1. PhD Program
Project Paper
East Cameron Gas Sukuk: Some Comparative Law Issues
Fiqh al-Muamulat
Semester September 2012
Professor Dr. Zainal Azam Abd. Rahman
Mace Abdullah
1000491
Page 1

2. ABSTRACT
The East Cameron Gas Sukuk (ECGS) was the Sukuk of the year in 2006 and
was showered with every kind of accolade. It was the first Sukuk with situs in
the Unites States, the first Sukuk claiming to contain Shari’ah-compliant
embedded hedges and it was the first Sukuk in the world to end in bankruptcy.
Those distinctions alone make it “fertile” ground for professional and academic
Islamic finance research on a variety of fronts. This paper takes a fresh look at
the ECGS, not to further rain upon it tribute. But, rather, this paper looks at its
structural implications; in fact, its structural pluralism. The ECGS structure had
virtually every business form known to modern finance in it within a multi-
jurisdictional framework. Thus, we ask the question anew: what is a Sukuk? We
ask this question from a comparative law perspective. One glowing look at the
ECGS structure leads to the irrefutable conclusion that it was much more than a
simple a Musharakah Sukuk. To that end, this paper compares and contrasts the
ECGS underlying premise of being a Musharakah Sukuk; its sweeping structure
helping us to compare “partnership” and company law from a Fiqh and
conventional law perspective.
2

3. OBJECTIVES OF THE PAPER
This analytic paper examines the East Cameron Gas Sukuk from a comparative
law viewpoint, i.e. from both the Shari’ah and conventional law points of view.
Specifically, this paper summarizes, compares and contrasts the legal theories
behind Musharakah Sukuk; e.g. the:
 Fiqh of companies
 Conventional law of companies
 Fiqh issues relating to Sukuk
 Conventional law issues relating to securities
Key terms of the paper
Musharakah; Sukuk; Islamic Companies Law; Islamic securities; Comparative
Law
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4. TABLE OF CONTENTS
I. INTRODUCTION
II. FIQH OF COMPANIES
A. Musharakah
1. Definitions & Legitimacy
2. Classifications
3. Rules & Prohibitions
B. Mudharabah
1. Definitions & Legitimacy
2. Classifications
3. Rules & Prohibitions
C. Conventional Counterparts
1. Originating Concepts & Conventions
2. Partnerships-General & Limited
3. Limited Liability Companies & Partnerships
4. Corporations
III. FIQH OF SUKUK
A. Definitions & Legitimacy
B. Classifications
C. Rules and Prohibitions
D. Originating Concepts & Conventions
IV. CONCLUSION
REFERENCES
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5. I. INTRODUCTION
East Cameron Gas Sukuk (ECGS) was the first Sukuk issuance to involve
securitized assets with situs1 in the United States of America (US or America).
(IFN 2006). It was touted as the first securitized Sukuk with embedded Shari’ah
compliant hedges (BSEC 2006). Its issuance was met with much fanfare. It was
heralded as the harbinger of “the dawn of a new frontier” for Islamic Finance in
America; awarded the Islamic Finance News “Deal of the Year” (IFN opt cit);
crowned with every accolade, as were the lawyers, arranger and syndicator that
structured it.
The excitement was understandable, particularly to the approximately 7
million Muslims who live in America (Ilias 2008) and the many more who do
business there. Yet, the fear of Islamic Finance growing in America triggered a
Congressional Report (Ibid). The growth of Islam itself in America has been
opposed vehemently, giving rise to a socio-political phenomenon known as
Islamaphobia.2 The phenomenon is remarkable since the tragedy of September
11, 2001. Islamophobia is now being added to dictionaries worldwide. This
phenomenon is characterized by an extreme or irrational fear, prejudice or
hatred towards Islam and Muslims. In its wake, masajid have been attacked,
protests against the building of masajid and other Muslim activities abound;
while numerous American states have sought constitutional amendments
seeking to prohibit American courts from using any foreign law in rendering
their decisions (the so-called Shari’ah Controversy3).
Financially, the size of the American economy and its appetite for debt
and equity securities makes it a likely target for growth oriented securities.
American debt now approximates $15 trillion; about the same amount as its
GDP (USA Today 1/19/12). Approximately 35% of the world’s known wealth
lies in America (IFSB 2011). In 2006, America’s bond market totalled $328
billion; by far the largest in the world (followed by Britain with $200 billion).
Combined the 2 countries comprised nearly 2/3 of the world’s total bond market
of $838 billion (McKinsey & Co. 2011). America currently has $7.4 trillion in
bonds and notes outstanding (BIS 2012).
1
Situs is a conventional law term that signifies location of immovable property. However, its application in modern
onventional law has generally implied personal property that has the location of it owner. Hence, stock certificates in modern
conventional law have the situs of a trust’s trustee. Situs can be used by courts to exercise in rem jurisdiction over a case
where personal jurisdiction may be lacking.
2
The term was first appeared in a book criticizing the mistreatment of North African Muslims by French authorities entitled
“La Politique Musulmane dans l’Afrique Occidentale Française” by Alain Quellien, published in Paris in 1910.
3
See http://www.aclu.org/religion-belief/bans-sharia-and-international-law for a discussion.
5

6. Moreover, the American capital market is arguably the most highly
developed capital market the world has ever known. In terms of size, the
American equities market, measured by capitalization value on its 2 exchanges
(NYSE and NASDAQ), is nearly $16 trillion; more than the next 6 largest
exchanges combined. By comparison, the Tokyo Stock Exchange (the next
largest) is $3.5 trillion, while Britain’s is $2.8 trillion4. All of these data are
ample cause for optimism about America as a target for Sukuk expansion.
And so it was in 2006, when ECGS was launched. There was much
optimism to say the least. However, a little over 2 years after the launch, more
sobering news began to surface, marked by the Chapter 115 bankruptcy filing by
the Originator, East Cameron Partners, LP6 (Reuters 1/15/09). Hence, ECGS
has the dubious distinction of also being the first Sukuk in the world to file
bankruptcy under any law.
As can be seen from Figure 1 below, East Cameron Bay is located in the
Gulf of Mexico (one of the most hurricane prone locations in the Western
Hemisphere). The Gulf of Mexico is notorious for its hurricanes, the most
notable in recent years being Hurricane Katrina in 2005, which virtually
destroyed the city of New Orleans, in the state of Louisiana, US. It is also the
place of the massive 2010 BP oil line rupture that released 4.9 million barrels of
crude oil into the Gulf of Mexico.
On or about September 14, 2008, Hurricane Ike destroyed a number of oil
drilling platforms in the Gulf of Mexico, effectively halting drilling operations
for a number of other drilling platforms7. This undoubtedly had an impact on
the hydrocarbon mix production required by the Production Delivery &
Marketing Agreement of the ECGS (see Table 2 below).
On September 17, 2008, ECGC’s Trustee (a Cayman Islands registered
trust company named Walkers), sent an Enforcement Notice to Deutsch Bank
(as the Escrow Agent) of a hydrocarbon mix shortfall (a so-called “exogenous
enforceable event) pursuant to the Funding Agreement (see Table 2 below). On
or about that same date, there was convened a meeting of Sukuk certificate
holders. The Purchaser SPV’s independent member was thereafter notified to
exercise its rights under the Funding Agreement, which included its choices to:
4
See http://todayforward.typepad.com/todayforward/2010/04/the-15-largest-stock-markets-and-exchanges.html.
5
Chapter 11 is one of 6 bankruptcy types allowed under US law. All bankruptcies are governed by federal law. They will be
discussed elsewhere herein.
6
An LP is a limited partnership, which is a common form of partnership in America. Its characteristics are discussed in the
section on Fiqh of Companies.
7
See http://thinkprogress.org/politics/2008/09/14/29138/hurricane-ike-destroys-oil-platforms-in-gulf-of-mexico/
6

7.  continue on with the regular payment schedule (effectively forgoing the
delinquent payment).
 accelerate payments pursuant to the Agreement.
 direct the Purchaser SPV (LOH) to sell the royalties in a commercially
reasonable manner.8
 withdraw any amounts in the escrow accounts and forward to the Issuer.
 exercise its rights as a secured creditor.9
 take such other action as afforded by the Agreement, any of the other
Sukuk agreements or remedies at law or equity.10
Adding “insult to injury,” so to speak, the Originator sought bankruptcy
protection against the Issuer, East Cameron Gas Company (ECGC) and the
Sukuk certificate holders and then filed lawsuit against the Purchaser SPV (see
“Parties” below) in an attempt to treat the structured Sukuk as a loan instead of a
“true sale.” Sukuk certificate holders included conventional hedge and
investment management companies (who represented their clients) and
anonymous GCC investors. Since the Sukuk certificate holders were not named
as defendants in the Originator’s lawsuit, they filed a “Motion to Intervene” to
assert and protect their legal and economic interests.
What follows is a discussion of the structure of the ECGS, its Shari’ah
component and the underlying Fiqh and conventional law (limited to American
law, which has distinct ties to common law) characteristics of musharakah and
mudharabah (generically partnerships) and Sukuk (generically securities). For
purposes of this paper, Sukuk are viewed “holistically” and include their
hybridized structures; which more often than not, include conventional “parts”
and aspects. This legal mix is referred to as structural pluralism.
Location or Situs. It is instructive as a starting point to note that the
ECGS (the “Sukuk”) proceeds were used to pay-off the Originator’s
conventional debt (undoubtedly imbued with riba), purchase oil and gas hedge
“puts” (considered by many Fiqh scholars as being questionable or shubh11),
8
Commercially reasonable manner is a conventional legal term best described in what is known as the Uniform Commercial
Code; it provides for the sale of the collateralize property in a public or private manner (including sale to the creditor for the
amount in default), in whole or part and may occur at any reasonable time, place and other reasonable terms. Fungible or
perishable collateral must be specifically handled speedily and the debtor must be notified.
9
Under conventional law, creditors are generally either secured or unsecured. Secured creditors whose interest in the
property is collateralized by lien, mortgage or hypothecation (e.g. recordation in public records of the interest so as to give
“constructive notice” to the “world.”
10
Conventional law emanating from the common law system of Britain provides for remedies at law (code or statute) or
equity (which started as a special appeal to the monarchy, but later became administered by special courts, procedures that
take a normative view of the law versus a positive view.
11
The fatwa describes the 'obligation' created by the hedges as iltizam, a term which refers to a system of mutual
obligations. They may be permissible or impermissible. The relevant factor that determines whether the iltizam transactio
was Shari'ah-compliant is whether it has a real value and does not just provide value to one of the parties, instead of both,
7

8. acquire oil and gas royalties in a Gulf of Mexico wildcatting operation
(speculative), as well as to otherwise “structure” the Sukuk. Wildcatting is an
American term used to describe risky or speculative drilling of wildcat wells,
i.e. oil and gas wells in areas not known to have significant oil or gas.
Notwithstanding its speculative nature, the Sukuk was based on a report
showing a history of oil and gas production and estimates of further reserves.
The underlying real assets in the Sukuk were deep water drilling
platforms, deepwater leases and their usufruct, i.e. oil & gas and the related
royalties. However, only the royalties to the usufruct were contributed to the
Sukuk.
Parties. There were 6 different parties involved in the Sukuk; each with a
different business form and each formed in a different jurisdiction. The primary
motivation for the Sukuk was the desire of the Originator, a family limited
partnership, owned by a father and son, to buy-out a third partner. In order to do
so, they needed financing. The financing available to them through conventional
means was unattractive and they were convinced to try Islamic financing
because it was cost effective. Table 1 shows the main parties to the transaction
and their respective jurisdictions.
Figure 1-Gulf of Mexico
As can be seen from Table 1, the “parties” included jurisdictional
presences in the State of Texas (US), Cayman Islands, the State of Delaware
(US), the State of New York (US), Lebanon and Britain. Moreover, the leases
were physically located off the coast of the State of Louisiana; subject to US
federal coastal leasing law; as “securities,” the Sukuk were subject to US federal
and is not speculative in nature.
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9. securities laws (Reg. D12 and S13) because they involved an US Originator; US
tax laws because the income from the Sukuk was sourced in the US; and US
federal bankruptcy law, by statute, because all US bankruptcies are governed by
federal bankruptcy laws. Hence, ECGS was truly a cross-border structured
hybridized transaction, including multiple jurisdiction law, applicable to: a trust,
a private company, two corporations, a limited partnership, a limited liability
company and ostensibly a partnership (ECGC).
Structuring. The Sukuk, though initially contemplated as an Ijarah Sukuk,
was ultimately structured as a Musharakah Sukuk. The underlying leases (East
Cameron Lease Blocks 71 and 72) were let by the US government’s Mineral
Management Service under authority of the Outer Continental Shelf Lands Act
to the highest reasonable bidder for renewable terms ranging from 5 to 10 years
(43 USC § 133714). The US and other third parties had overriding oil and gas
royalties pursuant to the leases.
Table 1-the Parties
Originator • East Cameron Partners, L.P.-
Houston, Texas, USA
• East Cameron Gas Co. (SPV)-
Issuer Cayman Islands
• Lousiana Offshore Holdings,
Purchaser LLC (SPV)-Delaware, USA
Syndicators-Arrangers • Bemo Securitisation (BCES),
Beirut, Lebanon and Merrill
Lynch-United Kingdom
Escrow & Payment Agent • Deutsch Bank-New York, USA
The leases in question were awarded to the Originator, ECP, who did not
contribute the leases to the “Purchaser” SPV, Louisiana Offshore Holdings
(LOH), LLC15, but instead contributed the oil and gas royalties to the
“Purchaser” SPV.
12
Reg D is a regulation under the Securities Act of 1933 of US securities law, which provides exemption from registration
of the security with the Securities & Exchange Commission (SEC), the primary US capital market regulator.
13
Reg S is a regulation under the Securities Act of 1933 of US securities law, which provides exemption from registration of
US based securities that are offered “offshore,” thus making it easier for foreign investors to purchase the securities.
14
US federal statute containing the Outer Continental Shelf Lands Act.
15
An LLC is a limited liability company under the laws of the various states in the US. It has characteristics of both a
corporation and a partnership, as those terms are generally understood in the US. They are typically conduit entities that have
9

10. It’s worth mentioning that even though the oil and gas royalties were
transferred to LOH, the sole “equity” membership interest in LOH was owned
by ECP, the Originator. It is not clear why this part of the Sukuk was structured
like this. However, the Originator, ECP, later sought to take advantage of this
structuring “flaw” by asserting that the royalties were never transferred, but
collateralized instead.
The LOH Operating Agreement did provide for an “independent”
member, who had no interest in the profits or losses of LOH, had no power to
bind it contractually, was not required to contribute capital, had no power to
vote and its membership “interest” would terminate and/or expire upon
fulfilment of certain contractual obligations by the equity member, the
Originator. The independent member did possess one power. That power was to
cause the sale of the oil and gas royalties payable to LOH at commercial
reasonable price and terms, without consent of the equity member, in the
eventuality that the Originator failed to make payments to LOH as agreed in the
Funding Agreement (see below).
Figure 2-Structure of the ECGS
Figure 2 shows the structure of the ECGS and all “parties” to the Sukuk.
Certain other companies were involved in the drilling and extraction operations,
including operators and back-up operators, who did the actual drilling, and “off
takers,” or companies responsible for buying and transporting the commodities,
are not shown for the sake of brevity.
particular attraction because of their asset protection features. Though named Louisiana Holdings, the LLC was formed and
organized under the laws of the State of Delaware, US.
10

11. The actual musharakah was based in the Cayman Islands, structured as a
so-called Star Trust (as opposed to a partnership) under that country’s Special
Trust Law of 1997 (IFN 2010); although it seems that a partnership company
also took residence in the Caymans, i.e. the ECGC. That jurisdiction has
specific laws governing trusts, which are separate and distinct from its
partnership laws (which are common law based and do not require registration).
As noted later, the duties of partners in Islam can include those similar to trusts.
In any event, if both the Cayman trust and partnership were viewed in
isolation, there would be no activity and there would effectively be no Sukuk,
only a pre-mixed (i.e. capital not mixed to acquire anything), a dormat shirkat
al-‘amlaak (capital partnership) or even a trust. The remaining “parties” are
needed to consummate the transactions contemplated by the Sukuk. Thus, the
Sukuk is for all intent and purposes comprised of all of the “parties” (which can
be descriptively called “affiliates” in modern financial parlance), each being
contractually bound by the various contracts encompassing the Sukuk.
Table 2
Underlying Contracts
CONTRACT PARTIES
• Certificate Purchase Agreement & • Sukuk Holders & East Cameron Gas
Declaration of Trust Company (ECGC)
• Funding Agreement • Lousiana Offshore Holdings, LLC
(LOH) & ECGC
• Purchase & Sale Agreement • LOH & East Cameron Partners, LP
(ECP)
• Contribution Agreement & • LOH & ECP
Conveyances
• Allocation Account , Deposit & • LOH, ECP & Deutsch Bank
Distribution Agreements
• Production Delivery & Marketing • LOH & ECP
Agreement
The musharakah was used to legitimatize the Sukuk Islamically and
essentially had no other role than to provide capital (much as a rabb al-mal
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12. would do in a mudharabah transaction). More will be said about the
implications of this practice later, which ironically is called “Shari’ah
conversion technology” by one of the scholars that gave the fatwa on the ECGS
(DeLorenzo 2007). The Shari’ah-compliance fatwa was given by Sheikh Yusuf
Talal DeLorenzo, of the US, and Sheikh Nizam M.S. Yacubi, of Bahrain; both
prominent scholars.
Table 2 shows the primary underlying contracts in the Sukuk, although
the Purchaser SPV’s LLC Operating Agreement16 might be considered another
underlying contract. The question that begs to be answered is whether or not all
of the contracts were Shari’ah-compliant? Is there even a requirement that the
underlying contracts all be Shari’ah-compliant? What are the consequences
from an Islamic Finance perspective, if one or more of the contracts are not
Shari’ah-compliant, in whole or part? Undeniably, in the ECGS, some of the
contracts are conditional upon others.
The basic financial terms of the Sukuk were:
 Currency and pricing ……………………. USD-$165,670,000
 Tenor in years …………………………… 13 years
 Coupon rate 17
……....………….……….. 11.25%
 Rating 18
……………………….….. S&P-CCC+
Litigation. A review of the bankruptcy pleadings related to the lawsuit
filed by the Originator, ECP, against the Purchaser SPV, LOH, reveals that the
US Bankruptcy Court, Western District of Louisiana rejected ECP’s contention
that the underlying Sukuk assets were simply collateral. That court relied
heavily on a “comfort letter” written by the attorneys for the Originator to
Standard & Poors (S&P), assuring S&P that the transaction was a “true sale”
under Louisiana law. That “true sale” comfort letter seems to have been the
proverbial “straw that broke the camel’s back.” Judgment was entered as
follows:
1. The court ruled that the transfer from ECP to LOH was a true sale under
Louisiana law19 (not the same meaning as in the Shari’ah). It relied
heavily on the “comfort letter” or opinion letter to Standard & Poors (for
16
An LLC’s Operating Agreement is an internal governance organizing document, which functions within an LLC much as
bylaws function within a modern corporation. Both are binding on stakeholders.
17
Not guaranteed per the offering circular, but the expected return per the offering circular.
18
ECGS was S&P's 1st Sukuk rating. The rating was reduced to CC after the bankruptcy was filed.
19
"True sale," under Louisiana statutory law means a “consummated sale of all rights, title and interests that the seller
may have in a receivable sold over an exchange located in this state, with the buyer acquiring all of the seller's rights and
interests, and with the seller not retaining a legal or equitable interest in the receivables sold”
12

13. rating purposes) by ECP’s own attorneys, who opined that the transfer of
the royalties qualified as a true sale under Louisiana and bankruptcy laws.
2. It further ordered that LOH, ECGC, Deutsche Bank, in its capacity as
Escrow Agent, and the Sukuk certificate holders, their principals, agents,
employees, directors, representatives and any persons acting on their
behalf or in active concert with them, are no longer restrained or enjoined
from selling, liquidating, encumbering, conveying, or otherwise
transferring all or any portion of the overriding royalty interest owned by
LOH.
3. ECP was left to work-out its financial difficulties through its plan of
reorganization, which appears to be still on-going. The court approved
nearly $2 million in legal fees; demonstrating the need for Islamic
mediation (sulh) or arbitration (tahkeem) as possibly less disruptive and
more cost efficient means to resolve disputes.
The S&P lead analyst20 involved in the Sukuk recently stated that the
musharakah trust was, according to the most recent reports available to him,
still collecting the oil and gas royalties, but at an amount less than required by
the Funding Agreement (the analyst actually used the phrase in an amount less
than the required “interest”). One wonders whether if the Sukuk certificate
holders had adhered more closely to the Islamic concept of forbearance and
allowed the Originator time to recuperate from Hurricane Ike’s impact on
production, would ECGS still be operating and doing so with more efficiency
than now is the case.
ECGS was undeniably a maverick at the time of its issuance and fairly
complex in structure. Its ground-breaking features and sudden failure raises
many Fiqh issues relating to a variety of topics, including, but not limited to: the
status of companies law in Islamic Finance, the special issues surrounding
Sukuk structures and their hybridization, the nature of property and the
concomitant rights in property under the Shari’ah, iflas (insolvency and
bankruptcy), dispute resolution and sulh (mediation) and tahkeem (arbitration)
and comparative or choice of law challenges. A comprehensive discussion of all
of these issues, even if limited to the context of the ECGS could easily fill the
pages of a book.
That’s obviously beyond the scope of this analytic research paper. Hence,
the remainder of this paper is restricted to a closer look at the comparative law
20
Based on an email received from the analyst on December 3, 2012.
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14. issues of how partnerships and securities are understood under Fiqh and
conventional laws. This paper proposes that from a modern Islamic Finance
viewpoint, classical shirkat partnerships closely resemble conventional
partnerships in form (albeit retaining their spiritual epistemological
underpinnings) and that Sukuk (being a modern financial phenomenon) closely
resemble conventional corporate structures and are not Islamic bonds and
should not be referred to as such. The ECGS serves as an excellent observation
point for these assertions.
II. FIQH OF COMPANIES
A. Musharakah
Fiqh al-Muamulat’s treatment of companies starts with partnerships, i.e.
shirkat or musharakat. All companies in classical Islamic Law are partnerships,
i.e. there is no discussion of the evolutionary forms of companies in modern
finance today. Corporations and limited liability companies are relatively new
forms of doing business. The various forms of partnerships found in modern
finance are, however, seen in the classical Fiqh of companies.
Definitions. According to al-Zuhayli, the word shirikat signifies the
“mixing of two properties in a manner that makes it impossible to define the
separate parts” (Al-Zuhayli 2007). The basic form of sharikat in Fiqh is the
musharakah. The mudhahib or different legal schools of thought differ as to the
precise definition of musharakah:
 Malikis view it as “a right for all the partners to deal with any part
of the partnership’s joint property.”
 Hanbalis view it “as sharing the rights to collect benefits from or
deal in the properties of the partnership.”
 Shafi’ees view it “as an establishment of collective rights
[pertaining to some property] for two or more people.”
 Hanafis view it “as a contract between a group of individuals who
share the capital and profits.” (Ibid).
The Hanafi madhab characterizes musharakah as a contract and in that
sense, it is more preferable. This is the view of Zuhayli (ibid) and others
(Nyazee 2000). The implication of the Hanafi definition is an expansive view of
the partnership company; one that might encompass a Sukuk Musharakah. For
example, in the ECGS, this definition might lead one to conclude that the
Originator was a partner, as it certainly shared in the capital and profits of the
14

15. venture. It is significant to note that the Originator was a party to more of the
contracts “in” the Sukuk than the Sukuk certificate holders themselves.
Legitimacy. As is often the case Fiqh al-Muamulat (specifically
commercial dealing between people) the general rule is that of mubah or
abahah, i.e. permissibility unless there is a specific text that forbids the
transaction. A text of nass can be narrowly or broadly construed; particularly if
there is no specific text from the Lawgiver, Al-Hakim, i.e. Almighty Allah or
His Messenger, Prophet Muhammad, AS21, by way of delegation. In such cases,
the text that is relied upon for a legal ruling may, out of necessity, come from
others, e.g. the Sahabah, Tabi’een or latter day jurists and scholars. Moreover, if
there is a text from the Lawgiver, it may be dhanni (open to interpretation);
again giving rise to the need to search for answers to legal questions by deriving
them from the primary Sources of Shari’ah, i.e. Qur’an and Sunnah.
That said, scholars of Fiqh Muamulat (fuqahah) believe that Musharakah
is legitimized by Qur’an, Sunnah, Ijma and ‘Urf (Ibid). However, Musharakah
as a business form is not specified in Qur’an, i.e. the word is not specifically
mentioned. Instead, Almighty Allah mentions sharing and associating in wealth
and business in Suratul Nisaa: Ayat 12 and Suratul Saad: Ayat 24, respectively:
“…If more than two, then they share (shurakaa) in a
third…” (4:12)
“…Many of those who mix or associate (khulataa’), do
wrong to one another, except those who believe and do the
good deeds; and how very few they are…” (38:24)
The former Ayat connotes the (fara’id) distribution of wealth according
the rules of inheritance, while the latter is used in the context of a commercial
dispute between two brothers brought to Prophet Daoud, AS, as a guise by
Angels to test his ability to judge fairly. Classical scholars use both to deduce
the legitimacy of sharing in wealth and mixing of property for commerce.
The legitimacy of musharakah or partnerships, i.e. shared commercial
activity, in this case, is buttressed by the Hadith Qudsi, narrated by Abu
Hurairah, RAA22, where Almighty Allah says:
“I am the third of every two partners as long as neither one
betrays the other. However, if one betrays the other, I leave
their partnership.” (Abu Dawud and Al-Hakim; both
validated its chain).
21
Alayhi Salaam or Peace be upon him.
22
Radhi Allaahu anhu or Pleased is Allah with him.
15

16. Moreover, the Prophet, AS, is reported to have told us in a Hadith: “If you
engage in a mufaawadah (sharing of capital), do it in the best possible way” and
“Engage in mufaawadah for that increases the blessings of the wealth” (Ibn
Majah as quoted by Zuhayli op cit). On the authority of Abu Hurairah, he is
further reported to have said: “Allah’s Hand is with the two partners so long as
one does not betray the other” (al-Dar Qutni).
Finally, the Prophet, AS, found the people of his day carrying on
partnerships and he accepted it. This form of Sunnah (Sunnatul taqririyyah or
tacit approval) also gives further legitimacy to the classical form of doing
business. (Zuhayli op cit). This acquiescence by the Prophet, AS, also gives
credence to the legitimacy of ‘urf or ‘adah (custom or conventions) as a mean to
derive a rule or hukm of law. Hence, we find the legal maxim or quwaid al
fiqhiyyah: “Custom (‘adah) is the basis of judgment” (al-'adatu mu˙akkamtun).
(Mejella Article 36). Accordingly, there is ijma or consensus among the
scholars of Islam that Musharakah is a valid business transaction.
Classifications. Musharakah are classified in a several different ways.
Notwithstanding the differences, two broad classifications are prevalent, i.e.
classifications between voluntary and involuntary and classifications between
limited and unlimited forms. Both are discussed from the viewpoint of several
prominent scholars.
Usmani (1998) prefers 2 broad classifications: (1) shirkat al-milk (joint
ownership of property), wherein he distinguishes between voluntary and
involuntary ownership (as noted below) and (2) shirkat al-‘uqud (joint or
mutual contract). He further categorizes the latter as either shirkat al-amwal
(joint capital contribution), shirkat al-‘amal (jointly providing services to
customers) and shirkat al-wujooh (joint use of deferred sales to acquire
commodities on credit and to then resell them for profit). The two broad
classifications above are also used by al-Fawzaan (2005).
Al-Zuhayli (2007) classifies musharakah under two main classifications:
sharikat al-‘amlaak (capital partnerships) and sharikat al-‘uqud (contractual
partnerships). He regards partnerships that originate without a contract as
“general partnerships.” Of these he divides them into “voluntary” and
“involuntary.” Voluntary general partnerships are those that originate by “joint
purchase” or “joint receivership of gifts or bequests,” i.e. they are accepted
jointly. Involuntary general partnerships are those that originate without any
action of approval by the partners, e.g. heirs by law according to the muwarith
16

17. or the ordained distribution. Al-Zuhayli notes that in the general partnerships,
neither partner has a right to deal in the other partner’s share.
Al-Zuhayli points out that there is khilaaf or differences of opinion among
the mudhahib (juridical schools) on the classification of contract-based
partnerships. That is not surprising since only the Hanafis include the term
“contract” in their definition. The following taxonomy summarizes the ikhtilaaf
surrounding contract-based partnerships:
 Hanafi-6 sub-classes, i.e. 2 subdivisions as either limited (‘inaan) or
unlimited (mufaawadah) and within them, three further divisions, i.e. (1)
capital (al-amlaak), (2) physical labor (al-‘abdaan) and (3) credit (al-
wujooh).
 Hanbali-5 sub-classes, i.e. (1) limited (‘inaan), (2) unlimited
(mufaawadah), (3) physical labor (al-‘abdaan), (4) credit (al-wujooh) and
(5) silent (mudharabah).
 Maliki & Shafi’ee-4 sub-classes, i.e. (1) limited (‘inaan), (2) unlimited
(mufaawadah), (3) physical labor (al-abdaan) and (4) credit (al-wujooh)
Ibn Rushd classifies Musharakah as 4: (1) shirkat al-‘inaan, (2) shirkat
al-‘abdaan, (3) shirkat al-mufaawadah, and (4) shirkat al-wujooh. (Ibn Rushd
2003).
There are legitimate theoretical differences as to the various
classifications, although some are simply differences in terminology, e.g. with
shirkat al-‘abdaan and shirkat al-‘amal and shirkat al-‘amlaak and shirkat al-
amwal. One of the more significant classifications according to Fiqh is that
which distinguishes between a limited (‘inaan) and unlimited (mufaawadah)
partnership. This distinction is comparable to the modern partnership
distinctions.
Shirkat al-‘inaan or limited partnership is the most common form of
partnerships in Islam (Al-Zuhayli op cit). All mudhahib agree as to its
legitimacy, but differ as to the right of each partner to deal in the property of the
partnership as its legal agent (wakalah). Thus, the Hanafis and most Hanbalis
allow this agency (i.e. each partner being considered the legal agent for all
others), while the Malikis do not. The Shafi’ees also allowed the mutual agency
in dealing with the partnership property, except in the case of credit sales. If a
restriction is placed on this mutual right of agency, the Hanafis regard the
partnership as shirkat al-‘amlaak. The Malikis simply reclassify such an
arrangement among partners as an unlimited partnership, i.e. shirkat al-
mufaawadah.
17

18. In a shirkat al-‘inaan, partners may have equal sharing of capital or labor
(and thus profits), or may have proportionate sharing of one or more of these 3
basic elements. In any event, the three elements are jointly decided as to
proportion and nature of: capital contributed, labor contributed and the ratio of
profit based on common capital. However, there cannot be uncertainty or
gharar as to these elements, i.e. the partners cannot just agree to come together,
without more.
Imam Malik and Imam Shari’ee required that profits be distributed
equally only when capital was initially contributed equally on the bases that
profit must follow capital, the legal maxim: “no reward without risk” (al ghorm
bil ghonm). (Ibn Rushd op cit). While the partners share in capital, labor or
profits according to any method of allocation they agree upon, they can only
share in losses according to their contributions to the partnership’s capital.
Thus, the general rule: “Profits are shared according to the parties’ conditions,
but losses are shared according to their share in the capital” (Al-Zuhayli op cit).
Yet, it might occur to those who specialize in Islamic Finance that
Islamic scholars have “pigeon-holed” themselves into a corner by insisting on
this constraint. While it is understandable that loss should follow capital, the
reasoning should not come to a “dead end.” There are adillah (proof) that might
support a different end, e.g.: “Damage and benefit go together. Thus, if a person
who obtains benefit from a thing, he should take upon himself also the loss from
it” (Mejalla, Art. 87). It then follows that if a partner enjoys profit
(notwithstanding the paucity or lack of capital altogether), then might (s)he also
suffer the damage? Consider further: “The burden is in proportion to the benefit
and the benefit to the burden (Mejalla, Art. 88). If this maxim is construed
narrowly to mean that benefit is capital, then it might be understandable.
However, in shirkat- al-‘inaan, benefit (i.e. profits) may flow as the partners
agree, not necessarily as the capital is arranged. Moreover, the Prophet, AS, has
advised us: “All the conditions agreed upon by the Muslims are upheld, except a
condition which allows what is prohibited or prohibits what is lawful” (Usmani
op cit). Thus, the restriction of loss to capital account balances seems a rather
“slim reed upon which to lean” an important legal principle. What might be
considered, as is the case in conventional laws, is that a negative capital
account, can under certain circumstance, trigger a duty to bring the capital
account back into the “black.”
Shirkat al-mufaawadah or unlimited partnerships allow any partner to
deal in the partnership’s property, ostensibly as its agent. It requires equality
18

19. among the partners. Al-Zuhayli (op cit) asserts that this equality applies to
capital, legal rights and religion.
Rules. Even though there are many differences between the legal schools
regarding the rules or conditions for partnership in Islam, most are subtle. Al-
Zuhayli (ibid) sets forth 2 general conditions for all partnerships:
 The actions or purposes for which the musharakah contract is written
must be permissible for delegation; and
 The ratio of profit sharing must be known precisely or the partnership
will be deemed to have gharar and rendered defective.
Al-Zuhayli states 2 rules for sharikat al-‘amlaak (capital partnerships),
that apply to both limited (‘inaan) and unlimted (mufaawadah) partnerships.
These norms seem grounded on the definitional views of requirement that all
partnership property be mixed and on the ability to measure some property and
the difficulty in measuring others. Such restrictions emanate from the
prohibition against bai’ al-sarf or spot transactions involving the 6 ribawi items.
Hence:
 Capital must be specified (again with the implication that transactions
viewed impermissible as bai’ al-sarf under the legal view will also be
held impermissible as contributed capital), present at the time of the
contract or at the time of making a trade (which, of course, has been seen
as an impediment to sharikat al-wujooh or credit partnerships that buy
goods on credit and sell for cash); and
 Capital must be fungible, i.e. gold, silver or contemporary currencies.
Notwithstanding that this is the majority position, there is enough dissent
among the mudhahib, that this norm has limited strength. For example,
Shafi’ees and Malikis both allow measurable fungible non-monetary
capital. Hanafis disallow fungible non-monetary capital only prior to
mixing the capital of a partnership; but if this capital is of the same genus
prior to mixing, it is acceptable.
Al-Zuhayli also states there are 6 rules for shirkat al-mufaawadah
(unlimited partnerships):
 Partners must be able to delegate (yufawwiduhu) legal authority, serve as
a guarantor (kafeel) and be an agent (wakeel) for one another.
 Partners’ shares of capital must be equal at all times.
 Each partner must include all his wealth from the genus used as capital in
the partnership (although this norm is the subject of ikhtilaaf or difference
of opinion, particularly by Imam Shafi’ii himself.
19

20.  Profit sharing must be equal.
 All permissible trading must be part of the partnership business, i.e.
partners are not allowed to trade on their own behalf because to allow it
would negate the mutual delegation and representation aspects of these
partnerships. Thus, according to Abu Hanifa, all partners must be
Muslim, although Abu Yusuf permitted unlimited partnerships between
Muslims and non-Muslims if all partners were eligible for wakalah and
kafalah. Al-Fawzaan (op cit) opines that having a non-Muslim partner is
permissible, provided the Muslim controls the management of the shirkat,
so as to avoid any dealings that are impermissible; whether intentionally
or unintentionally. This is particularly important, since the agency right of
wakalah is given such prominence in the Fiqh rationale for partnership
dealings.
 The partnership contract must use the term mufaawadah to insure each
partner understood the partnership’s conditions.
In substance, the prominence of agency (wakalah) and guarantee
(kafalah) in the sharikat rules (ahkam) appear to be setting forth parameters on
liability and duties. That is to say, what rights do partners have to use the
partnership and its assets in dealing with those outside the musharakah?
Further, it can be said that in shirkat al-‘inaan, there can be restrictions placed
on a partner’s right to do so. Moreover, there appears to be the right or option in
al-‘inaan partnerships for a partner to act as guarantor (kafeel) vis-à-vis some
3rd party debt. Such latitude does not seem present in shirkat al-mufaawadah
(Nyazee 2000).
Ibn Rushd (2003) adds that among the ahkam of a valid partnership is
that the underlying contract is revocable (iqaalah) and partners may withdraw at
will; selling their partnership interest back to the other partners at cost
(tawliyyah). He further notes that partners may be held liable for their negligent
dealings in the properties of the musharakah; albeit liable to the other partners.
He gives the example of a partner who deals with a third party without taking
witnesses of the transaction. If the third party denies the claim, the partner is left
to compensate the remaining partners for his negligence.
Finally, Al-Zuhayli points out 4 instances that invalidate any partnership:
 Dissolution by any partner (although the Malikis and Hanbalis require
mutual consent to terminate the mutual delegation of agency).
 Death of any partner (whether known or unknown).
20

21.  Apostasy by any partner is viewed in the same manner as death with
respect to that partner (whether is tantamount to a prohibition against a
valid partnership with a non-Muslim is otherwise addressed by the
different views of Abu Hanifa and Abu Yusuf, the latter thinking the
partnership still valid as long the non-Muslim does not control the
management of the shirkat).
 Insanity, coma or prolonged loss of capacity results in termination of the
mutual agency.
Al-Zuhayli adds 2 other conditions that terminate specific types of musharakah:
 In shirkat al-‘amlaak (capital partnerships), if any or partner capital
perishes or is diminished (in an inequitable manner) before the “mixing”
of the capital, the shirkat is deemed terminated. There are minor nuances
which discuss the possibility that 1 partner might engage in trading for
the benefit of all partners. Thus, in that case, there are some differences as
to whether the diminution of that partner’s capital causes the shirkat to
become invalid.
 In shirkat al-mufaawadah (unlimited partnerships), the Hanafi position is
that any inequality in the capital accounts invalidates the contract.
Partner Liability. Before moving on the the mudharabah (silent partner)
model, it is instructive to raise the important issue of partner liability. The
literature is clear that each partner has unlimited liability in the mufaawadah
partnership. As to whether there is limited liability for al-‘inaan partnerships, it
does not appear that a partner can bind all other partners without their consent
and any creditor may demand payment from the specific partner incurring the
liability. However, this leaves open the problem of how a creditor will know
who is the lawful obligor? This is the issue of ostensible authority and the
juristic person addressed in conventional partnership law. An ostensible partner
is one “whose name is made known and appears to the world as a partner”
though he may lack the actual authority to bind his partnership (Black 1968).
The classical literature does not seem to confront this issue clearly (but that
could be the result of the researcher’s limitations). The juristic person is the
concept of a separate legal existence of the partnership itself.
As to the unlimited partnership (mufaawadah), Al-Zuhayli (2007) states
unambiguously:
“…there are specific conditions that apply only to unlimited partnerships:
21

22. 1. The partner in a mufaawadah can undertake debt on behalf of the partnership,
as well as pawn objects on its behalf. This follows from each of the partners
being a guarantor (kafeel) for the other in this type of partnership.
2. Every partner is liable for all financial liabilities induced by his partners
through valid sales, loans, leases, guarantees and pawning, as well as guarantees
for usurped objects and kept deposits and loans. All those responsibilities also
follow from each partner being a guarantor for the others…”
Nyazee (2000) agrees, but does not appear to limit his view to unlimited
partnerships. He states:
“The liability of a partner for the debts of a partnership is unlimited, and Islamic
law does not legitimate the concept of limited liability as we know it in modern
law for corporations and limited partnerships.”
Nyazee attributes this difference to the acknowledgement of the “juristic
person” in conventional law, which he unequivocally rejects as having no basis
in Fiqh. He does, however, back-off this position a bit, by analogizing an al-
‘inaan partner to that of a mudharib partner. He limits the liability of the rabb
al-mal for actions by his mudharib that are unauthorized, and de facto does the
same as to uninvolved partners in an al-‘inaan partnership. He makes this
argument by appealing to the authority of al-Sarahkhsi, who called such actions
bateel. He buttresses his argument on the premise that the only loans
permissible in Islam are qard hasan and rejects istiqraad or debt financing. He
concludes that both mudharib and al-‘inaan partner acting alone do not have the
right to incur a liability on behalf of the partnership because they lack authority
and, in his view, more importantly, because any such authority would be bateel
per se.
Though one is referred to as limited (‘inaan) and the other unlimited
(mufaawadah), those designations can only clearly be related to “authority”
bestowed upon partners in dealing with partnership assets, not the degree of
legal exposure of partners beyond their investment. That is a distinguishing
feature of partnership law under the Shari’ah as opposed to conventional law (at
least in the common law countries). In conventional law, limited or unlimited
refers to the exposure partners have to 3rd parties dealing with the partnership.
B. Mudharabah
Mudharabah has been referred to a “silent” partnership (Al-Zuhayli op
cit) and “speculative” partnership (Al-Fawzaan op cit). These partnerships are
alternatively called muqaradah, i.e. qiraad. The term mudharabah is prominent
in Shams, while qiraad being so in the Hijaz. Shikat al-Mudharabah have been
22

23. called the “work horse” of Islamic finance. This accolade most likely has its
origin in its wide acceptance and predominance during the time of the Prophet,
AS.
Definition. The definition of mudharabah is not as complex as those of
musharakah. Also, there is little, if any, ikhtilaaf regarding the definition or
classification of mudharabah. The term mudharabah comes from darb fil-ard in
the Arabic; meaning to journey through the earth seeking the Bounty of
Almighty Allah (Nyazee 2000). Its meaning indicating the work the mudharib
does to seek out the profit on behalf of the rabb al-mal (provider of capital).
The term muqaradah comes from the Arabic qard, meaning to abstain from
something. Likewise the term points to the rabb al-mal refraining from
interfering with the work of the mudharib.
The Mejalla (Article 1404) defines these partnerships as: “A partnership
of capital and labor is a type of partnership where one party supplies the capital
and the other the labor. The person who owns the capital is called the owner of
the capital (rabb al-mal) and the person who performs the work is called the
workman (al-mudharib).” It further states that the basis of the partnership is
offer (ijab) and acceptance (qabl). (Article 1405). The common thread in
similar definitions is that there is no khalt or mixture of capital. Although some
definitions compare this form of partnership to that of a wakalah, with the rabb
al-mal being the muwakeel and the mudharib being the wakeel (Nyazee op cit).
The distinction is that in mudharabah there is sharing of profits based on the
efforts of the mudharib and capital of the rabb al-mal. However, losses are
borne by the rabb al-mal and the mudharib loses his effort and labor (ibid).
Legitimacy. The mudharabah partnership finds legal authorization in
Qur’an, Sunnah, Ijma and Qiyas. Scholars derive implicit support for seeking
out profits in 2 Ayat:
“Others travelling through the land (yadriboona fil-ardee)
seeking of Allah’s Bounty” (73:20).
And
“…and when the prayer is finished, then you may disperse
through the land and seek the Bounty of Allaah and
Remember Allah much…” (62:10)
In the Sunnah, the scholars of Fiqh point to the life of the Prophet, AS,
wherein he travelled and management the capital of his wife, Khadijah, RAA
and Abu Sufyan, on the basis of mudharabah. He did so both before and after
the advent of Islam as noted by Ibn Taimiyyah (Zuhayli op cit). Moreover, the
23

24. Hadith narrated on the authority of Ibn Abbas, RAA, that states he “used to
stipulate a condition whenever he gave his money in a mudharabah, that the
mudharib will not take his money across any sea, into any valley or buy any
animal with a soft belly; and if the mudharib were to do any of those actions,
then he must guarantee the capital. The Prophet, AS, heard of this practice and
permitted it.” And in a Hadith, said to have a weak isnad or chain of narration
(with at least 1 weak transmitter in it), Ibn Majah reported on the authority of
Suhayb, RAA, that the Prophet, AS, said: “There is blessing in three
transactions-credit sales, silent partnership and mixing wheat and barley for
home, not for trade.”
There are athar or narrations regarding the Sahabah (Companions of the
Prophet, AS), RAA, wherein several of them invested the money of orphans in
silent partnerships and no one criticized them. It is also narrated the Ibn ‘Umar
and his brother, both when travelling with the Muslim armies to Iraq, took
money owed to the Baital-Mal (Treasury), invested it in goods in Iraq, which
they sold in Madinah Munawarah. Their father, ‘Umar al-Khattab, RAA,
objected to them doing this, bringing to their attention that other soldiers had
turned down the same proposal. Yet, upon further discussion and consultation,
‘Umar, RAA, agreed to treat the transaction as a qirad and allow them to keep
½ the profit and to turn the capital and the other ½ of profit over to the Baitaul-
Mal. The Hanafis believe there was ijma regarding mudharabah, but the most
that can be determined is that this belief is based on the fact that the no
Sahabah, RAA, objected to the practice. This would result in ijma sukuti or ijma
by tacit approval.
As far as Qiyas is concerned, Shafi’ee has analogized mudharabah to
musaaqah or share cropping and given the partnership further legitimacy
thereby. Others, such as al-Kasani reject this approach, believing it to involve
unknown or non-existent wages (Nyazee 2000).
Classifications. There are 2 basic forms of mudharabah:
 Restricted-wherein the rabb al-mal dictates restrictions in the contract
with the mudharib. Restrictions as to time, location of performance and
work to be done are examples. There is ikhtilaaf among the mudhahib as
to the permissibility of these restrictions. Nevertheless, the Hadith of Ibn
Abbas, RAA, offers strong evidence of permissibility.
 Unrestricted-wherein the capital is turned over and there are no
restrictions placed on the mudhahib. Zuhayli asserts that this is the only
24

25. permissible mudharabah according to the Malikis and the Shafi’ees
(Zuhayli op cit).
The classifications in the Majella (Article 1406) conform to these classes with
the use of absolute and limited in lieu of unrestricted and restricted,
respectively.
Rules. Al-Zuhayli states that the cornerstone of the silent partnership is
the contract that must include 3 cornerstones (rukn): (1) the parties (al-aqidan),
i.e. rabb al-mal and mudharib; (2) an object of the contract (al-mawdu’ aqd);
and (3) the language (sighah) of the contract, which must include an offer (ijab)
and acceptance (qabl).
Other general rules governing mudharabah partnerships include:
 All jurists allow monetary capital.
 Some (Hanafi and Hanbali) jurists reject fungible capital.
 Most classical jurists reject non-monetary, non-fungible capital as being
based on gharar (its initial value) and thus making the division of profits
uncertain. However, ‘Abu Hanifa, Malik and ‘Ibn Hanbal all permitted
listing the price of non-monetary property as capital of a silent
partnership. In this instance, the rabb al-mal would give the capital to the
mudharib to sell according to the listed price and subsequently use the
money as the capital (in this way removing the gharar from the dealings).
 Jurists agree that the capital must be present and not absent and may not
be debt from the rabb al-mal (however, he may commission his agent to
collect a debt owed to him and to thus use the proceeds as capital).
 It is majority opinion (jumhur) with the exception of the Hanbalis that the
capital must be delivered to the mudharib. The Hanbalis permitted the
rabb al-mal to keep the capital in his possession, while the Malakis
permit the him to make multiple contributions of capital to the
mudharabah. This condition is said to differentiate the mudharabah
partnership from shirkat al-‘amlaak, which allows each partner to keep
his capital in his possession.
 Profit ratios must be known, be in common shares and be void of any
fixed monetary compensation.
 Losses to capital are borne by the rabb al-mal, while the mudharib
suffers the loss of his effort, work and expertise.
Prohibitions. When any of the above rules are violated, the silent
partnership may be defective (fasid) and once corrected, leaves the partnership
25

26. intact. The Hanafi mudhab call our attention to 2 general conditions that will
result in defective silent partnerships:
 Ignorance regarding profit sharing; and
 Violations of any of the other rules or conditions, e.g. a statement that
losses can be allocated to the mudharib, which would render the
partnership defective (but would be ignored and losses allocated to the
rabb al-mal nonetheless).
All juridical schools agree that extreme profit sharing allocating render
the partnership defective. In such cases, the jumhur position is that a failure to
allocate profit to the mudharib results in the partnership being transformed into
an uncompensated agency or otherwise entitling him to his going market rate
wage (referred to as quantum meruit in conventional law). The Maliki position
is one of “standard silent partnership” vis-à-vis fair wage, depending on the
nature of the extreme profit sharing allocation. Thus, the mudharib is allocated
some of the profit, if any, and none if there is none. However, if the
circumstances warrant it, a Maliki jurist might grant the mudharib quantum
meruit instead.
An invalid silent partnership is one that results in termination. All legal
schools agree that a silent partnership may be terminated by direct voiding of
the agreement or by withdrawal of authority to deal in the capital by the rabb
al-mal, provided the following conditions are met:
 The non-voiding partner is notified of the direct voiding by the voiding
partners; and
 The partnership capital must be in the form of monetary capital at the
time authority is terminated.
The Malikis make mutual consent a further condition for voiding the contract
once work has been done. The Malikis view the silent partnership contract as
binding, while the other schools regard it as non-binding.
The following events may also trigger termination of the silent
partnership:
 Death of one of the partners; although the Malikis disagree and state that
the mudharib’s heirs may replace him if trustworthy or otherwise hire a
wakeel to undertake the work.
 Insanity in either party; although the Shafi’ees require it to be long-term
and irreversible. The latter rule applies to comas as well. The Hanafis
have an additional rule limiting termination in the case of mental
26

27. incapacity, wherein a mudharib may be subject to legal conservatorship
and another legal agent commissioned for the work.
 Apostasy on the part of the rabb al-mal. Apostasy includes him dying or
being killed in a state of apostasy, as well as migrating to a land of war
(presumptively a land at war with Islam). This rule does not apply to the
mudharib.
 Destruction of the capital that perishes in the possession of the mudharib
before work has commenced.
 Capital as credit (i.e. as receivables or other debt) after any of the above
events, results in different treatment, each turning on the responsibility of
the collect on the credit, if any, of if profits remain to be allocated.
In conclusion to this section of the paper on classical partnerships in
Islam, it is widely understood that in the area of Muamulat, there is latitude for
change due to time and place; which is not the case in the areas of ‘Ibadat
(matters pertaining to worship and the rights of Almighty Allah), ‘Itiqadiyat
(‘aqidat or the Islamic belief system) and ‘Akhlaqiat (moral code). That is not to
say that all conformity isn’t important; because it is. It is the measuring stick
against which change must align itself. Yet, one must struggle to find a Hukm
(i.e. other than sharing, mixing and betrayal), particularly an iqtida or talab (i.e.
command) or tahrim (i.e. prohibition). Those who include ijma and qiyas in the
primary sources will take issue with that assessment. However, there is no ijma
on the primary canonical sources containing more than Qur’an and Sunnah. In
fact, after consideration of what is in the divine sources, there is ikhtilaaf or
differences of opinions as to how partnerships should be formed, operated and
terminated; and what more closely resembles takhyir or option than wajib or
obligatory requirements. That said, what follows is a discussion of comparative
law similarities and differences.
C. Conventional Counterparts
It’s noteworthy as a preface to the comparative law issues surrounding
Shari’ah-compliant partnerships, that clearly much of the Fiqh of partnerships
is judicially derived. Basic premises are discerned from the “texts,” if that term
is interpreted as Qur’an and Sunnah, i.e. very clear commands on sharing,
mixing and prohibiting betrayal (e.g. dishonesty and lack of transparency-
essentially zulm or gharar). Of course, as a threshold issue, partnerships cannot
engage in business activities that are based on riba or otherwise involve
prohibited lines of business. Accordingly, rules governing contribution and
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28. mixing seem to be fairly imposed, as do the rules governing the “fiduciary”
duties of wakalah owed by partners to one another.
The classical view of companies in Islam is no less “structured” in the
area of partnerships than in conventional law. The principal differences between
Islamic company laws and conventional laws can be categorized into 4 areas:
(1) epistemology; (2) freedom of contract; (3) separate legal existence; and (4)
evolution of forms. Categories (1) and (2) will be discussed under this section
on partnerships. Items (3) and (4) will be discussed in the section of this paper
comparing Sukuk and corporations and their related modern structures.
Originating Concepts & Conventions. The epistemology of conventional
partnerships and their concomitant laws can be traced to Near Eastern societies
and Medieval Europe (Henning 2007). These origins are said to be as old as
commerce itself. Roman expansion and conquest, along with its developing
body of law, gave shape to lex mercatoria or merchant laws. These laws
contributed several important concepts. Foremost among them was the idea of
parties coming together for consensual good faith dealings inter se or among
themselves. Moreover, the Roman law of lex mercatoria advanced another
fundamental legal principle still found in modern conventional partnership, i.e.
the doctrine of agency or each partner having the right to participate in the
management of the business (mutua praepositio), as well as the liability of all
the partners (in solidum) to third parties for “partnership obligations and the
entity theory of the legal nature of partnership” (ibid). These principles of law
run with the theory of general partnership till this day. They also bare
resemblance to al-‘inaan and al-mufaawadah in Fiqh; although the
epistemologies differ (i.e. the conventional counterparts drawing on a sort of
“natural law” while the Islamic forms seeking affirmation in the Shari’ah).
The other form of partnership known as a commenda or “an arrangement
by which an investor (commendator) entrusted capital to a merchant
(commendatarius) for employment in business on the understanding that the
commendator, while not in name a party to the enterprise and though entitled to
a share of the profits, would not be liable for losses beyond his capital” (ibid).
The parallel to modern Anglo-American limited partnership (see below) is
clear. It also strikes an amazing similarity to Islam’s mudharabah.
Finally, with respect to the origins of conventional partnerships, others
believe that the origins can be traced to early societal “merchant houses” or
family businesses that ultimately formed ventures and companies with other
“merchant houses” (Kohn 2003). Taking a more “organic” view of how
28

29. partnerships developed, Kohn draws a similitude between these family “houses”
of merchandising and trades with family agricultural endeavours. He traces
these origins to “sea lions” or commerce in the Mediterranean Sea and the
Roman forms noted above. He repeats another theme found in other literature in
this area and that is that one of the motivations for using the partnership form in
the Roman and European environments was to avoid Roman edicts against
usury (ibid). In other words, a partner might be able to secure legitimate profits
at a rate suitable to him through the partnership form that he would not be able
to charge by simply loaning money to a merchant. This is certainly an
interesting phenomenon from the Islamic perspective.
Freedom of contract has been defined as the concept that "parties to a
transaction are free, or ‘entitled,’ to agree on, or ‘to choose,’ any lawful terms”
to an agreement between them (Angelo 1992). From the Western perspective,
freedom of contract is associated with laissez-faire capitalism (Epstein 1997).
The theory assumes that “the unrestricted exercise of freedom of contract
between parties who possess equal bargaining power, equal skill, and perfect
knowledge of relevant market conditions maximizes individual welfare and
promotes the most efficient allocation of resources in the marketplace”
(Edwards 2009). Obviously, as with most theories, the assumptions present
formidable limitations on application. However, there is something that can be
said of the so-called sanctity of contract. As noted earlier, the Prophet, AS, is
reported to have said: “All the conditions agreed upon by the Muslims are
upheld, except a condition which allows what is prohibited or prohibits what is
lawful” (Usmani op cit).
Although freedom to contract can lead to zulm or oppression,
exploitation, etc., it is an overriding principle in conventional partnership law. It
“originated in the late eighteenth and the early nineteenth centuries, and was
based on the natural law principle that it is ‘natural’ for parties to perform their
bargains or pacts. During that period, the doctrine was incorporated into the
Prussian Code of 1794 and into the French Civil Code promulgated in 1804.
Other continental codifications later adopted this doctrine. During this same
period, English law embraced the doctrine as a manifestation of freedom of
trade” (Angelo op cit).
Today, freedom of contract is still part and parcel of conventional legal
theory, but with limitations imposed in equitable law, so as to prevent harshness
and unconscionable results notwithstanding that parties are assumed to be able
to “fend for themselves” while engaged in the bargaining process (ibid). The
29

30. Shari’ah by contrast, presumes that oppression may enter into the dealings and
that parties do not always have equitable positions in their dealing. Thus,
parameters (dhawabit) are established from the onset. This is obviously a
simplification of a subject that could easily be a paper by itself. However, it is
instructive to note that both legal systems have areas of that are deemed illegal
per se, one (Islamic) more steadfastly than the other.
Partnerships-General and Limited. As in Fiqh, conventionally,
partnerships are given several definitions:
 A voluntary contract between two or more competent persons to place
their money, effects, labor, and skill, or some or all of them, in lawful
commerce or business, with the understanding that there shall be a
proportional sharing of the profits and losses between them (under
Oregon law).
 An association of two or more persons to carry on as co-owners a
business for profit (Uniform Partnership Act).
 A commutative contract made between two or more persons for the
mutual participation in the profits which may accrue from property,
credit, skill, or industry, furnished in determined proportions by the
parties (Louisiana law).
 It is in effect a contract of mutual agency, each partner acting as a
principal in his own behalf and as agent for his copartners, and general
rules of law applicable to agents apply with equal force in determining
rights and liabilities of partners (US federal case law). (Black op cit).
The parallels to the Fiqh definitions are striking.
General Partnerships. General partnership law in America follows
common law and bifurcate partnerships as general or limited. General
partnerships are governed by the Uniform Partnership Act (UPA), which is a
“model” set of rules for general partnerships that is promulgated by the Uniform
Law Commission and adopted with or without modification by the several
states in America. The more salient provisions include:
 Partnerships may be oral or verbal, simple or complex.
 Partners join their capital and share accordingly in profits and losses by
default. However, the partners may agreed for an allocation that is
different based upon other factors, e.g. labor or services provided, credit
worthiness, expertise, etc. Certain partners may be granted “guaranteed
payments.” Partners may be paid interest on their capital accounts
pursuant to the terms of the partnership agreement. They may also be
30

31. paid “guaranteed payments” (generally for services or expertise provided
to the partnership) according to terms in the agreement.
 Partners may contribute tangible, intangible or other benefits to the
partnership, including money, services, promissory notes, or agreements
to contribute (in the future). A partner will be held liable for promised
contributions, even after death.
 Partners share control over the enterprise and subsequent liabilities.
 Every partner is equally able to transact business on behalf of the
partnership. However, the UPA permits the filing of a statement of
partnership authority. The statement can be used to limit the capacity of a
partner to act as an agent of the partnership, and limit a partner's capacity
to transfer property on behalf of the partnership. The statement is
voluntary. But the statement, if filed, has an impact on third parties
dealing with the partnership to the extent they know of the filing. Filings
that are recorded on property records are deemed known, e.g. those that
are filed against real property or in personal secured property
transactions.
 A partner may file a statement of denial respecting facts, including
limitation upon partnership authority. A partner or the partnership may
file a statement of dissociation from a partner. There is also a statement of
dissolution that may be filed when a partnership is dissolving. Each of
these statements has a notice function. Third parties are held to have
knowledge of these last two statements 90 days after they are filed.
 The UPA articulates the duties of loyalty and care to which each partner
is to be held. There are minimum standards of conduct that each partner
must meet. No agreement can abrogate these standards, i.e. they are
obligatory. Moreover, there is an express good faith obligation to which
each partner is subject. There is a duty not to do business on behalf of
someone with an adverse interest to the partnership. A partner must
refrain from business in competition with the partnership. The standard of
care with respect to other partners is gross negligence or reckless
conduct. A partner would be liable to another partner for such conduct,
but not for ordinary negligence. The good faith obligation simply requires
honest and fair dealing.
 Dissociation normally entitles the partner to have his or her interest
purchased by the partnership, and terminates his or her authority to act for
the partnership and to participate with the partners in running the
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32. business. Otherwise the entity continues to do business without the
dissociating partner. Dissolution and winding up are required unless a
majority in interest of the remaining partners agree to continue the
partnership within 90 days after a partner's triggering dissociation before
the expected expiration of the term of the partnership.
 Creditors of the partnership are entitled to rely upon the assets of the
partnership and those of every partner in the satisfaction of the
partnership's debts.
 The character of any partnership depends upon the agreement of the
partners (“freedom of contract”) and great deference is given to the
partnership agreement with model provisions generally not being applied
unless the agreement is silent as to the model terms (so-called “default
rules”). Other provisions, e.g. a partner’s right to inspect the books and
records of the partnership cannot be taken away (deemed obligatory).
Other provisions are regarded simply as voluntary.
 A partnership is an entity, rather than an aggregation of individual
partners (the “separate legal existence” concept discussed later).
 A general partnership may convert to a limited partnership or a limited
partnership may convert to a general partnership. A general partnership
may merge with another general partnership or limited partnership,
forming an entirely new partnership (Uniform Law Commissioners
1994).
As can be seen, there are again, many parallels with musharakah.
However, interest on capital and guaranteed payments are both prohibited in
Islamic Law. There is also greater latitude in the kind of property that may be
contributed to the partnership under conventional law than under the Shair’ah.
One observation that should seem somewhat obvious is that there is an example
of harmonization that Fiqh might consider, adopt or modify so as to create a
greater degree of organization in the laws of partnerships. In other words, a
“model” partnership “act” might be vetted, agreed upon and adopted by the
various jurisdictions, which encompasses the rules of the various mudhahib,
making certain provisions wajib, other mandub or makruh and leaving others
mubah.
This would have three benefits for Muslim jurists and Islamic Finance:
(1) it would quell what is perceived as “unacceptable is irresponsible,
decontextualized ‘patching’ (talfiq) where rules are merely put together
mechanically to meet current commercial demands” (Hamoudi 2008); (2) help
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33. Muslim and non-Muslim jurists alike, see where “structural pluralism” is and is
not (ibid); and (3) it would promote harmonization on points of Fiqh that will in
all likelihood continue to present themselves as Islamic Finance growns.
Limited Partnerships. Limited partnerships in America are outlined in the
Uniform Limited Partnership Act (ULPA). The source and scope are similarly
formatted as with the UPA. The more salient aspects of the ULPA can be
summarized as follows:
 Limited partnerships may be formed for any “lawful” purpose, but
formation requires a filing with the “secretary of state” in which the
limited partnership is formed. There is therefore separate legal existence
and is not an aggregation of partners from a legal standpoint.
 Duration may be perpetual, but the agreement may provide for automatic
dissolution based upon date or completion of purposes. Annual reporting
is required.
 Must have at least 1 general partner and at least 1 limited partner.
Partnership is managed by a general partner and the rights of the limited
partners to transact any business on behalf of the partnership or with or
without accessing the capital is severely restricted. General partner(s)
may be granted a management fee in the partnership agreement. If there
are more than 1 general partner, they may manage by majority or as
otherwise stated in the partnership agreement.
 Same statement filing provisions as in the UPA regarding disassociation,
but may be filed by either general or limited partners. However, the
partnership agreement may limit the ability of limited partners to
disassociate by a statement filing. The ULPA does provide an exhaustive
list of events that can trigger an involuntary disassociation of a limited
partner, as well those that can trigger dissolution.
 Limited partners do not have the right to bind the partnership or any other
partner and therefore are liable to creditors only to the extent of their
capital investment in the partnership. General partner(s) may have
unlimited liability for obligations of the limited partnership if he is named
in the legal action against the partnership. The limited partnership may
elect limited liability partnership (LLP) status by filing the election. A
limited partner who is also a general partner (dual capacity) may bind the
partnership and deal in partnership capital.
 Limited partners do not owe fiduciary (agency) duties to one another, but
have a general duty of good faith and fair dealing among themselves and
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34. towards the partnership. General partner has fiduciary duty towards the
limited partners, as well as duty of loyalty, good faith and fair dealing.
 Reasonable restriction on access and use of information imposed on
limited partners. Access to certain required information, including profits
or losses, or information needed for consent (e.g. addition of limited
partners) to certain transactions may be modified by the partnership
agreement, e.g. standards for making reasonable requests, advanced
notice thereof, etc.
 Profits and losses are allocated according to capital in the default, but
may be modified by the agreement. Part of the consideration for
allocation may be tax based, i.e. some partners may be allocated losses in
the early stages of existence, but later receive more distributions (which
in conventional partnerships may be different from profits, i.e. money
distributed to a partner is not required to equal a proportionate share of
profits). Non-profit partners may forgo tax deductions in favour of their
for-profit partners, receive increased monetary distributions from
operations and ultimately be given the right to purchase the underlying
asset(s) at a bargain or nominal prices (this arrangement is common in
developing so-called “low income” housing). Partners may be paid
interest on their capital balances.
 General partner may be liable for improper distributions. The general
partner has legal duty to distribute profits to limited partners. A general
partner may also be a limited partner and act in a dual capacity.
 Limited partnership must have an “agent for service of process” recorded
in public records, i.e. a person or firm designated to receive legal
notifications from the public and the government.
 A general partner is an agent of the partnership and may have ostensible
authority when acting as agent, if for example, his name has not be added
to the certificate of limited partnership before he acts as the partnership’s
agent. All acts performed on behalf of the partnership by the general
partner are otherwise deemed authorized unless they are acts that are not
customarily carried out by a partner for a partnership and those acts are
not authorized in the partnership agreement.
 A general partner owes the duties of loyalty and care to the limited
partnership and the other partners. The duty of loyalty prohibits the
general partner from competing with the limited partnership. The duty of
care prohibits him from grossly negligent, reckless, intentional conduct or
34

35. conduct that is knowingly in violation of law. The partnership agreement
may alter these duties.
 Partners may contribute tangible, intangible or other benefits to the
partnership, including money, services, promissory notes, or agreements
to contribute (in the future). A partner will be held liable for promised
contributions, even after death. However, this will generally require that
such an obligation be in writing, in order for it to be enforceable
(Uniform Law Commissioners 2001).
Again, generally, there are parallels between conventional and Islamic
limited partnerships. However, some of the same differences noted for general
partnerships, also are present with respect to limited partnerships.
Limited Liability Partnerships & Companies. Both Limited Liability
Companies (LLC) and Limited Liability Partnerships (LLP) are hybrid
company structures seeking to encompass the best of both the partnership and
corporate structures. Hybridization would seem to be the trend in business
organizations, both Islamically and conventionally. Sukuk are, in fact, almost
universally now, hybrid in structure. Both are relatively new as business forms.
Yet, their underlying conceptual bases are not. There is, as we have seen,
nothing new about partnerships. They are ancient. Similarly, the evolution of
limited liability can be traced to the early business models, e.g. mudharabah, up
to the more recent legal principles surrounding corporations. And like
corporations, these companies require explicit governmental approval and
compliance to come into existence and to remain in existence.
LLCs are modelled after the Revised Uniform Limited Liability
Company Act of 2006 (Uniform Law Commissioners 2006). The noteworthy
provisions of LLCs can be summarized as:
 They are based on foundational contracts called operating agreements.
 They have “articles” which are filed with governmental agencies, much
as a corporation files articles; which in turn results in the state issuing a
“charter” or authorization for the company to do business as an LLC.
 Rather than “cabining-in” the fiduciary duties of members and managers
(who may also be members), the model Act leaves it to the members,
through their operating agreement, to delineate the duties and
responsibilities of the parties. However, the Act does identify major
fiduciary duties which are more or less beyond the reach of the freedom
of contract and in a cautiously scaled back manner imposes the duty of
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36. loyalty, care and good faith and fair dealing on members towards the
company and other members.
 Members are not agents of the company simply because they are
members. They must have authority to bind the company and rarely have
authority, if ever, to bind other members. Moreover, the doctrine of
ostensible or apparent authority is not as well defined in these companies.
Once third parties know that the company is an LLC, then there is a
developing area of law in the conventional space that more or less
resembles “caveat emptor” in real estate law, i.e. the third party must
beware that who he is dealing with has express authority, just with
corporations.
 Either members or managers or both may manage the affairs of an LLC,
although the Act’s defaulting methods are managed and member-
managed.
 Charging orders are again the sole remedy against the individual acts of
members “outside” of the LLC construct.
 The so-called organic transactions, e.g. mergers, conversions, and
domestications are sustained.
While the Act does not sanction them, many states in the US do sanction
“series” LLCs. These LLCs are allowed to have companies within the LLC, i.e.
“series” within one umbrella LLC that are insulated from the rights and
obligations of any other series in the LLC. Each series has its own assets and
liabilities, revenue, expenses and gains and losses (Uniform Law
Commissioners 2006).
As noted elsewhere, LLPs are simply limited partnerships that afford the
general partner limited liability, just as the limited partners are allowed. Thus,
putting the general partner on equal footing with limited partners as far as
liability is concerned. But, the general partner retains his management powers
both within and outside of the partnership. Moreover, the partners in an LLP are
not subject to personal vicarious liability for the malfeasance liabilities of the
firm merely because they are members of the LLP. Only those partners who are
personally implicated in wrongful acts or omissions are subject to unlimited
personal liability. Otherwise, LLPs retain the definitional aspects of
partnerships. They are relatively recent entrant into the world of companies,
appearing in the US in the state of Texas around 1991 and now in virtually
every state (Oxtoby 2006).
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37. The distinguishing features of LLPs and LLCs are a greater degree of
protection for all partners, i.e. generally, no partner is liable beyond his or her
invested capital, and the primacy of contract. There is also a greater flexibility
of management options. Accordingly, members (the equivalent of partners) may
manage or managers may be engaged to manage. The primacy of contract or
“freedom of contract” is most evident in these companies, as it is generally
accepted that their operating agreements may override most statutory provisions
regarding the internal operation of the company.
It would further appear that, at least in the case of LLCs, the Islamic
concept of “mixing” of capital has been recognized, because outside creditors,
i.e. those creditors who seek the partners as debtors for transactions outside the
scope and course of business of the LLC, are only able to obtain a “charging
order” upon judgment. That means that they can wait for any distribution from
the LLC and take it, but they cannot invade the LLC’s capital to do so.
Corporations. Corporations have their historical roots in the same early
companies that gave genesis to modern partnerships. However, corporations
have the added feature of duration. Duration allows corporations, if so desired,
to outlive any one person or groups of people. In other words, a corporation
need not terminate or dissolve simply because someone dies, becomes
incapacitated or otherwise is indisposed. Shares are inheritable, as are
partnership interests in the West. They represent the quintessential form of
khultah or mixture of financial interests. Shareholders need not even know each
other, though they may. Shares are the most mobile of all mobile securities.
In American jurisprudence, corporate rights and the contract between
shareholders and the corporation are constitutional. Such rights, with the State
as an ever present third party is based on the Tenth Amendment to the US
Constitution, which states: “The powers not delegated to the United States by
the Constitution, nor prohibited by it to the States, are reserved to the States
respectively, or to the people” (US Constitution). Thus, it is the reserved power
of the State to regulate that gives rise to the right of people to form corporations
and to operate them within the framework established by the State. Again, we
return to the Islamic guidance to see the wisdom of such a framework. “All the
conditions agreed upon by the Muslims are upheld, except a condition which
allows what is prohibited or prohibits what is lawful” (Usmani op cit). Thus, the
articles of incorporation of each corporation are subject to the reservation of
legislative power of the State to amend the corporate laws and change the rights
and liabilities of the shareholders, notwithstanding the freedom to contract,
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38. wherein provisions in the articles become repulsive under the law (Ballatine
2012).
So, why was there such lethargy in the development of the corporate model
in Islam? Kuran (2006) identifies 3 potential causes. He was interested in
identifying the causes of underdevelopment in the Middle East. He identifies
3 distinct mechanisms that inhibited the transformation of its partnerships
into corporations:
 “Persistent simplicity of business partnerships caused by Islamic inheritance
law, which by dividing the fortunes of a wealthy merchant discouraged the
formation of large and long lasting partnerships. As wealth could not be
accumulated generations after generations due to its division amongst legal
heirs businesses did not grow to an extent that might require corporate
structure...
 The second mechanism operated in the form of waqf, Islamic charitable
trust, which was used to provide public services. However, it was also used
as a family settlement. It was the only permanent institution under Islamic
law that enjoyed some features of a corporation but it stagnated over the
time and failed to evolve into a self-governing institution like modern
corporations.
 The third mechanism involved the state, which discouraged the development
of permanent organisations that might pose any political challenge to the
state authority. But financially weakened because of the fragmentation of
wealth caused by inheritance law, the private sector led by the merchant
class could not stand against the powerful state” (ibid).
III. FIQH OF SUKUK
Without a doubt, Sukuk are the “creme de la crème” of the Islamic
Finance world today. They comprise a substantial share of the international
Islamic Finance market, are a driving force in the nascent Islamic Capital
Market, yet still regarded as a mere “drop in the bucket” when compared to the
conventional securities market (Iqbal 2012). Nonetheless, Sukuk have, in a
sense, given Islamic Finance something it has not had before, i.e. a viable
substitute for near non-existence Islamic corporate securities. More to the point,
Sukuk are Islamic securitizations or securities backed by assets in a manner that
complies with the Shari’ah. Securitization is by definition a process of pooling
assets and issuing securities against them (ibid).
38

39. A. Definitions & Legitimacy
Definition. Technically, the Accounting and Auditing Organization of
Islamic Financial Institutions (AAOIFI) defines “sukuk” as:
“… certificates of equal value representing, after closing
subscription, receipt of the value of the certificates and
putting it to use as planned, common title to shares and
rights in tangible assets, usufructs and services, or equity of
a given project or equity of a special investment activity”
(AAOIFI FAS 17).
Linguistically, Sukuk is simply the Arabic plural for sakk, meaning
certificate. It has been said that the modern word “check” has derivation from
sakk (Iqbal op cit). It is interesting to note that stock was originally referred to
as stock certificates.
Legitimacy. Sukuk gain their legitimacy from the underlying legitimate
Shari’ah-compliant contract, i.e. musharakah, ijarah, etc. That has been the
anecdotal and prevalent view since their appearance in the modern Islamic
financial markets. Thus, some attribute this aspect of legitimacy to the Words of
Almighty Allah:
“O you who believe! When you contract a debt for a fixed
period, write it down…But take witnesses whenever you
make a commercial contract…” (2:282).
Moreover, they gather further legitimacy by avoiding riba and other prohibited
aspects of conventional finance.
Scholars are also quick to note that the sakk is not new in Fiqh muamulat.
They note that in classical period of Islam, Imam Malik recorded in his famous
treatise al-Muwatta, that in the first century of Islamic history, the Umayyad
government would pay soldiers and public servants both in cash and in kind.
The payment in kind was in the form of Sukuk al-bad’ia. This term has been
translated to mean “commodity coupons” or “grain permits” (Iqbal op cit). The
holders of the certificates would redeem them at the treasury or Bait al-Mal for
a fixed amount of the subject commodity. Others sold their Sukuk for cash
before the maturity date thereon. Thus, the concept of a tradable certificate has
been known in Islam from its first century (ibid).
B. Classifications
Modern day efforts to use Sukuk were said to have begun in Jordan circa
1978 (ibid). There were 457 Sukuk issuances in 2011; considered by most to be
an “off year” (ibid). The great majority of Sukuk are either musharakah
39

40. (approximately 32%) and ijarah (31%). Ibid. There are a variety of way to
classify Sukuk: (1) the are commonly referred to as being debt based, equity
based or khultah (mixed) depending on the underlying securities (2) asset-based
or asset-backed, depending on whether there has been a “true sale” and the
Sukuk are securitized by liens or encumbrances on assets or by the assets
themselves; (3) sovereign, corporate or quasi-sovereign, depending on whether
the issuer is promoted by a government, corporation or a quasi-governmental
activity or entity; and (4) according to the underlying contract, i.e. ijarah, bai
bithaimin ajal, salam, murabahah, istisna’, musharakah or mudharabah. This
paper, as stated, takes a closer look at musharakah Sukuk.
Musharakah Sukuk have been defined as: “certificates of equal value
issued for the purpose of using the mobilized funds to establish a new project,
develop an existing project or finance a business activity on the basis of a
partnership contract. The certificate holders become the owners of the project or
the assets of the activity according to their respective shares, with the
musharakah certificates being managed on the basis of either participation,
mudharabah or an investment agency” (Securities Commission Malaysia 2009).
C. Rules and Prohibitions
There are at present no cohesive set of rules or prohibitions relating to
Sukuk other than those of AAOIFI. This lack of harmonization has been
repeatedly identified as an area of concern as the issuances grow (Ariff et al.
2012). That said, Table 3 summarizes AAOIFI’s salient recommendations
regarding Musharakah Sukuk.
 Sukuk holders must own  Cannot have repurchase
the assets and that provision of Sukuk
ownership includes the interests at nominal values;
right to sell. Articles (2) Std. 12 (2/1/6/2) and Std.
and (5 ½) of Std. 17 on 5 (2/2/1 and 2/2/2).
Investment Sukuk.  Shari’ah advisors should
 If tradable, cannot not limit their involvement
represent receivables or to the issuance of the
debt; Fin. Std. 21. Sukuk, ignoring the
 Restricted use of liquidity underlying contracts and
top-up provisions or loans documents.; Shari’ah Std.
on distribution; Std. 13 17 (5/1/8/5).
(8/8).
Adapted from AAOIFI’s FAS No. 17
40