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Definition: Literally the word Musharakah means sharing or mingling. In Arabic language, the
root words of Musharakah are Shirkah or shirk which means partnership. 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 percentage mutually agreed in the contract.
Based on the above definitions, the ideas of partnership are: first, to contribute capital to an
enterprise or a venture, whether existing or new, or to owner of a real estate or moveable asset,
either on a temporary or permanent basis. Therefore, the partnership can be used in the case of
large users of funds to establish investment for short term or long term basis. Second, to share
profit over the business with the share of loss. Thus, a partnership needs to be defined as a contract
between two or more persons in carrying out a particular business with a view of not only sharing
the profit but also loss and liability. Third, partners share and control how the investment is
managed. Fourth, liability in this partnership is unlimited. Therefore, each partner is fully liable
for the actions and commitments of the other in financial matters.

In the terminology of Islamic fiqh, the modes partnership are termed as Sharikah. Sharikah means
sharing and in the book of Fiqh, it has been divided into two kinds.

(1): Shirkat-ul-milk - it means joint ownership of two or more persons in a particular property.
This kind of Sharikah may come into existence in two different ways:
a) Optional (Ikhtiari)
b) Compulsory (Ghair Ikhtiari)

(2): Shirkat-ul-aqd - which means a partnership effected by a mutual contract. Shirkat-ul-‘aqd is

further divided into three kinds:
a) Shirkat-ul-amwal (Partnership in Capital)
b) Shirkat-ul-Aamal (Partnership in services))
c) Shirkat-ul-wujooh (Partnership in goodwill)

Legitimacy of Sharikah: The legitimacy of sharikah as a valid mode of business is established

by the Quran, the Sunnah and Ijma. Some of the relevant verses of the Holy Quran and traditions
of the Holy Prophet are cited in the following lines.

“And verily, many are the partners (in business) who wrong each other except those who believe
and work deeds of righteousness and how few of them” (Al-Sad: 24)
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(i) The Narration of Abu Hurairah. Abu Hurairah said that: The Prophet SAW said: Allah
says: I am the third (partner) of the two partners as long as they do not betray each
other. When one of them betrays the other, I depart from them”. (Sunan Abu Daud)
(ii) The Holy Prophet (s.a.w.s) also said “Allah Almighty is with the two partners unless
they defraud each other.”
(iii) Sharikah business was widespread in the Arabian Peninsula at the beginning of Islam.
The Holy Prophet (s.a.w.s) accorded his unspoken approval to this practice. He himself
carried on business on the basis of partnership before his declaration of prophet hood.

Based on Surah al-Sad verse 24 and hadiths, Allah SWT describes the partnership of the property.
If a person dies without leaving behind any ascendants or descendants; but he has brothers and
sisters more than two in number; then they will share a third of the property of the mortal. So,
based on that, the partnership of the property is legal in the shariah. Shariah scholars generally
agreed on the validity of a sale contract which is combined with lease contract. Also, there is no
clear text in the shariah that prohibits Musharakah. Considering the public interests and benefits
of Musharakah in the investment, it should be permitted in the shariah. Some scholars however,
disagreed to the validity of Musharakah contract. To them, it should be declared invalid as it
contains some elements of doubts. They claim that it is similar to interest as the primary purpose
of Musharakah is to give loan to the clients and to derive extra money from the amount of loan.

Different School of thoughts on Terms and Conditions of the Musharakah

Contract:
Liquidity of Capital: Imam Malik is of the view that liquidity is not a condition for the validity
of Musharakah. Therefore, even if a partner contributes in kind to the partnership, his share can be
determined on the basis of the evaluation according to the prevalent market price at the date of the
contract. However, Imam Abu Hanifa and Imam Ahmad do not allow capital of investment to be
in kind.

The reason for this restriction is as follows:

• Commodities contributed by one partner will always be distinguishable from the commodities
given by the other partners; therefore, they cannot be treated as similar capital.

• If in case of redistribution of share capital to the partners, tracing back each partner's share
becomes difficult. If the share capital was in the form of commodities then redistribution cannot
take place.

Imam Shafi has an opinion dividing commodities into two:

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• Dhawat-ul-Amthal (Homogenous Commodities): Commodities which if destroyed can be

compensated by similar commodities in quality and quantity. Example rice, wheat etc.

• Dhawat-ul-Qeemah (Heterogeneous Commodities): Commodities that cannot be compensated

by similar commodities, like animals. Imam Shafi is of the view that commodities of the first kind
may be contributed to Musharakah in the capital while the second type of commodities cannot be
a part of the capital. In case of Dhawat-ul-Amthal, redistribution of capital may take place by
giving each partner the similar commodities he had invested earlier, the commodities need to be
mixed so well together that the commodity of one partner cannot be distinguished from
commodities contributed by the other.

Profit sharing rights:

 In the view of Imam Malik and Imam Shafi’i, it is necessary for the validity of Musharakah
that each partner gets the profit exactly in the proportion of his investment. Therefore, if A
has invested 40% of the total capital, he must get 40% of the profit. Any agreement to the
contrary which makes him entitled to get more or less than 40% will render the Musharakah
invalid in shariah.
 On the contrary, the view of Imam Ahmed is that the ratio of profit may differ from the
ratio of investment if it is agreed between the partners with their free consent. Therefore,
it is permissible that a partner with 40% of investment gets 60% or 70% of the profit, while
the other partner with 60% of the investment gets only 40% or 30%.
 The third view is presented by Imam Abu Hanifah which can be taken as a discussion
between the two opinions mentioned above. He says that the ratio of profit may differ from
the ratio of investment in normal conditions. However, if a partner has put an express
condition in the agreement that he will never work for the Musharakah and will remain a
sleeping partner throughout the term of Musharakah, then this share of profit cannot be
more than a ratio of his investment.

Loss sharing:

 According to Imam Shafi, the ratio of the share of a partner in profit and loss both must
follow to the ratio of his investment.
 According to the Imam Abu Hanifa and Imam Ahmad, the ratio of the profit may differ
from the ratio of investment according to the agreement of the partners, but the loss must
be divided between them exactly in accordance with the ratio of capital invested by each
one of them.

Tenure of Musharakah:
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 Under the Hanafi school of thought, a person can fix the tenure of the partnership because
it is an agreement and an agreement may have fixed period of time.
 In the Hanbali school of thought, the tenure can be fixed for the partner as it is an agency
agreement and an agency agreement in this school can be fixed.
 The Maliki School however says that Shirkah cannot be subjected to a fixed tenure.
 Shafi School like the Maliki considers fixing the tenure to be impermissible.

Modern Forms of Musharakah:

1. Project Financing: Islamic banks provide project finance on the basis of Musharakah One
or two or more entrepreneurs approach the bank for finance and the bank along with the
other partners provides complete finance. All the partners, including the bank, have the
right to participate in the management of the project. Any one or all of them also have right
to waive this right. The profits are distributed according to agreed ratios, which need not
be the same as capital proportion but loss has to be shared exactly in the same proportion
in which different partners provided finance.

2. Financing of a single transaction: Islamic banks provide finances in order to meet day to
day needs of small trader. The traders approach the bank requesting it to finance purchase
of certain goods. Now if the bank considers transaction profitable, it finances purchase of
required goods on the basis of Musharakah. Then the goods are sold in the market and both
parties share the profit in proportion to their investment.

3. Redeemable Musharakah: in this category, the bank participates in the capital of a

company, or a business venture or agricultural project on the condition that it will recapture
its initial investment along with its agreed share in the profit. The other partner or partners
also promise at the time of contract that they will purchase the share of bank in the
investment and will gradually become the sole owners of that project.
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