Understanding Islamic Finance - Doha Academy of Tertiary Studies

312 Understanding Islamic FinanceA Musharakah (and also Mudarabah) contract may be for any specific project up toits completion or in the form of a redeemable investment by a partner, 13 particularly thefinancial institutions – also known as Diminishing Musharakah. If the Musharakah lasts aslong as a business operates without any midway termination, it is considered a continuousMusharakah.The above discussion implies that Shirkah in Islamic law refers to all forms of partnership,also including Mudarabah. Some of the jurists observe that Mudarabah is a form of Shirkah,while some others treat this as different from Shirkah. It seems that the difference is due tovariation in analysis of business conditions more than the differences in Shirkah principles.The former view is held by some of the jurists of the Maliki and Hanbali schools, while thelatter by the Hanafi school. The Hanafi jurists argue that Mudarabah should not be treated asa form of Shirkah, because in Shirkah, the contracting parties become partners and, therefore,liable to losses soon after the business is started or the capital of the partners is combined,while in Mudarabah, the working party does not become a partner and is not liable to anylosses unless and until profits arise. Before the creation of profits, the position of the workingparty is that of an agent, although the contract of Mudarabah becomes effective.12.3 BASIC RULES OF MUSHARAKAHIn this section we shall be discussing the rules relating mainly to a general partnershipconducted with joint capital of the partners (Shirkatulamwal-cum-Shirkah al ‘Inan). Allconditions necessary for any valid contract, e.g. free consent of the parties that must bewithout deception, misrepresentation and duress, etc., should be fulfilled in the Shirkahcontract. Certain other conditions must also be fulfilled, and these are outlined in thefollowing paragraphs.12.3.1 Conditions with Respect to PartnersThe word “persons” as used in the definitions refers to both individuals and legal personsor corporate bodies. As regards individuals, it is unanimously agreed that they should befree and of sound mind. The study of relevant rules in Fiqh suggests that insolvency andprison are disqualifications for making the contract of sale; as the contract of partnershipcomprehends mutual agency, anybody who is handicapped in exercise of this right cannotact as a partner in the true sense and a contract so made should be deemed to be ineffective.On this ground, minors and the insane are incompetent to become partners. A minor canenter into a partnership if allowed by his guardian. 14 Imam Shafi‘e extends the state ofincompetence to all those who, for any reason, lose their power of decision, like a manwho is intoxicated. This is, however, a temporary incompetence. A man who is put underinhibition by a court either because of insolvency or due to any other reason is also notcompetent to enter into a contract of partnership, because his partner could be preventedfrom making use of the inhibited partner’s property. The Jafari scholars give five reasonswhich inhibit one from making a contract of sale. These are minority, stupidity, insanity,13 Ibn-Qudama, 1367 AH, 5, p.63.14 Al-Atasi, 1403 AH, Majallah, Article 1335.