Islamic Banking Products – Part 2 – Musharakah
By Mohammed Waseem
Musharakah is a partnership-based contract or an investment product with a partnership structure for sharing profits and losses, which is based on the Islamic Sharee’ah. It involves investment from all the partners and an agreement to share profits in a predetermined ratio and to share losses in the ratio of contribution. Parties to the contract of Musharakah are referred as “musharik” which literally means partner.
The common conditions for Musharakah are the existence of partners (Mushariks), capability of the partners to enter into a contract with free consent, without any misrepresentation and the existence of commodity. The special conditions for Musharakah are that the commodity should be capable of agency, which means each partner should be in a position to manage and take responsibility of the project or carry on the business; the ratio of profit sharing should be predetermined; and along with the profits, losses should also be shared in the ratio of contribution towards the contract. However, defining absolute value or fixed value is not permissible, instead, ratios or percentages must be determined.
The initial contribution or the capital must be quantified and specified in terms of currency, value, etc. and the capital invested by various partners need not be mixed and need not be in liquid form, which means that the capital can wither be in the form of cash or commodity which meet the conditions specified.
There is a possibility of having a sleeping partner as well in a Musharakah contract. In such case, they shall be entitled to only the share of profits to the extent of investment and the ratio of profit allocated to them should not exceed the ratio of investment (there is difference if opinion on whether the ratio of profit can increase the ratio of investment for a sleeping partner). Additionally, the working partners can be predetermined to be allocated higher proportion of profits, with the justification that the excess received is the compensation for their work. In case of distribution of losses, it is always distributed on the ratio of investment; no more, no less.
Musharakah stands terminated in case of violation of the conditions of the contract. It can also be terminated when the purpose of forming the partnership has been achieved. Every partner has the right to terminate the contract after issuing a notice to the other partners, which could bring an end to the Musharakah; in such case, the partners may mutually choose to either liquate the assets or distribute them, in case of dispute concerning this, distribution is preferred. The Musharakah may also come to an end on the death or insanity of one of the partners. If one partner wants to terminate the Musharakah while others want to continue the partnership, it is possible.
The duration of the Musharakah should be fixed for such a long term that after the end of the duration, no other business can be carried out. However, it can also be for a short term for which the partnership is necessary, during which no partner can choose to dissolve the partnership.
The legitimacy of Musharakah contracts is proven from a Hadith Qudsi (Hadith with the words of Allah, Glory be to Him). Most major Islamic banks offer Musharakah as a mode of investment, which the investors can benefit from.