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 2. The ratio of profit for
profit to be each partner must
distributed between be determined in
proportion to the
the partners must actual profit accrued
be agreed upon at to the business, and
the time of the not in proportion to
effecting of the the capital invested
contract. by him.
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 one 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 partners can participate
all the partners, while in in the management of the
mudarabah the
investments comes from business, and can work
rabb-ul-mal only. This for it. While in
means that the musdarabah the rabb ul-
musharakah is a mal has no right to
partnership in profit and participate in the
capital, while mudarabah management, which is
is a partnership in profit carried out by the
not in capital.
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 muttaqah (unrestricted
(restricted mudarabah): mudarabah): where
where rabb-ul-mal rabb-ul-mal leaves the
specifies a particular door open for the
business for the mudarib to undertake
mudarib, in which case whatever business he
he shall invest the whishes, the mudarib
money in that particular shall be authorized to
business only. invest the 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 Mustajir, 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 only difference between
the sense of leasing is Ijarah and sale is that in the
sale case the corpus of the
very mush similar to the property is transferred to the
rule of sale, because in purchaser. While in the case
both cases something is of Ijarah the corpus of the
transferred to another property remains in the
person for a valuable ownership of the transferor,
and only its usufruct, the
consideration. right 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.
