Understanding Islamic Finance - Doha Academy of Tertiary Studies

308 Understanding Islamic FinanceMusharakah is a term used by the contemporary jurists both for broad and limited connotations.In the limited sense, it is used for contractual partnership in which all partners providefunds, not necessarily equally, and have the right to work for the joint venture. In the specificsense, it is an amalgam of Musharakah and Mudarabah wherein a Mudarib, in addition to thecapital provided by the Rabbul-māl, employees his own capital as well. This arrangement is alsopermissible according to the jurists. 3While in Musharakah all parties contribute to the joint business and work for it, inMudarabah, one party contributes funds and the other acts as entrepreneur and the profit isshared in a predetermined, mutually agreed ratio. In Mudarabah, the financier bears the losswhile the entrepreneur loses his already expended labour.In this chapter we shall discuss the traditional concept of Shirkah as discussed in booksof Fiqh followed by a discussion on the application of the system of profit and loss sharingin the contemporary world.The modern Shirkah takes the form of partnerships, joint stock companies and cooperativesocieties and, in a sense, that of pools, cartels, trusts and syndicates, etc. In modern law,all these forms are treated differently in accordance with the differences in their objectivesand the nature of combination. An important difference between the Islamic and themodern partnership laws exists in the former’s religious character. To describe the rules ofpartnership, we shall discuss the subject in the three main sets of Musharakah, Mudarabahand Diminishing Musharakah, the last being the latest development of Islamic jurisprudencebased on the broad principles of Shirkah.12.2 LEGALITY, FORMS AND DEFINITION OF PARTNERSHIPThe legality of Shirkah is proved by the texts of the Holy Qur’ān and Sunnah and the consensusof the Islamic jurists. 4 In particular, the two forms of Shirkah al Inan (general partnership) andMudarabah, which we will be discussing in the following pages, enjoy acceptance by all juristswithout any difference of opinion. Jurists normally divide Shirkah into two broad categories ofShirkatulmilk (partnership by ownership or in right of ownership) and Shirkatul‘aqd (partnershipby contract). With these two forms, traditional Shirkah is the main source of rules governingthe operations of Musharakah, Mudarabah and Diminishing Musharakah by Islamic financialinstitutions in the present age.Keeping in mind the discussion by classical jurists and the modern business environment,Shirkah can be defined as a business where two or more people combine their capital orlabour or creditworthiness together, having similar rights and liabilities, to share the profits ora yield or appreciation in value and to share the loss, if any, according to their proportionateownership. This implies that capital is not necessary in certain structures of Shirkah. “Profit”in the context of this definition and according to Islamic law can be made through purchase,sale, hire or wages and excludes income arising from the contracts of marriage, divorce,subsistence payable to wives and children or in the case of penalties and fines. We definevarious forms of Shirkah in the following section. 53 Usmani, 2000a, pp. 27–33, 53, 54.4 Holy Qur’ān, verses: 4: 12 and 38: 24; the holy Prophet is reported to have conveyed the message of Allah (SWT), who says: “Solong as the two partners remain honest to each other, I am the 3rd”. (Abu Daud and Sahih al Hakim).5 For various forms of Shirkah, see Ibn Qudama, 1367 AH, 5, p. 1 and Usmani, 2000b, pp. 139–144.