary issues.

One of the areas that were severely impacted by this decline was in
the understanding and in the practice of business organisation. It is
with this in mind that this series of articles demonstrates the unique
Islamic thoughts with regards to business structures and
organization so that once again Islam is understood beyond the
ritual conducts and not studied as a thought only but applied in
practice.

Linguistic Meaning
The word for partnership is sharika and some jurists use the word
shirkah.

Ibn al-Humam in Fath al-Qadir describes sharika as meaning the

mixing of the shares so that one of them cannot be distinguished
from another.

Shaikh Taqiuddin an-Nabhani states in Nidaam ul Iqtisaad fil Islam

(Economic System in Islam) that Ash-Sharika linguistically means
mixing two or more shares together such that neither can be
distinguished from the other.

Shariah Meaning
Differences in the types of sharikah between the Mujtihideen has
meant that there has been difficulty in producing a general shariah
definition.

The Maliki scholar Al-Khayyat quotes a definition from al-Dardir in

his al-Sharikat that a partnership is “a contract between two or
more owners of wealth for joint trade or it is a contract for shared
labour and shared profits.â€‌

Ibn Qudamah the Hanbali scholar in al-Mughni defined it as

“participation of two or more persons in transactions.
However perhaps the most comprehensive shariah definition is
provided by Sheikh Taqiuddin an-Nabhani in Nidaam ul Iqtisaad
where the company in Shar'a is defined as a contract between two
or more persons, in which they agree to perform financial work with
the intention of making profit.

Daleel (Evidence)
Partnership is allowed in Islam because when Muhammad was sent
as a Messenger people were dealing with companies and he
(salAllahu alaihi wasallam) did not forbid this. Al Bukhari narrated
that Abu Al-Minhal said: "I and my partner bought something in
cash and credit. Al-Bara ibn 'Azib came to us so we asked
him about this. He said: 'My partner, Zaid ibn Al-Arqam, and
I did the same and we asked the Prophet (salAllahu alaihi
wasallam) about this.' He (salAllahu alaihi wasallam) said:
'That which is in cash you take, and that which is in credit
you return it back."' Ad-Daraqutni narrated from Abu Hurairah
that the Prophet (salAllahu alaihi wasallam) said: "Allah the
Supreme said 'I am the third of the two partners as long as
one of them does not betray his companion. If he betrayed, I
would withdraw from them."

Common Conditions
According to the majority of the imams the following form the
common elements of the contract of sharika.

Two parties and an offer and acceptance between them

The contract of the company requires the existence of both offer
(ijab) and acceptance (qabul), as is the case with all Islamic
contracts. An offer occurs when one party says to the other: 'I
entered into partnership with you in such and such' and the other
party replies by saying, 'I accepted.' These actual words are not
necessary but the meaning is.

Subject matter
There must occur in the offer and acceptance something that
indicates that one of the parties addressed the other orally or in
writing on the matter of partnership over something, and the other
accepted. Therefore, an agreement on partnership only does not
represent a contract. An agreement to pay money or property for
partnership is also not considered a contract as well. Rather, the
contract must include the concept of partnership in something.

Right of Disposal
The condition of validity of the partnership contract in Islam requires
that the contracted matter be a right of disposal, suitable for
representation (Wakala) and what is gained by the disposal is shared
between the two partners. It follows that it is invalid to form a
company with a person who is prevented from disposal of property
e.g. a minor, insane etc.

Dissolving the Company

Dissolution of the company by one of the two partners is valid
because it is a permissible contract allowed by Shar'a. It becomes
void by the following:
• the death of any partner
• a partner becoming insane
• if a partner was declared incompetent and put under
guardianship, if it is a company consisting of two persons.
If one of the partners dies leaving behind a mature inheritor, he has
the option to continue with the company and his partner has to
permit him to dispose (Tassaruf) in the company. However, he also
has the option to demand dissolution of the company. If one of the
partners demands dissolution of the company then the other partner
must accept his request.

If they were more than two partners, and one of them demanded
the dissolution of the company and the rest were happy to continue
with the company, then the existing company would be dissolved
and renewed between the remaining partners.

Generally if one partner demanded division and the other demanded

sale of the company, the demand of division is accepted rather than
that of sale. Except in the Mudharaba company (discussed in a
future article), where if the worker (Mudharib) demanded the sale of
the company and the other partner demanded division, then the
demand of the worker will be accepted because his right is in the
profit which will not be known except when selling.
Capitalist Companies
The necessity of understanding these Islamic rules has acquired all
the more importance in light of the current dominance of capitalist
company structures across the world, including the Islamic lands,
many of which are invalid and prohibited for Muslims to participate
in.

Although it is not the subject matter of this series of articles, a

cursory look at one of the most prominent capitalist company
structure, the share company (the cornerstone of the modern
capitalist economy), serves to highlight its invalidity with the
shariah.
• No Offer or Acceptance
In the share stock company no agreement occurs between two
or more persons. Rather it is a commitment made by an
individual will from one side.
• Absence of Partnership in Something – No Subject
Matter
No concept of partnership in something as no agreement has
occurred to carry out a work on something; instead one person
commits himself to offer property only.
• Invalid Right of Disposal
The share stock company is viewed as a corporate personality
which has the right of disposal. In the share stock company
those who carry out the actions in the company are the board
of directors who are deputies for the shareholders, i.e. for the
property partners. However the partner is not allowed in
Shar'a, to deputise somebody with the right of disposal and
action in the company on his behalf whether he was a property
partner or a body partner. The contract of the company is
concluded on him personally, so he has to act by himself. So
entrusting the disposal to a corporate personality is not
allowed.
• No Right of Dissolution
The share stock company is permanent, and it continues to
function despite the death or the incompetence of any of the
partners.

Thus the share company is void and it is prohibited for Muslims

 to participate in them as a partner.

A detailed study of the share company and other void capitalist

company structures such as the unlimited liability company
and the co-operative societies can be found in Nidaam ul
Iqtisaad fil Islam (Economic System in Islam).
Types of Company Partnership
Ibn Qudamah states in al-Mughni (Vol 5) that partnership contracts
are of five types; Al-'Inan, Al-Abdan, Al-Mudharaba, Al-Wujooh and
Al-Mufawadha.

Shaikh Taqiuddin an-Nabhani states in Nidaam ul Iqtisaad fil Islam

“From the examination of partnership contracts in Islam, and the
divine rules (Ahkam Shar'iyah) related to them it can be concluded
that there are five types of company in Islam. These are Al-'Inan
(equal), Al-Abdan (bodies), Al-Mudharaba (two or more), Al-Wujooh
(faces) and Al-Mufawadha (negotiation).â€‌

The next article will discuss the Company of Equal (Al-'Inan) Insha
'Allah.
Habib ur-Rahman, Khilafah.com Journal, 9 Jumaad al-Oola 1424
Hijri / 8 July 2003
============================================================
…‫ظ‘ظژطظ’ظ‬±‫ظ’ظ…ظگ ط§ظ„ظ„ظ‡ظگ ط§ظ„ط‬³ ‫ط¨ظگط‬
‫ظ‘ظژطظگظٹظ…ظگظگ‬±‫ظ†ظگ ط§ظ„ط‬
The Company of Equal (Al-'Inan)
uploaded 10 Jul 2003
The Company of Equal (Al-Inan) is one of the most common forms of
partnerships in Islam.

The Meaning of Inan

Al Sarkhasi (May Allah have mercy on him) says in his Mabsut Vol 2:
….and it is said that it (Inan) is derived from the reins of a riding
animal.

Ibn Qudammah (May Allah have mercy on him) in al-Mughni Vol 5

state:
The meaning is derived from the example of a man driving two
horses when he gives equal rein to both.
Shaikh Taqiuddin an-Nabhani (May Allah have mercy on him) in his
book The Economic System in Islam:
'Inan means two riders in a race if their horses are equal and their
race is equal, so their bridles ('Inan) are equal.
The Meaning of the Company of Equal (Al-'Inan)
Ibn Qudammah in al-Mughni Vol 5 state: The meaning of (inan)
partnership is that two persons should participate with their wealth
and work on the condition that the generated profits will be shared
by them.

Shaikh Taqiuddin an-Nabhani in his book The Economic System in

Islam stated
that this is two bodies associating with their properties. Namely, two
persons associating with their properties and share the work
dividing the profit between them.

It is therefore called a company of 'Inan because the partners are

equal in their right of disposal.

In this type of company, the capital is represented by money,

because money represents the value of the properties and the sales.
It is not allowed to enter into partnership over merchandise unless it
was evaluated in monetary terms at the time of contract. The value
of the merchandise at the time of the evaluation would represent
the capital.

An example of the Company of Inan is where person A makes an

offer to person B to establish a health and fitness centre by each
providing 10,000£‫ آ‬in capital and for both to participate in the day to
day management and operation of the centre. Person B accepts.
They in turn make an offer to another 3 people, who all accept as
partners, to also provide capital and share in the work.

Proofs
The evidence for this type of partnership is that it was practised at
the time of the Prophet and the Sahabah and allowed.

Al-Kasani (May Allah have mercy on him) states in Badai al

Sana’I Vol 7: …the Inan contract is valid by consensus of the
jurists of the provinces and the practice of the people (i.e. the
Sahabah). …. He (the Prophet [salAllahu alaihi wasallam])
approved their actions insofar as he did not proscribe them or deny
it to them, and taqrir (tacit approval) is one form of the Sunnah.

Shaikh Taqiuddin an-Nabhani in his book The Economic System in

Islam stated: This form of company is allowed by the Sunnah (of the
Prophet) and Ijma'a of the Sahabah (consensus of the Companions).
People have entered into this form of partnership since the time of
the Prophet (salAllahu alaihi wasallam) and the Sahabah.

Conditions relating to the Capital of the Company

It is a condition that the capital is defined and available for disposal.
The partnership cannot be formed over an unknown capital, absent
property or a debt.

Shaikh Taqiuddin an-Nabhani in his book The Economic System in

Islam states that this is because …the capital has to be referred to
at the time of division and because the debt cannot be disposed
with immediately and this is the aim of the company.

Al-Kasani states in Badai al Sana’I Vol 7 another reason for why

the Capital must be defined and present: Among these conditions is
the availability of the wealth in the form of an ayn (present thing). It
should neither be a debt (dayn) or an absent wealth. If it is so, the
partnership is not permitted as Inan or as mufawadah. The reason is
that the purpose of the partnership is profit and this is achievable
through transactions in the capital. Such transactions are not
possible in a dayn or in wealth that is absent.

It is a condition that the capital of the company is one property of all

the partners such that neither partner can differentiate his property
from the others.

It is not necessary that the capital should be equal in value. Ibn

Qudammah in al-Mughni Vol 5 mentioned: Equality in the amount of
wealth is not stipulated, and Al-Marghinani (May Allah have mercy
on him) says in al-Hidayah Vol 3: Because equality in wealth is not a
condition for it as the word (inan) does not require this.

It is also not necessary that the capital should be of the same kind.
However, they must be evaluated by one measure so that both
shares become one property. It is, therefore, valid for two people to
become partners with, for example, Egyptian Pounds and Pakistani
Rupees, but these should be evaluated by one value (agreed
between the partners) so that there is no difference between them
and they become one of the same kind.

It is also conditional that each of the partners has authority over the
capital. The Inan (equal) company is based on delegation and trust.
The partners trust each other through handing over properties, and
by delegating permission to each other to dispose of property. Once
the company has been formed it becomes one entity.

Conditions relating to the work and responsibility of the

partners
It is obligatory for the partners to start work themselves as the
company is established upon their bodies. As such a partner is not
allowed to delegate another person to work for the company
personally on his behalf. It is also permitted for partners to assign
themselves roles such as Operations Director or Head of Finance etc.
However, the company as a whole can employ whom it wants and
uses the body of whom it likes as its employee to work for the
company but not a partner.

Any of the partners can trade in whatever way he feels is beneficial

to the company. Each of the partners is also allowed to collect the
price and make purchases, to take legal action for and request
payment of debt, to pay and accept payment, and to return faulty
goods. Each is allowed to hire and lease the capital of the company,
as these are benefits to the company and this is similar to selling
and buying.

Conditions relating to Profit and Loss

It is not conditional that the partners have equal shares, but it is
necessary that they are equal in the right of disposal. With regard to
the capital, it is permitted that the partners have different or equal
shares, while the profit is divided according to what they agree
between themselves. According to what 'Abdurrazzaq narrated in Al-
Jami',

'Ali (May Allah be pleased with him) said: 'The profit is according to
what they stipulated.'
And al-Sarkhasi mentions in his Mabsut Vol II: …the animal has two
reins, one longer than the other and the other one shorter. Thus, it
is permitted in this partnership to have equality in capital and profit
or inequality. We therefore call it Inan.

With regard to losses in the 'Inan company, it is according to the

capital share only. If their shares are of equal value then the loss
between them is divided equally, and if the capital is divided in
thirds then the loss is divided in thirds. If they agreed on other than
that, no value will be given to their stipulations. This is the rule on
loss i.e. the loss is based upon the ratio of their capital shares. This
is because a company is a form of representation (Wakala). The rule
is that the deputy is not held responsible for the loss but the loss is
carried upon the property of the deputising person.

Abdurrazzaq narrated in Al-Jami' from 'Ali (May Allah be pleased with

him): "The loss (Al-Wadhi'a) is upon the capital and the profit is
according to what they stipulated."