Fiqh of Islamic Finance

Musharakah

1. Shirkah (partnership): It literally means

sharing. The sharing may be of money,
labor, or anything else. The prophet (SAW)
said, “People are partners in three [things]:
water, herbage, and fire.”
2. Shirkah (partnership): is defined as a
contract between partners on both capital
and profit.
 Kinds of Partnerships
 Shirkat ul-milk (partnership of ownership): It means
joint ownership of two or more persons in a particular
property.
This kind of Shirkah may come into existence in two different
ways.
1. By the partners choice: means coming into the
operation at the option of the parties. For example, if two
partners agree to buy equipment it will be owned jointly
by both of them.
2. Without the partners choice: means coming into the
operation automatically without any action taken by the
parties. For example, if property is inherited.
 Kinds of Partnerships
 Shirakal al-aqd (partnership of a contract):
which means a partnership effect by a mutual
contract.
This kind of Shirkah exists in three types:
1. Shirkal ul-amwal (financial company): where
all the partners invest some capital into a
commercial enterprise.
2. Shirkat ul-amal (company of workmanship):
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.
 Kinds of Partnerships
3. Shirkal ul-wujooh (partnership with eminent
people): where the partners have no
investment at all. All they do is purchase the
commodities on a deferred price and sell them
at that spot. The profit so earned is distributed
between them at an agreed ratio.
 Basic Rules of Musharakah
Distribution of profit
1. The proportion of profit 2. The ratio of profit for each
partner must be
to be distributed determined in proportion
between the partners to the actual profit
must be agreed upon accrued to the business,
at the time of the and not in proportion to
the capital invested by
effecting of the him.
contract.
 Basic Rules of Musharakah
Sharing of Loss
In the case of loss
each partner shall
suffer the loss
exactly according to
the ratio of his
investment. If a
partner has invested
40% of the capital,
he must suffer 40%
of the loss, not
more, not less.
Basic Rules of Musharakah
The Nature Of the Capital
Most of the Muslim
jurists are of the opinion
that the capital of a joint
venture must be in
monetary form, no part
of it can be contributed
in kind. Except in the
opinion of Imam Malik
who said that it is
permissible for a partner
to contribute to the
musharakah in kind.
 Basic Rules of Musharakah
Management of Musharakah
 Every partner has a right to take part in the
business's management and to work for it.
 However the partners may agree upon a condition
that the management shall be carried out by only
one of them and that no other partner shall work for
the musharakah.
 If all the partners agree to work for the joint venture,
each one of them shall be treated as an agent of
the other in all the matters of the business.
 Basic Rules of Musharakah
Termination of the Musharakah
1) Every partner has a right to terminate the musharakah
at any time after giving his partner a notice to this
effect.
2) If any one of the partners die during the currency of
musharakah, his heirs will have the option to terminate
or to continue with the contract of musharakah.
3) If any one of the partners becomes insane or otherwise
becomes incapable of effecting commercial
transactions, the musharakah can be terminated.
 Diminishing Musharakah
 A financier and his client participate either in
the joint ownership of a property or an
equipment, or in a joint commercial
enterprise.
 The share of the financier is further divided
into a number of units. It is understood that
the client will purchase the units of the
financier’s share, one by one, periodically.
 Mudarabah
 The word mudarabah comes from the Arabic
root (Dharabahfi al ard), which means going
and working to obtain livelihood.
 Mudarabah is a special kind of partnership
where on partner provides work in trade and
the other side provides the capital.
 The first partner is called “mudarib,” and the
second partner is called “rabb ul-mal.”
 Difference between Musharakah
and Mudarabah
1. The investment in 2. In mushararkah all the
musharakha comes form all
the partners, while in partners can participate in
mudarabah the investments the management of the
comes from rabb-ul-mal only. business, and can work
This means that the for it. While in
musharakah is a partnership
in profit and capital, while musdarabah the rabb ul-
mudarabah is a partnership mal has no right to
in profit not in capital. participate in the
management, which is
carried out by the mudarib
only.
Difference between Musharakah
and Mudarabah
3. In musharakah all the
partners share the
loss. While in the
mudarabah, only
rabb-ul-mal suffers
the loss, while the
mudarib suffers the
loss of his labor.
 Types of Mudarabah
 Al-mudarabah al-  Al mudarabah al
muqayyadah (restricted muttaqah (unrestricted
mudarabah): where mudarabah): where rabb-
rabb-ul-mal specifies a ul-mal leaves the door
particular business for open for the mudarib to
undertake whatever
the mudarib, in which
business he whishes, the
case he shall invest the
mudarib shall be
money in that particular authorized to invest the
business only. money in any business he
deems fit.
 Distribution of the Profit
It is necessary for the
validity of mudarabah that
the parties agree right at the
beginning on a definite
proportion of the actual
profit to which each one of
them is entitled. They can
share the profit in equal
proportions, and they can
also allocate different
proportions for the rabb-ul-
mal and the mudarib.
 Termination of Mudarabah
 The mudarabah and some profit has
contract can be been earned on the
terminated at any time principal amount, it shall
by either of the two be distributed between
parties. The only the parties according to
condition is for notice to the agreed ratio.
be given to the other  If the assets of the
party. mudarabah are not in
 If all the assets of the cash form, the mudarib
mudarabah are in cash shall be given an
form at the time of opportunity to sell and
termination, liquidate them, so that
the actual profit may be
determined.
Combination of Musharakah and
Mudarabah
A contract of mudarabah normally presumes
that the mudarib has not invested anything to
the mudarabah. He is only responsible for the
management, while all the investment comes
from the rabb-ul-mal. Sometimes the
Mudarib wants to invest some of his money
into the business of the mudarabah, in such
case the musharakah and the mudarabah are
combined together.
Combination of Musharakha and
Mudarabah
Example:
A gives B $100,000 in a contract of mudarabah. B
then added $50,000 with the permission of A. This
type of partnership will be treated as a combination
of musharakah and mudarabah. The mudraib is a
sharik, so he gets s a certain percentage of profit
on account of his investment as a sharik and
another percentage for his management and work
as a mudarib.
 Murabahah (Set Profit Sale)

Definition of Murabahah:
 It is a sale contract, with a set increment on the
original price, agreed upon by the two parties.
 It is a particular kind of sale where the seller
expressly mentions the cost of the sold
commodity he has incurred, and sells it to
another person by adding some profit.
 Rules of Murabahah
1. The original price should be made known to the
second buyer
2. The profit should be made known
3. All the expenses incurred by the seller in acquiring
the commodity like freight, custom duty, etc. Shall
be included in the cost price, and the mark up can
be applied on the aggregate cost.
4. No usurious dealing is involved, as the increment
of money in usurious dealings is prohibited in
Islam.
 Rules of Murabahah
5. The first contract should be legal. This is because the
second (set profit) sale is based on the first contract, so if
the first contract is illegal the second contract is also illegal.
6. The first buyer must own the commodity before he sells it to
the second buyer.
7. The commodity must come into the possession of the first
buyer whether physical or constructive, in the sense that the
commodity must be in his risk, though for a short period.
 Ijarah (hire)

Definition of Aqd al-

Ijarah:
 It is a contract on
using the benefits or
services in return for
compensation.
 Ijarah (hire)
In the Islamic jurisprudence the term Ijarah is
used for two different situations:
1. It means to employ the services of a person
on wages given to him as a consideration for
his hired services.
 The employer is called Musfajir, the employee
is called Ajir
 If A has employed B in his office as a manager
or as a clerk on a monthly salary, A is the
mustajir and B is an ajir.
 Ijarah (hire)
In the Islamic jurisprudence the term Ijarah is
used for two different situations:
2. Relates to the usufructs of assets and properties
 Ijarah in this sense means to transfer the usufruct
(using the benefit) of a particular property to another
person in exchange for a rent claimed from him.
 The term Ijarah is analogous to the English terms
leasing
 The lesser is called mujir
 The lessee is called Mustajir.
 The rent payable to the lesser is called Ujrah.
 Ijarah (hire)
 The rules of Ijarah in the  The only difference between
sense of leasing is very Ijarah and sale is that in the
sale case the corpus of the
mush similar to the rule property is transferred to the
of sale, because in both purchaser. While in the case of
cases something is Ijarah the corpus of the
property remains in the
transferred to another ownership of the transferor,
person for a valuable and only its usufruct, the right
consideration. to use it, is transferred to the
lessee.
 Basic Rules of Leasing
1. Leasing is a contract whereby the owner of something transfers its
usufruct to another person for an agreed period and at an agreed
consideration.
2. The subject of lease must have a valuable use. Therefore things
having no usufruct at all con not be leased.
3. It is necessary for a valid contract of lease that the corpus of the
leased property remains in the ownership of the seller, and only its
usufruct is transferred to the lessee.
4. The period of lease must be determined in clear terms.
5. The lessee cannot use the leased asset for any purpose other the
purpose specified in the lease agreement
 Basic Rules of Leasing
6. The lessee is liable to compensate the lesser
for any harm to the leased asset cased by any
misuse or negligence of the part of the lessee.
7. The leased asset shall remain in the risk of the
lesser through out the lease period in the sense
that any harm or loss caused by the factors
beyond the control of the lessee shall be borne
by the lesser.
8. It is necessary for a valid lease that the leased
asset is fully identified by the parties.
9. If the leased property is insured it should be at
the expense of the lesser and not at the
expense of the lessee.
 Basic Rules of Leasing

10. The Ijarah itself should not contain a

condition of gift or sale at the end of the
lease period, because due to the Islamic
jurisprudence one transaction cannot be
tied up with another transaction.
– However the lesser may enter into a unilateral
promise to sell the leased asset to the lessee at
the end of the lease period.
 Bai Mu’ajjal (Sale on Deferred
Payment Basis)
 A sale in which the parties agree that the payment
of price shall be deferred.
 The Rules:
1. Bai Mu’ajjal is valid if the due date of payment is
fixed in an unambiguous manner.
2. The due time of payment can be fixed either with
reference to a particular date or by specifying a
period like three months if the time of payment is
unknown or uncertain, the sale is void.
 Bai Mu’ajjal (Sale on Deferred
Payment Basis)
3. The deferred price may be more than the cash
price, but it must be fixed at the time of sale.
4. Once the price is fixed it cannot be decreased in
case of earlier payment nor can it be increased
in case of default.
5. If the commodity is sold on installments, the
seller may put a condition on the buyer that if he
fails to pay any installment on its due date, the
remaining installments will become due
immediately.
 Bai Mu’ajjal (Sale on Deferred
Payment Basis).
6. In order to secure the payment of price the
seller may ask the buyer to furnish a
security whether in the form of a mortgage
or in the form of a lien or a charge on any of
his existing assets.
7. The buyer can also be asked to sign a
promissory note or a bill of exchange but
the note or the bill cannot be sold to a third
party at a price different from its face value.