Understanding Islamic Finance - Doha Academy of Tertiary Studies

328 Understanding Islamic Financethe Mudarib has conducted business with negligence or has been dishonest, he shall beliable for the loss caused by his negligence or misconduct.4. The liability of the partners in Musharakah is normally unlimited. However, if all thepartners have agreed that no partner shall incur any debt during the course of business,then the liabilities exceeding assets shall be borne by that partner alone who has incurred adebt on the business in violation of the aforesaid condition. Contrary to this, in Mudarabah,the liability of the Rabbul-māl is limited to his investment unless he has permitted theMudarib to incur debts on his behalf. 775. In Musharakah, profit can be distributed on an annual, quarterly or monthly basis byvaluation of the assets. 78 In the case of Mudarabah, final distribution can take place onlyafter liquidation of the Mudarabah business. However, on account payment of profit ispossible subject to ultimate adjustment. 79 To avoid problems in perpetual Mudarabah, thecontemporary jurists have accepted the concept of constructive liquidation of assets bydetermining the market value of nonliquid assets. 806. In Musharakah, all assets of the Musharakah become jointly owned by all of the partnersaccording to the proportion of their respective investment. Therefore, each one of themcan benefit from the appreciation in the value of the assets, even if profit has not accruedthrough sales. In Mudarabah, however, all the goods/assets purchased by the Mudarib aresolely owned by the Rabbul-māl, and the Mudarib can earn his share in the profit only ifhe sells the assets profitably. However, there are some exceptions to this rule accordingto a minority view.7. If the Mudarabah business is dissolved, its assets and profit, if any, can be distributed onlyafter assessing its value in terms of money. In the case of Shirkah, this is not necessary. 8112.6 MODERN CORPORATIONS: JOINT STOCK COMPANIESModern corporate bodies can be considered to be based on the concept of Shirkah al ‘Inanor a combination of Musharakah and Mudarabah, which is allowed by the generality ofthe contemporary jurists. 82 There are a number of forms of modern corporations, includingjoint stock companies with limited liability, joint liability companies (a form of personalpartnership), companies limited by shares (also a kind of personal partnership), partnershipsin commendum (a form of financing partnership), etc. 83 The general principles governingthese forms are the same and we will be discussing mainly the modern stock companieswith limited liability of the shareholders.The main ingredient of modern corporate business is the issuance of shares or certificatesto the investors in a joint business. A large number of people provide funds and are issuedany specific type of receipts that are called shares or a variety of certificates that representthe proportionate ownership of the shareholders. The AAOIFI Standard on Musharakah hasdefined a stock company as an entity, the capital of which is distributed into equal units of77 Ibn-Qudama, 1367 AH, pp. 18, 35.78 Ibn-Qudama, 1367 AH, pp. 5, 64.79 AlJaziri, 1973, 3, p.61.80 Usmani, 2000b, pp. 276–283.81 Al-Kasani, 1993, 6, p.77.82 Usmani, 2000b, pp. 313–329.83 See, for details, AAOIFI, 2004–5a, Standard on Musharakah, pp. 208–213.