Here are the steps to setup the Musharakah company for Case 1: 1. Partner A and Partner B form a Musharakah company on Jan 1 with a capital contribution of Rs. 10 million and Rs. 5 million respectively. 2. The company operates throughout the year and earns a profit of Rs. 3 million by Dec 31. 3. As per the agreed ratio, the profit of Rs. 3 million is distributed between Partner A and Partner B in the ratio of their capital contribution i.e. Partner A receives Rs. 2 million (10/15 of Rs. 3 million) and Partner B receives Rs. 1 million (5/15 of Rs. 3 million). 4.

1. 12/4/2013
The concept of Shirkah &
Musharakah

2. Overview
o Terminology & Definition of Musharakah
o Types of Musharakah
o Structure of Musharakah
o Basic Rules in Musharakah
o Termination of Musharakah
o Constructive Liquidation of Musharaka
o Security / Collateral in Musharaka
o Musharaka Management and Liability
o Application of Musharaka As a Mode
o Problems and Risk for Banks in Musharaka Financing

3. MUSHARAKAH

4. Musharakah
Hadees-e-Qudsi
“Allah (SWT) has declared that he will become a
partner in a business between two Mushariks
until they indulge in cheating or breach of
trust”

5. Musharakah
Terminology & Definition of Musharakah
“Musharakah ” means “Sharing” and in the terminology of Islamic
Fiqh.

The word Musharakah has been derived from “Shirkah” which
means being a partner

Musharakah is basically a kind of partnership in which the
partners join together with different contributions, work or
obligation for the common objective of undertaking business and
trade in accordance with the principles of Shariah.

It is an ideal alternative for the interest based financing with far
reaching effects on the economy


6. Musharakah
Contract of Musharakah
The contract of Musharakah can take
place between two or more persons
with the capital contributed by the
partners/shareholders and the profit
to be distributed among them
according to the rates agreed upon by
the shareholders.

7. Types of Musharakah
SHIRKAH
SHIRKAT-UL-MILK
IKHTIARI
SHIRKAT-UL-AQD
GAIR IKHTIARI
SHIRKATUL-AMWAL
SHIRKATUL-AAMAL
SHIRKATUL-WUJOOH

8. Types of Musharakah
Shirkat has been divided into two kinds:
1. SHIRKAT-UL-MILK
It means joint ownership of two or more persons in a
particular property/asset.
2. SHIRKAT-UL-’AQD
This is the second type of Shirkah which means “a
partnership effected by a mutual contract for ”.

9. Shirkat-ul-Milk
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. OPTIONAL SHIRKAT-UL-MILK (Ikhtiari)

If two or more person 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.
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10. Shirkat-ul-Milk
2. UNOPTIONAL SHIRKAT-UL-MILK (Ghair Ikhtiari)
 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.
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11. Shirkat-ul-’Aqd
This is the second type of Shirkah which means:
“A partnership effected by a mutual contract in which the
partners join together with different contributions, work
or obligation for the purpose of earning profit”.
For the purpose of brevity(shortness) it may also be
translated as
“Joint commercial enterprise.”
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12. Types of Shirkat-ul-’Aqd
Shirkat-ul-‘aqd is further divided into three
kinds:
1. Shirkat-ul-amwal (contractual partnership)
2. Shirkat-ul-A’mal (liability partnership)
3. Shirkat-ul-wujooh (vocational partnership)
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13. Types of Shirkat-ul-’Aqd
1. Shirkat-ul-amwal:
 Where all the partners invest some Capital into
a Commercial enterprise.
 It is the most important & commonly used
form of Shirkat
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14. Types of Shirkat-ul-’Aqd
2. Shirkat-ul-A’mal:

Where all the partners jointly undertake to render
some services for their customers.

The fee charged from them is distributed among them
according to an agreed ratio.

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
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partner has actually done.

15. Types of Shirkat-ul-’Aqd
3. Shirkat-ul-wujooh
The word Wujooh comes from Wajahat meaning
goodwill


Hence this is a partnership in Goodwill
Here the partners contribute in the business not
through capital but through their goodwill and share
profit at an agreed ratio

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
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ratio.


16. Musharakah
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.
The term Musharakah has been introduced recently by
those who have written on the subject of Islamic modes
of financing
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.
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17. BASIC RULES FOR MUSHARAKAH
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18. Rules of Musharakah
Musharakah means relationship established under a
contract by the mutual consent of the parties for sharing
of profits and losses,arising from a joint enterprise or
venture.

Investments come from all partners / shareholders
hereinafter referred to as partners.

Profits shall be distributed in the proportion mutually
agreed in the contract.
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

19. Rules of Musharakah
The existence of Muta’aqideen(Partners):
Capability of Partners:
Must be sane & mature and be able of entering
into a contract.

The contract must take place with free consent
of the parties without any fraud or
misrepresentation.

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20. MANAGEMENT OF MUSHARAKAH
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21. Rules of Musharakah
Asset of Musharakah
All assets of Musharakah are jointly owned in proportion to the
capital of each partner.

Capital of Musharakah
All partners must contribute their capital in terms of money or
species at an agreed valuation.

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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

22. DISTRIBUTION OF PROFIT
View of Muslim Jurists About RATIO OF
PROFIT

23. RATIO OF PROFIT
In the view of
Imam Malik & Imam Shafi'i
“it is necessary for the validity of musharakah that each
partner gets the profit exactly in the proportion of his
investment.”

24. In the view of
Imam Malik & Imam Shafi'i
• EXAMPLE:
• If Mr.A has invested 40% of the total
capital, he must get 40% of the profit.
• Any agreement to the contrary which makes
him entitled to get more or less than 40% will
render the musharakah invalid in Shari'ah.
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25. RATIO OF PROFIT
In the view of
Imam Ahmed
The ratio of profit may differ from the ratio of
investment if it is agreed between the partners with
their free consent.

26. In the view of
Imam Ahmed
• EXAMPLE:
• it is permissible that a partner with 40% of
investment gets 60% or 70% of the profit,
• While the other partner with 60% of
investment gets only 40% or 30%
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27. RATIO OF PROFIT
In the view of
Imam Abu Hainfah
The ratio of profit may differ from the ratio of
investment in normal conditions.

28. In the view of
Imam Abu Hainfah
• EXAMPLE:
• Sleeping Partner:
If a partner has decided to remain inactive
or to become a sleeping partner throughout
Musharakah, then he is not entitled to
receive profit ratio more than the ratio of
his investment
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29. Rules of Musharakah
Distribution of Profit
• The ratio of profit distribution must be agreed at the time
of execution of the contract
• The ratio must be determined as a proportion of the actual
profit earned by the enterprise
- Not as percentage of partner’s investment
-
•
Not in lump sum amount
A sleeping partner cannot share the profit more than the
percentage of his capital.
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30. Profit Distribution
ILLUSTRATION
If A and B enter into a partnership and it is agreed between them
that A shall be given Rs. 10,000/- per month as his share in the
profit, and the rest will go to B, the partnership is invalid.
Similarly, if it is agreed between them that A will get 15% of his
investment, the contract is not valid.
The correct basis for distribution would be an agreed percentages
of the actual profit accrued to the business.
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31. Profit Distribution
OBSERVATIONS
If a lump sum amount or a certain percentage of the
investment has been agreed for any one of the
partners, it must be expressly mentioned in the
agreement that it will be subject to the final settlement at
the end of the term, meaning thereby that any amount so
drawn by any partner shall be treated as on account
payment and will be adjusted to the actual profit he may
deserve at the end of the term.
But if no profit is actually earned or is less than
anticipated, the amount drawn by the partner shall have
to be returned.
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32. View of Muslim Jurists About
RATIO OF LOSS
33

33. Rules of Musharakah
Rules for Loss
In the case of a loss, all the Muslim jurists are
unanimous on the point that each partner shall
suffer the loss exactly according to the ratio of
investment.
There is a complete consensus of jurists on this
principle.
Profit is based on the agreement of the parties,
but loss is always subject to the ratio of
investment.
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34. TERMINATION OF
MUSHARAKAH
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35. Termination of Musharakah
Musharakah is deemed to be terminated in any one of the
following events:
(1) Every partner has a right to terminate the Musharakah
at any time after giving his partner a notice to this
effect, whereby the Musharakah will come to an end.
In this case, if the assets of the musharakah are in cash
form, all of them will be distributed pro rata between the
partners.
But if the assets are not liquidated, the partners may
agree either on the liquidation of the assets, or on their
distribution or partition between the partners as they are.
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36. Termination of Musharakah
(2) If any one of the partners dies during the
musharakah, the contract of musharakah with him stands
terminated. His heirs in this case, will have the option
either to draw the share of the deceased from the
business, 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 stands terminated.
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37. Mr. A
Mr. B
Mr. C
Musharakah
Mr. A
Wishes to Terminate
the contract
Mr. B
Mr. C
Wishes to continue
Mr. B & C can continue
to run the business by
purchasing Mr. A’s
share
Musharakah
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38. Termination of Musharakah
• If one partner wants to terminate the Musharakah but other
partners want to continue this can be done by mutual
Agreement
• Termination of Musharakah with one partner does not mean
termination with other partners
• Price of leaving partner’s share must be determined
• If assets are not liquid their valuation must be done to
distribute shares
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39. Termination of Musharakah
• If partners cannot arrive at consensus on value the
leaving partner can compel others to liquidate
business
• However, partners may agree at the start of the
project that liquidation will require majority’s consent
• If assets are not liquid their valuation must be done
to distribute shares
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40. APPLICATION
42

41. Application
Musharakah can be successfully used to in the following
areas:
• Project financing
• Working capital financing
• Import Financing
• Export Financing
• Running finance
• Saving/Deposit account
• Certificates of Investments
• Term finance certificates
• Inter bank financing
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42. Project Financing
•
In the case of project
financing, the
traditional method of
Musharaka can be
easily adopted.
1
Share in Capital
Share in Capital
THE PROJECT
2
PARTNER
BANK
Accruing Profits
3
Share of profits
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43. Exercise
45

44. Exercise
Setup a Musharakah company
Data
Case 1:
a. Setup
Jan 1
Partner A Invest 10 mn (working partner)
Partner B Invest 5 mn
(working partner)
b. Operation
Dec 31: Profit earned 3.0 mn
c. Distribution of profit - Dec 31
d. Termination – Dec 31
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