Musharakah is a term frequently referred to in the context of Islamic modes of financing. The connotation of this term is a little more limited than the term “shirkah” more commonly used in the Islamic jurisprudence. For the purpose of clarity in the basic concepts, it will be pertinent at the outset to explain the meaning of each term, as distinguished from the other.
“Shirkah” means “sharing” and in the terminology of Islamic Fiqh, it has been divided into two kinds:
Shirkat-ul-Milk
Shirkat-ul-Milk means joint ownership of two or more persons in a particular property. This kind of “shirkah” may come into existence in two different ways: Sometimes it comes into operation at the option of the parties. For example, if two or more persons purchase an equipment, it will be owned jointly by both of them and the relationship between them with regard to that property is called “shirkat-ul-milk.” Here this relationship has come into existence at their own option, as they themselves elected to purchase the equipment jointly.
But there are cases where this kind of “shirkah” comes to operate automatically without any action taken by the parties. For example, after the death of a person, all his heirs inherit his property which comes into their joint ownership as an automatic consequence of the death of that person.
Shirkat-ul-Aqd
Shirkat-ul-‘Aqd is the second type of Shirkah which means “a partnership affected by a mutual contract”. For the purpose of brevity it may also be translated as “joint commercial enterprise.”
Shirkat-ul-’aqd is further divided into three kinds:
(i) Shirkat-ul-Amwal where all the partners invest some capital into a commercial enterprise.
(ii) Shirkat-ul-A’mal where all the partners jointly undertake to render some services for their customers, and the fee charged from them is distributed among them according to an agreed ratio. For example, if two persons agree to undertake tailoring services for their customers on the condition that the wages so earned will go to a joint pool which shall be distributed between them irrespective of the size of work each partner has actually done, this partnership will be a shirkat-ul-a’mal which is also called Shirkat-ut-taqabbul or Shirkat-us-sana’i’ or Shirkat-ul-abdan.
(iii) The third kind of Shirkat-ul-’aqd is Shirkat-ul-wujooh. Here the partners have no investment at all. All they do is that they purchase the commodities on a deferred price and sell them at spot. The profit so earned is distributed between them at an agreed ratio.
All these modes of “Sharing” or partnership are termed as “shirkah” in the terminology of Islamic Fiqh, while the term “musharakah” is not found in the books of Fiqh. This term (i.e. musharakah) has been introduced recently by those who have written on the subject of Islamic modes of financing and it is normally restricted to a particular type of “Shirkah”, that is, the Shirkat-ul-amwal, where two or more persons invest some of their capital in a joint commercial venture. However, sometimes it includes Shirkat-ul-a’mal also where partnership takes place in the business of services.
It is evident from this discussion that the term “Shirkah” has a much wider sense than the term “musharakah” as it is being used today. The latter is limited to the “Shirkat-ul-amwal” only, while the former includes all types of joint ownership and those of partnership. Table 1 will show the different kinds of “Shirkah” and the two kinds which are called “musharakah” in modern terminology.
Since “musharakah” is more relevant for the purpose of our discussion, and it is almost analogous to “Shirkat-ul-amwal”, we shall now dwell upon it, explaining at the first instance, the traditional concept of this type of Shirkah, then giving a brief account of its
application to the concept of financing in the modern context.
Nature of Capital
Most of the Muslim jurists are of the opinion that the capital invested by each partner must be in liquid form. It means that the contract of musharakah can be based only on money, and not on commodities. In other words, the share capital of a joint venture must be in monetary form. No part of it can be contributed in kind. However, there are different views in this respect.
1. Imam Malik is of the view that the liquidity of capital is not a condition for the validity of musharakah, therefore, it is permissible that a partner contributes to the musharakah in kind, but his share shall be determined on the basis of evaluation according to the market price prevalent at the date of the contract. This view is also adopted by some Hanbali jurists.
Imam Abu Hanifah and Imam Ahmad are of the view that no contribution in kind is acceptable in a musharakah. Their standpoint is based on two reasons:
Firstly, they say that the commodities of each partner are always distinguishable from the commodities of the other. For example, if A has contributed one motor car to the business, and B has come with another motor car, each one of the two cars is the exclusive property of its original owner. Now, if the car of A is sold, its sale-proceeds should go to A. B has no right to claim a share in its price. Therefore, so far as the property of each partner is distinguished from the property of the other, no partnership can take place. On the contrary, if the capital invested by every partner is in the form of money, the share capital of each partner cannot be distinguished from that of the other, because the units of money are not distinguishable, therefore, they will be deemed to form a common pool, and thus the partnership comes into existence.
Secondly, they say, there are a number of situations in a contract of musharakah where the partners have to resort to redistribution of the share-capital to each partner. If the share-capital was in the form of commodities, such redistribution cannot take place, because the commodities may have been sold at that time. If the capital is repaid on the basis of its value, the value may have increased, and there is a possibility that a partner gets all the profit of the business, because of the appreciation in the value of the commodities he has invested, leaving nothing for the other partner. Conversely, if the value of those commodities decreases, there is a possibility that one partner secures some part of the original price of the commodity of the other partner in addition to his own investment.
3. Imam al-Shafi’i has come with a via media between the two points of view explained above. He says that the commodities are of two kinds:
(i) Dhawat-al-amthal
(i.e. the commodities which, if destroyed, can be compensated by the similar commodities in quality and quantity e.g. wheat, rice etc. If 100 kilograms of wheat are destroyed, they can easily be replaced by another 100 kg. of wheat of the same quality.
(ii) Dawat-ul-qiyamah
(i.e. the commodities which cannot be compensated by the similar commodities, like the cattle. Each head of sheep, for example, has its own characteristics which cannot be found in any other head. Therefore, if somebody kills the sheep of a person, he cannot compensate him by giving him similar sheep. Rather, he is required to pay their price.
Now, Imam al-Shafi’i says that the commodities of the first kind (i.e. dhawat-al-amthal) may be contributed to the musharakah as the share of a partner in the capital, while the commodities of the second kind (i.e. the dawat-ul-qiyamah) cannot form part of the share capital.
By this distinction between daawat-al-amthal and dhawat-ul-qeemah, Imam al-Shafi’i has met the second objection on ‘participation by commodities’ as was raised by Imam Ahmad. For in the case of daawat-al-amthal, redistribution of capital may take place by giving to each partner the similar commodities he had invested. However, the first objection remains unanswered by Imam al-Shafi’i.
In order to meet this objection also, Imam Abu Hanifah says that the commodities falling under the category of daawat-al-amthal can form part of the share capital only if the commodities contributed by each partner have been mixed together, in such a way that the commodity of one partner cannot be distinguished from that of the other.
In short, if a partner wants to participate in a musharakah by contributing some commodities to it, he can do so according to Imam Malik without any restriction, and his share in the musharakah shall be determined on the basis of the current market value of the commodities, prevalent at the date of the commencement of musharakah. According to Imam al-Shafi’i, however, this can be done only if the commodity is from the category of dhawat-al-amthal.
According to Imam Abu Hanifah, if the commodities are daawat-al-amthal, this can be done by mixing the commodities of each partner together. And if the commodities are dawat-ul-qiyamah, then, they cannot form part of the share capital.
It seems that the view of Imam Malik is more simple and reasonable and meets the needs of the modern business. Therefore, this view can be acted upon.
We may, therefore, conclude from the above discussion that the share capital in a musharakah can be contributed either in cash or in the form of commodities. In the latter case, the market value of the commodities shall determine the share of the partner in the capital.
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