Musharakah

1. By: Camille Paldi
CEO of FAAIF

2. Musharakah
 Musharakah is rooted in the word shirkah or
‘partnership’ in English and refers to a joint-venture
agreement between two or more parties to engage in a
specified business activity based on profit -and- loss
sharing.

3. Musharakah
 According to Bank Negara Malaysia, Musharakah is a
contract between the partners to contribute capital
(monetary or non-monetary) to a venture (where in
general debt cannot form the capital), whether
existing or new, or to an owner of real estate or
moveable asset, either on a temporary or permanent
basis.
 Profits generated by that venture, real estate, or asset
are shared in accordance with the terms of the
Musharakah agreement, while losses are shared in
proportion to each partner’s share of capital.

4. Musharakah
 Also, according to Bank Negara Malaysia, it is not
permissible to include a condition in a Musharakah
contract that stipulates a predetermined fixed amount
of profit to one partner, which deprives the profit share
of the other partner.

5. Musharakah
 Basically, in this financing structure, an Islamic
investment company and the client(s) agree to partake
in a joint-venture within a specified time period.
 Both parties to the joint-venture agree to contribute
capital (in a lump-sum or staggered basis), which is
agreed upon at execution of the contract and mutually
amendable at a future date so as to allow the injection
of new capital.

6. Musharakah
 In addition, new partners to the venture can be added
after the initial execution of the agreement with
mutual consent.

7. Musharakah
 Each party’s net profit is determined in a pre-agreed
ratio like the Mudharabah, however, the portion of
profit due to a partner does not have to correspond to
the amount invested.

8. Musharakah
 For example, it can be agreed that a partner that
contributes a large portion of labor receive a larger
portion of the profit than a partner that contributed
more capital.
 It is great to see a system of finance that recognizes the
value of labor and does not see labor as just a person to
squeeze profit out of in an exploitative formula of
paying labor an hourly wage, which does not include
the value added to the product or service by the
laborer.

9. Musharakah
 A laborer should not just be an expendable input of
production in a calculation of profit, however, a
laborer should be increasingly viewed as a producer of
profit where in which the laborer should be able to
share in that profit to enhance the overall productivity
and profitability of the venture.

10. Musharakah
 This system actually encourages higher productivity
levels as laborers are paid their worth and given
incentive to work harder instead of squeezed dry and
tired by a capitalistic system that sees them as a
valueless, expendable machine used in someone else’s
quest for profit generation.

11. Musharakah
 According to Bank Negara Malaysia:
 “A partner who has agreed to a certain profit- sharing ratio
may waive the rights to profits to be given to another
partner on the basis of Tanazul (waiver) at the time of
profit realization and distribution as well as at the time of
the contract. However, a waiver of profit that takes place at
the time of contract shall be by way of unilateral promise
(wa’d).
 The mechanism for estimating profit on Musharakah
capital employed may be benchmarked to conventional
benchmarks, such as but not limited to Base Lending Rate
(BLR) in order to determine the indicative profit rate.

12. Musharakah
 Profit may be distributed from actual or realized
profits through the sale of assets of the Musharakah
partnership (al-tandhid alhaqiqi / al-fi’li).
 Profit distribution may also be on the basis of
constructive valuation (al-tandhid al-hukmi) on the
assets including accounts receivables.
 In the case of constructive valuation based on market
valuation or a third party verification, the unrealized
profit shall be recorded as a reserve.”

13. Musharakah
 According to Bank Negara Malaysia, ‘examples of
Musharakah financing are structuring project
financing, syndicated financing, asset financing,
working capital financing, contract financing, trade
financing, and structured products based on
securitization such as sukuk.
 One of the common Musharakah applications in asset
financing is Musharakah Mutanaqisah (diminishing
partnership).
 Musharakah may also be applied to acquire a stake in
another entity in the form of Musharakah investment.’

14. Musharakah
 One of the common Musharakah applications in asset
financing is Musharakah Mutanaqisah (diminishing
partnership).
 Musharakah may also be applied to acquire a stake in
another entity in the form of Musharakah investment.’

15. Musharakah
 Unlike the Mudharabah, both parties may participate
in the management of the profit-making venture.
 However, according to Bank Negara Malaysia, it may
be decided that one party may manage the venture or
management may be outsourced to a third- party
based on a relevant contract such as Wakalah, Ujrah,
or the Mudharabah contract.

16. Musharakah
 Similar to the Mudharabah, in a Musharakah both
parties may mutually pre-agree on the profit-
distribution ratio, which may or may not correspond to
the level of capital contribution.
 In a Musharakah, similar to an LLC, all parties bear
loss in proportion to the amount of invested capital.
 This is in contrast to the Mudharabah structure where
in general only the investor suffers the loss with
exception to negligence, misconduct, or violation of
certain terms and conditions by the Mudharib.

17. Musharakah
 However, in Musharakah as well, according to Bank
Negara Malaysia, ‘any partner acting on his own or as
agent who has caused the loss of capital due to
misconduct or negligence shall be liable to refund the
loss of capital to the other partners.’

18. Musharakah
 In addition, according to Bank Negara Malaysia, upon
realization of loss, a partner may agree, without any
prior condition, to bear the loss of another partner at
the time such a loss is realized.

19. Musharakah
 Therefore, in a Musharakah, the profit may be
distributed according to pre-agreed contributions not
necessarily based on capital contribution, however,
loss is spread in proportion to the capital contribution
of each partner unless a partner has aggravated loss
due to negligent conduct, in which case, the negligent
partner may be liable for more than the proportion to
his invested capital.
 Also, a partner may agree to bear the loss of another
partner.

20. Musharakah
 Similar to a Mudharabah, the provisions of the
Musharakah contract must be written in a manner to
avoid the possibility of dispute during the operation of
business or at the time of distribution of profit,
bearing loss, or winding down.
 A Musharakah contract can be terminated based on
expiration of a time period, after fulfillment of certain
conditions, or by the liquidation of the assets that
constitute the subject-matter of the partnership.

21. Musharakah
 Furthermore, according to Bank Negara Malaysia,
‘failure to contribute capital by the capital provider as
per the agreed schedule shall constitute a breach of
promise according to specified terms and conditions of
the contract.
 The partners shall than have an option to terminate
the agreement or may agree to revise the agreement
based on actual capital contribution.’

22. Musharakah
 Each partner is entitled to terminate the venture
agreement after giving notice as per the contract.
 The withdrawing partner is then entitled to her share
in the partnership.
 The remaining partners may then enter into a binding
promise to continue the partnership for a specified
period of time (after withdrawal of one or more of the
partners).

23. Musharakah
 For the withdrawing partner, all obligations, which
existed before termination under the Musharakah
shall continue to exist after the partner’s withdrawal.

24. Musharakah
 It may be the case, according to Bank Negara Malaysia,
that ‘the Musharakah agreement may impose a
condition that compels a partner to offer the
redemption of the partner’s share of capital to existing
partners based on certain agreed terms and
conditions,’ for example before offering the shares to a
third- party.

25. Musharakah
 According to Bank Negara Malaysia, a share of a
Musharakah capital may be transferred to existing
partners or a third -party according to the existing
terms and conditions of the Musharakah contract.

26. Musharakah
 Two Categories of Musharakah
 Sharikah Mulk (Property Partnership) – Involves the
joint- ownership of a property without its joint-
exploitation, such as the joint- ownership of a house
transmitted by devolution to the heirs of a deceased
person. According to Bank Negara Malaysia, ‘in
general, it refers to joint-ownership in a particular
asset.’

27. Musharakah
 Sharikah ‘Akd (contractual partnership) – It
emphasizes the joint- exploration of capital and the
joint- participation in profits and losses where joint
ownership is a consequence of and not a prerequisite
for the formation of the partnership. According to
Bank Negara Malaysia, ‘it is generally a venture with a
commercial objective.’
 Three Different Methods in Establishing the Sharikah
‘Akd, which can be in the form of Mufawadha or an
unlimited, unrestricted, and equal partnership or
Sharikah ‘Inan or a limited investment partnership.

28. Musharakah
 Sharikah Mal (finance partnership) – Where money is
the main criteria in the formation of the partnership;
 Sharikah A’mal (labor partnership) – Partnership
based on a partner’s experience or skill;
 Sharikah Wujuh (credit partnership) – Where credit
alone is used for the partnership investment.’
 (The Law and Practice of Islamic Banking and Finance
by Dr. Nik Norzrul Thani; Mohamed Ridza Mohamed
Abdullah; and Megat Hizaini Hassan. (2003))

29. Musharakah
 The Musharakah Contract
 According to Bank Negara Malaysia, ‘the essential
features attributable to a Musharakah contract are
capital, management, profit- sharing, loss- sharing,
and a joint- venture.

30. Musharakah
 CAPITAL CONTRIBUTION BY ALL PARTNERS
 The essential conditions of a valid Musharakah capital
are as follows:-
 i. Musharakah capital shall be readily available;
 ii. Musharakah capital shall be contributed by all
partners; and
 iii. The capital may be in the form of monetary assets
such as cash or non-monetary assets that includes
tangible and intangible assets.’

31. Musharakah
 Furthermore, according to Bank Negara Malaysia,
business ventures of Musharakah shall be Sharia’h
compliant and may be conducted in various sectors
such as trading, plantation, construction,
manufacturing, investment, and services.

32. Musharakah
 A Musharakah contract may be adopted for non-
commercial activities, which are non-profit oriented.
 Pre-contracting costs incurred to conclude
Musharakah contracts such as the conduct of technical
and feasibility studies of the financial viability of the
Musharakah venture by the IFI may be charged to the
customer subject to the latter’s consent.

33. Musharakah
 Origin in the Qu’ran and Sunnah
 According to Bank Negara Malaysia, ‘Musharakah has
been practiced before the Prophet Muhammad’s
Sallallahu `Alaihi Wasallam (SAW) first revelation and
since then, the practice of Musharakah has been
assimilated as part of Islamic jurisprudence by virtue
of Sunnah of the Prophet Muhammad (SAW).
 The legitimacy of the Musharakah contract is based on
the Qur’an, the Sunnah of the Prophet Muhammad
(SAW), and the consensus of Muslim jurists.

34. Musharakah
 THE QUR’AN
 The following Qur’anic verses generally indicate the
validity of Musharakah.
 i. “…but if more than two, they share in a third…” (Al-
Nisa’:12) The verse specifically underlines the rule of
Islamic inheritance. However, in general context, Muslim
jurists have regarded the text as containing general
permissibility of any form of partnership.
 ii. “Verily many are the partners (in business) who wrong
each other, except those who believe and work deeds of
righteousness and how few of them….” (Al-Sad: 24)

35. Musharakah
 THE SUNNAH OF THE PROPHET MUHAMMAD
(SAW)
 The Narration of Abu Hurayrah
 Abu Hurayrah said that: The Prophet SAW said: Allah
says: I am the third [partner] of the two partners as
long as they do not betray each other. When one of
them betrays the other, I depart from them”. (Sunan
Abu Daud)

36. Musharakah
 The Narration of Abu al-Minhal
 Abu al-Minhal narrated that Zayd Ibn Arqam and al-
Barra’ Ibn ‘Azib were partners, and they bought silver
in cash and credit. Their practices were brought to the
Prophet SAW, and the Prophet SAW pronounced that
what was bought on cash then they could benefit from
it and what was bought on credit then they should
reject it.”

37. Musharakah
 (Musnad Ahmad)
 It is learned from the narration that Prophet
Muhammad SAW approved the partnership formed
between Zayd Ibn Arqam and al- Barra’ Ibn ‘Azib but
disapproved their venture into business activity of
purchasing silver on credit.

38. Musharakah
 THE CONSENSUS OF THE MUSLIM JURISTS
 This type of partnership has been practiced throughout the history of
Muslims without objection from the jurists.
 Imam Ibn al-Munzir states in his book al-Ijma’: “And they (Muslim
jurists) agree on the validity of partnership where each of the two
partners contributes capital in dinar or dirham, and co-mingles the two
capitals to form a single property, which is indistinguishable, and they
would sell and buy what they see as (beneficial) for the business, and
the surplus will be distributed between them whilst the deficit will be
borne together by them, and when they really carry out [as prescribed],
the partnership is valid.”’
 Based on Information from (The Law and Practice of Islamic
Banking and Finance by Dr. Nik Norzrul Thani; Mohamed Ridza
Mohamed Abdullah; and Megat Hizaini Hassan. (2003)) and
Bank Negara Malaysia.

39. Musharakah
 Imam Ibn al-Munzir states in his book al-Ijma’: “And they
(Muslim jurists) agree on the validity of partnership where
each of the two partners contributes capital in dinar or
dirham, and co-mingles the two capitals to form a single
property, which is indistinguishable, and they would sell
and buy what they see as (beneficial) for the business, and
the surplus will be distributed between them whilst the
deficit will be borne together by them, and when they
really carry out [as prescribed], the partnership is valid.”’
 Based on Information from (The Law and Practice of
Islamic Banking and Finance by Dr. Nik Norzrul
Thani; Mohamed Ridza Mohamed Abdullah; and
Megat Hizaini Hassan. (2003)) and Bank Negara
Malaysia.

40.  THANK YOU!
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