Understanding Islamic Finance - Doha Academy of Tertiary Studies

318 Understanding Islamic Finance12.3.5 Guarantees in Shirkah ContractsAll partners in Shirkah maintain the assets of the partnership as a trust. Therefore, no one isliable except in cases of breach of the contract, misconduct or proven negligence. Negligencewill be considered to have occurred in any of the following three cases: (i) a partner doesnot abide by the terms and conditions of the contract; (ii) a partner works against the normsof the concerned business; and (iii) the established ill-intention of a partner. Hence, theprofit or even capital of any partners cannot be guaranteed by the co-partners. However, onepartner can demand from another partner to provide any surety, security or pledge to coverthe cases of misconduct and negligence. 38Therefore, in the case of a Musharakah agreement between a bank and the businesscommunity, the bank, as a part of risk management and for the judicious use of funds ofthe depositors, can obtain adequate security from a partner against his misconduct, breachof contract and negligence (if any).Third Party Guarantee in MusharakahAny third party can also provide a guarantee to make up the loss of capital of all or someof the partners. This is subject to the conditions:1. The third party should not be legally and financially related to the Musharakah by owningmore than 50 % of the capital of the guaranteed joint venture.2. The guaranteed joint venture should not own more than half of the capital of the guaranteeprovidingentity.3. The Shirkah contract should not be conditional on such a guarantee.4. The guarantee should not be provided for any consideration. In other words, fulfilmentof promise by a third party is not a condition for validity of the contract.It is important to observe that the third party’s undertaking is actually a “promise toguarantee” and does not create the right for the beneficiary to relate the Shirkah contractwith fulfilment of the guarantee. The partners in whose favour third party guarantee is givencan neither claim that Shirkah should become null and void nor can they refuse to meet theirobligations under the contract on the grounds that they had entered into Shirkah taking intoaccount the third party’s undertaking to guarantee the profit or the capital. 3912.3.6 Maturity/Termination of MusharakahMusharakah is basically a nonbinding contract, meaning that any partner can withdraw hisshare from the partnership at his will. But the partners can agree on any timeframe of Shirkahbusiness. A traditional Shirkah agreement is terminated in any of the following situations:1. When the purpose of forming Shirkah is achieved in the case of a specific purposeMusharakah. While the profit will be distributed according to the agreed profit distributionratio, any loss will be borne by each partner according to the ratio of his investment.2. When, after sufficient information or notice, any partner withdraws from a partnershipafter giving his partners due notice to this effect. His withdrawal will not necessitate38 AAOIFI, 2004–5a, Standard on Musharakah, clauses 3/1/4/1, 3/1/4/2.39 AAOIFI, 2004–5a, Standard on Musharakah, clause 3/1/4/3, pp. 203, 220, 221.