FIQH FOR ECONOMIST 2

ECON 3511

PARTNERSHIP IN ISLAM (SHARIKAH)

SECTION

NAME: NOR FARHAIN BINTI SARMIN
MATRIC NO: 1229128






TABLE OF CONTENT

INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
DEFINITION OF PARTNERSHIP IN FIQH AND LAW. . . . . . . . . . . . . 1 - 2
TYPES OF AL-SHARIKAH. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 - 4
THE CONDITION FOR THE CAPITAL . . . . . . . . . . . . . . . . . . . . . . . . . . 4 - 5
THE CONDITION FOR THE DISTRIBUTION OF
PROFIT AND LOSS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
RULES AND REGULATION OF MUSHARAKAH . . . . . . . . . . . . . . . . . 5 - 6
MANAGEMENT OF MUSHARAKAH . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
TERMINATION OF MUSHARAKAH . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
MUSHARAKAH PRODUCT DEVELOPED BY
ISLAMIC BANKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ISSUES AND CHALLENGES OF MUSHARAKAH
IN MODERN WORLD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 - 9
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10








1.0 INTRODUCTION
Islamic finance rests on the general idea of extending tenets of Islamic religious belief to
economics activity in a way that enhances social welfare. Islamic contracs are normally
grounded on asset-based and it must be comply with the Shariah, which prohibits
elements of riba, maisir, gharar and non halal activities. The prohibition is clearly stated
in Quran and Hadith and must be adhered to the financial institution. Thus, in Islamic
economics and finance, a wide range of consensus has been reached on the fact that all
of the financial instruments, partnership-based instruments are the most preferable.
Then, the purpose of this paper is to analysis the modern application of Sharikah
(partnership) in Islamic banks. Besides, it is to investigate Sharikah management and to
recognise the obstacles that influenced on it.

2.0 DEFINITION OF PARTNERSHIP IN FIQH AND LAW
2.1 Definition in Fiqh
2.1.1 The literal meaning in Sharikah
The literal meaning Sharikah means partnership. It also means mixing
of two properties so that they could not be distinguished from each
other. Besides, it also means sharing and participation. Assigning
partner to Allah is referred to as Shirk. Musharakah means the act or
contract of striking up a partnership.
2.1.2 The technical meaning in Sharikah
In Islamic law, partnerships are referred to as Sharikah. In the parlance
of contemporary jurists, the term Musharakah is more commonly used.
Both words are from the same derivative and used interchangeable.
Musharakah or Sharikah can be defined as a joint enterprise formed for
conducting some business in which all partners share the profit
according to a specific ratio while the loss is shared according to the
ratio of the contribution.




2.2 Definition of partnership in Law
A business organization in which two or more individuals manage and operate the
business. Both owners are equally and personally liable for the debts from the
business. The federal government recognizes several types of partnerships.
Partnerships come in two varieties which are general partnerships and limited
partnership.

3.0 TYPES OF AL-SHARIKAH
Based on this figure, there are several concepts of Islamic partnership that can be applied
for the purpose of Islamic equity finance. However, due to the limitation, this paper will
be discussed on the topic musharakah.




















Partnership
Holding Partnership
Contract (commercial)
partnership
Optional Compulsory Trading Partnership
Agriculture
Partnership
Mudharabah Musharakah
Muzaraah
Musaqah
Mugharasah
Sharikah al-amal/al-
abdan
Sharikah al-wujuh
Sharikah al- Amwal



Thus, Sharikah couldbroadly be divided into two main types which are:
3.1 Sharikah al-Amlak (Partnership of Property)
It is a type of sharikah where two or more persons become joint owners of a
property without any business intention. This joint ownership could be established
either by operation of law such as inheritance or through other contracts like
hibah(gift) or wasiyyah. Sharikah al-amwal is subdivided into two which are
Sharikah al-Amlak Ikthiari(voluntary partnership) and Sharikah al-Amlak Ghair
Ikhtiari(involuntary partnership). Voluntary partnership refers to a situation where
two or more persons jointly buy a property or receive a certain as a gift or as a
result of a will. While involuntary partnership is operation without any action on
the part of parties. For example, ownership of heirs on the inherited property.



3.2 Sharikah al-Uqud (Contractual Partnership)
It is considered a proper type of partnership because the parties concerned have
willingly entered into a contractual agreement for joint investment and sharing of
profits and loss. In contractual partnership each partner is consider an agent for the
other. The partners may contribute money, goods, reputation or services.
Contractual partnership could be divided into four main types which are Sharikah al-
Inan, Sharikah al-Mufawadha, Sharikah al- Abdan and Sharikah al-Wujuh.

Sharikah al-Inan and Sharikah al-Mufawadha are made on properties and could also
be classified under Sharikah al-Amwal. Sharikah al-Abdan refers to atype of
partnership where two or more professionals agree to work in partnership and share
Sharikah al-
Amlak
Sharikah al-
Amlak Ikthiari
Sharikah al-
Amlak Ghair
Ikhtiari

their earnings. For instance shoe-makers into Sharikah al-Abdan. The partners
contribute their skills and efforts without contributing to the capital. The Shafii
reject this type of partnership on the ground that the labour and efforts contributed
by the parties cannot be calculated. As a result there is uncertainty as to the exact
percentage in which the partners contribute. They further argue that capital which is
indispensable to a partnership is absent and partnership is made on a future gain
which they may not earn. The Hanafi on the other hand, argue that the contract is
designed to gain profit, which is possible to attain.

Sharikah al-Wujuh where the partners have no investment at all, they purchases
commodities on deferred price by their goodwill and sell them on spot. Their capital
is their credit worthiness and reputation. Sharikah al-Mufawadha refer to a
partnership where two or more persons become partners in a venture on the
condition to equally contribute to the capital and management. In this partnership all
parties also to equally share profit or losses. All the partners should be Muslims.
Each partner is an agent as well as a surety or a guarantor for the other partners.
Sharikah al-Inan where partners share capital, management, profit and risk are not
equal and may differ for each partner.


4.0 THE CONDITION FOR THE CAPITAL

The capital should be a type of property on which agency is possible. The capital
should be present. Debt cannot become the capital for the partnership contract. Besides,
the contribution of each partner to the capital should be known. This is important since
Sharikah al-
'Uqud
Sharikah al-
Amwal
Sharikah al-
Mufawadha
Sharikah al-
'Inan
Sharikah al-
Wujuh
Sharikah al-
Abdan

all rights, obligations, profit or losses based on the respective ratio of each partner in
capital. According to Imam Malik and some Hanbali jurists, the nature of capital is not
a restriction in a Musharakah arrangement. Therefore, in-kind (non-cash) contributions
by partners are allowed. The share in partnership will be determined based on the
market value of the commodity contributed. According to Imam Abu Hanifah and
Imam Ahmed, no in-kind contributions are allowed in a Musharakah arrangement. This
is because they believe it poses problems if the partnership needs to be liquidated or
redistributed. Imam Shafii makes a distinction between replaceable commodities and
irreplaceable commodities (like cattle). The view is rather complex, and not important
for our purposes.

5.0 THE CONDITION FOR THE DISTRIBUTION OF PROFIT AND
LOSS

The proportion of profit to be distributed among the partners must be determined and
agree upon at the time of the contract. Otherwise, the contract is not valid under Shariah.
According to Imam Malik and Imam Shafii, it is necessary that each partners share in
the profit is exactly equal to the proportion of initial investment into the partnership.
According to Imam Ahmad, the ratio of profit distribution may vary, without restriction,
from the ratio of investment. According to Imam Abu Hanifah, the ratio of profit
distribution may vary, however, for silent partners (non-active partner, who only
contribute capital), it cannot be any higher than the ratio of investment. Besides, the
profit receivable by each partner should be known and clearly specified in partnership
contract. All the Muslim jurists are unanimous that each partners share in loss must be
exactly equal to the ratio of initial investment. The contract will be void if anything that
contradict with the contract.

6.0 RULES AND REGULATION OF MUSHARAKAH

The basics rules and regulation of Musharakah is both partners contribute a portion of
capital which may not necessarily be equal. The contributed capital can be either in form
of cash or assets with an ascribed monetary value. While both partners may undertake
the management of the business, if a partner chooses to withdraw from the management
to become a sleeping partner, such arrangement is allowed. The partner is also allowed

to appoint a third party to manage the business on behalf of the Musharakah partnership.
Besides, the project or business must be permissible by Shariah and the proportion of
profit to be distributed between the partners must be mutually pre-agreed upon inception
of the contract. Any losses shall be distributed between the partners according to the
capital contribution ratio. However, if the loss is due to the negligence of the managing
partner or management team, such losses shall be borne by the respective partner or the
management team.

7.0 MANAGEMENT OF MUSHARAKAH

The norm is for each partner to take part in the management of the partnership, with each
partner acting as an agent of the partnership and any work done by one partner deemed
to be authorized by all partners. However, if the partners wish they can contract under
alternate arrangements for the management of the partnership. The partners who manage
the partnership act as an agent for other partners. Thus, all rights and obligation that may
arise in the ordinary course of business are attributed to all the partners and not to him
personally.

8.0 TERMINATION OF MUSHARAKAH

Musharakah will be terminated when death of a partner or incapacity of one of the
parties whose heirs or their guardian decide to discontinue the partnership. In normal
course of business, every partner has a right to terminate the Musharakah at any time
after giving notice to other partner. Besides, termination can occur with mutual consent
of the parties and by a request made by one of the parties which is subsequently
approved by other parties. The bankruptcy of the partner also can be dissolute the
agreement of Musharakah.

In case of liquidation the assets of the Musharakah will be converted into liquid money
to enable the partners to know the gross as well as the net position of the Musharakah
enterprise. In case of liquidation, the outstanding obligation of the partnership is
discharged first and the capital shared are paid next. If profit is realized, it shoul be
distributed in accordance with the terms of the contract. In case of loss, the parties will
be bear the loss in the same ratio in which they contributed to the capital.


9.0 MUSHARAKAH PRODUCT DEVELOPED BY ISLAMIC BANKS
These products are used both as a mode of finance and contractual agreement. Some of these
forms are the continuous Musharakah and Musharakah Mutanaqisah. The continuous
Musharakah when an Islamic bank and a client enter into a joint venture to establish and run
an industrial, agricultural or a service project. There may be one or more than one bank or
client. The parties may contribute in cash or assets such as land or machine which are suitable
for the partnership. These assets will be registered as their agreed upon value will be
registered as the share of a particular partner who contributes them. The client may manage
the partnership, and in return, he would be entitled to the percentage of the profit. The bank
may reserve the right to supervise the management. Both the bank and the client may jointly
manage the business or they may choose to appoint an executive body to manage it. The
percentage of the profit claimed is negotiable and depends on the agreement of the parties.
The problem of this Musharakah is that during periods of inflation assets may appreciate
while the money depreciates.
Musharakah Mutanaqisah contract is a partnership in which one of the two partners promises
to gradually buy the other partners stake until he owns the entire (Shariah Standard No 12,
AAOIFI). The concept of Musharakah Mutanaqisah is an agreement between two parties to
establish joint ownership (sharikat al-milk) between them in a project, real estate or a
manufacturing plant to be terminated by gradual transfer of one partners share in the
partnership to the other through separate and successive sale contracts. This type of
partnership is also called decreasing Musharakah where the bank encourages the other partner
and provides an option to gradually buy the banks share. The entrepreneur has the option to
purchase. However, they cannot be forced to uy the shares. The price for which the shares
are purchased is negotiable. It should be based on the market price, which more or less, or the
same with the nominal price.

10.0 ISSUES AND CHALLENGES OF MUSHARAKAH IN MODERN
WORLD
Recently, Islamic financial system has been concentrated on debt-financing neglecting
equity-financing which is more appealing for the development of Islamic financial system as

the conventional banks may be likely unwilling or unable to undertake this type of financing.
Equity financing is best represent by both Mudharabah and Musharakah contracts of
partnership. The reluctance of modern Islamic financial system is likely caused by a few
reasons which are interrelated and subsequently render the Islamic financing based on equity
financing less popular.

The first reason, undoubtedly, is due to the high risk to which both Mudharabah and
Musharakah are exposed. Needless to say that banks are conservative and risk averse by
nature as they are responsible not to their shareholders but also to their depositors. As their
depositors comprise both small and large depositors, banks look upon themselves as trustees
for these funds. As trustees they are bound to protect these funds and their depositors to
ensure that the banking system is fair, sound and most importantly safe. This can only be
assured if the banks use less risky financing products.

The second obvious reason is the question of moral hazard. Naturally, both Mudharabah and
Musharakah require substantial trust between the banks and their customers. If a bank acts
only as a capital provider as in Mudharabah or leaves all aspects of management to the
customer in terms of honesty, integrity, management and business skills. Equally problematic
is the aspect of monitoring and supervision. Musharakah in particular requires more
commitment and effort from the banks compared to other forms of financing as the bank
assumes business as well as credit risks. Given the fact that both Mudharabah and
Musharakah are equity financing in character, collateral is not a prerequisite. This inability to
secure a lien on the (partner's) assets of the business would require more careful evaluation of
the prospects of the business and hence more precaution in extending financing. Most
bankers are generally trained to do credit analyses, thus lacking in these management skills
which are necessary to protect the banks' interest in Musharakah financing.

Besides, the relevant point of discussion is that most Islamic bankers were initially trained as
conventional bankers. It will take some time for them to adapt their way of viewing financing
from conventional perspectives to Islamic perspectives. The issues of guarantee, collateral,
fixed and certain returns or creditworthiness are still of paramount importance to Islamic
bankers Islamic bankers find it difficult to break away from comparing the return received
from Islamic financing to conventional financing direct comparison is more straight-forward
and easily done in Murabahah and bay' bi thanam ajil than in Mudharabah and Musharakah.


Last but not least, the above reluctant is probably due to the customer or potential partner's
perspective. If they have good projects or business, customers generally would not want the
banks to share the profits and therefore would prefer to borrow. On the other hand, if a
project is not financially attractive and the customer wants the bank to participate in the
equity, the project may be likely rejected by the bank for being not feasible. In addition, most
businesses do not want to relinquish management control of their business which may happen
if they enter into musharakah financing contract with a bank.

The above list of problems which seems to discourage the role of equity financing requires a
comprehensive response and solutions to overcome some, if not all, of the said problems. In
this context, the bankers must be creative enough, with the assistance of Shariah experts, to
be able to undertake the above challenges positively and constructively and this, surely, will
require the restructuring of the concept and modus operandi of Islamic equity financing to
make it more feasible and attractive. Otherwise, the problems will render the Islamic equity
financing unpopular and impractical from the modern banking perspective.

10.0 CONCLUSION
In a nutshell, Islamic contracs are normally grounded on asset-based and it must be comply
with the Shariah, which prohibits elements of riba, maisir, gharar and non halal activities. The
prohibition is clearly stated in Quran and Hadith and must be adhered to the financial
institution. The improvement about Islamic contract should be made to enhance the Islamic
financial institutions. Furthermore, to remain consistent with religious strictures, the bank
cannot charge interest in its lending operations, but has to use special modes of investment
and financing that are also based on the concept of profit and loss sharing system. Besides,
partnership will enable the Muslim communities not only to mobilize their internal resources
but also stand on their own feet in matters of finance and save them from going to
conventional financial institutions, where the paying of interest is a curse.





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