Understanding Islamic Finance - Doha Academy of Tertiary Studies

12Participatory Modes: Shirkah andits Variants12.1 INTRODUCTIONIslamic modes are asset-based and entail real economic activity and undertaking responsibilityor liability. The modes that form the basis of Islamic finance belong to participatoryor profit/loss sharing (PLS) or risk-sharing techniques and as such are considered the mostdesirable modes by the majority of jurists on Islamic finance. This does not imply that nonparticipatorymodes, as discussed in the previous few chapters, do not involve business risk;taking risk and responsibility is rather a precondition for the legality of profit in any business.Shirkah-based participatory modes of business, however, involve direct participationin profits and losses by the parties.Two contracts, namely Mudarabah and Musharakah, that lend themselves to the systemof profit/loss sharing are based on the concept of Shirkah. A partnership may be in the rightof ownership (Shirkatulmilk), wherein a profit motive may not necessarily exist, or it maybe contractual (Shirkatul‘aqd), in which the partners enter into a contract to conduct a jointbusiness with the objective of earning profit and agree to share the profit on a pre-agreedratio and bear the loss, if any, to the extent of the investment of each partner. Anothervariant may be wherein one partner may provide the capital and the other may manage thebusiness (Mudarabah) for earning profit. These modes are the means of providing risk-basedcapital and are jointly termed participatory modes of finance. In this chapter we shall discussvariants of Shirkah, namely Musharakah, Mudarabah, modern corporations and DiminishingMusharakah, as modes of business by Islamic financial institutions (IFIs).Partnership-based business was widely practised in the pre-Islamic period. The holyProphet (pbuh) himself did business on the basis of partnership before his prophethood andmany of his Companions did it during his life and later. Islam approved the concept ofbusiness partnership. 1 The practice was so commonly prevalent among the Arabs and otherMuslims that, perhaps under their influence, the Christians of the areas in Europe whereMuslims went also conducted it and introduced it far inside Europe. 2In the early/conventional books of Fiqh, joint businesses are discussed mainly under thecaption of Shirkah, which is a set of broad principles that can accommodate many forms ofjoint business. According to the majority of the classical jurists, Mudarabah is also a typeof Shirkah when used as a broad term. In Fiqh books, discussion on Mudarabah is availableboth in the chapters on Shirkah and under the separate caption of Mudarabah.1 Hassan, 1993, p.104.2 See Postan and Rich, 1952, 2, pp. 173, 267.