Fiqh of Islamic Finance

Musharakah
1.

2.

Shirkah (partnership): It literally means

sharing. The sharing may be of money,
labor, or anything else. The prophet (SAW)
said, People are partners in three [things]:
water, herbage, and fire.
Shirkah (partnership): is defined as a
contract between partners on both capital
and profit.

Kinds of Partnerships

Shirkat ul-milk (partnership of ownership): It means

joint ownership of two or more persons in a particular
property.

This kind of Shirkah may come into existence in two different

ways.
1.

2.

By the partners choice: means coming into the

operation at the option of the parties. For example, if two
partners agree to buy equipment it will be owned jointly
by both of them.
Without the partners choice: means coming into the
operation automatically without any action taken by the
parties. For example, if property is inherited.

Kinds of Partnerships
Shirakal al-aqd (partnership of a contract):

1.

2.

which means a partnership effect by a mutual

contract.
This kind of Shirkah exists in three types :
Shirkal ul-amwal (financial company): where all
the partners invest some capital into a
commercial enterprise.
Shirkat ul-amal (company of workmanship):
where all the partners jointly undertake to render
some services for their customers and the fee
charged from them is distributed among them
according to an agreed ratio.

Kinds of Partnerships
3.

Shirkal ul-wujooh (partnership with eminent

people): where the partners have no
investment at all. All they do is purchase the
commodities on a deferred price and sell them
at that spot. The profit so earned is distributed
between them at an agreed ratio.

Basic Rules of Musharakah

Distribution of profit
1.

The proportion of
profit to be
distributed between
the partners must
be agreed upon at
the time of the
effecting of the
contract.

2.

The ratio of profit for

each partner must
be determined in
proportion to the
actual profit accrued
to the business, and
not in proportion to
the capital invested
by him.

Basic Rules of Musharakah

Sharing of Loss
In the case of loss
each partner shall
suffer the loss
exactly according to
the ratio of his
investment. If a
partner has invested
40% of the capital,
he must suffer 40%
of the loss, not

more, not less.

Basic Rules of Musharakah

The Nature Of the Capital
Most of the Muslim
jurists are of the opinion
that the capital of a joint
venture must be in
monetary form, no part
of it can be contributed
in kind. Except in the
opinion of Imam Malik
who said that it is
permissible for a
partner to contribute to
the musharakah in kind.

Basic Rules of Musharakah

Management of Musharakah

Every partner has a right to take part in the

business's management and to work for it.
However the partners may agree upon a
condition that the management shall be
carried out by only one of them and that no
other partner shall work for the musharakah.
If all the partners agree to work for the joint
venture, each one of them shall be treated as
an agent of the other in all the matters of the
business.

Basic Rules of Musharakah

Termination of the Musharakah
Every partner has a right to terminate the
musharakah at any time after giving his partner a
notice to this effect.
2) If any one of the partners die during the currency
of musharakah, his heirs will have the option to
terminate or to continue with the contract of
musharakah.
3) If any one of the partners becomes insane or
otherwise becomes incapable of effecting
commercial transactions, the musharakah can be
terminated.
1)

Diminishing Musharakah

A financier and his client participate either in

the joint ownership of a property or an
equipment, or in a joint commercial
enterprise.
The share of the financier is further divided
into a number of units. It is understood that
the client will purchase the units of the
financiers share, one by one, periodically.

Mudarabah

The word mudarabah comes from the Arabic

root (Dharabahfi al ard), which means going
and working to obtain livelihood.
Mudarabah is a special kind of partnership
where on partner provides work in trade and
the other side provides the capital.
The first partner is called mudarib, and the
second partner is called rabb ul-mal.

Difference between Musharakah

and Mudarabah
1.

The investment in
2. In mushararkah all the
musharakha comes form
partners can participate in
all the partners, while in
the management of the
mudarabah the
business, and can work
investments comes from
for it. While in
rabb-ul-mal only. This
musdarabah the rabb ulmeans that the
mal has no right to
musharakah is a
participate in the
partnership in profit and
capital, while mudarabah
management, which is
is a partnership in profit
carried out by the
not in capital.
mudarib only.

Difference between Musharakah

and Mudarabah
3.

In musharakah all
the partners share
the loss. While in
the mudarabah,
only rabb-ul-mal
suffers the loss,
while the mudarib
suffers the loss of
his labor.

Types of Mudarabah

Al-mudarabah almuqayyadah
(restricted mudarabah):
where rabb-ul-mal
specifies a particular
business for the
mudarib, in which case
he shall invest the
money in that particular
business only.

Al mudarabah al
muttaqah (unrestricted
mudarabah): where
rabb-ul-mal leaves the
door open for the
mudarib to undertake
whatever business he
whishes, the mudarib
shall be authorized to
invest the money in any
business he deems fit.

Distribution of the Profit

It is necessary for the
validity of mudarabah that
the parties agree right at
the beginning on a
definite proportion of the
actual profit to which each
one of them is entitled.
They can share the profit
in equal proportions, and
they can also allocate
different proportions for
the rabb-ul-mal and the
mudarib.

Termination of Mudarabah

The mudarabah
contract can be
terminated at any time
by either of the two
parties. The only
condition is for notice to
be given to the other
party.
If all the assets of the
mudarabah are in cash
form at the time of
termination,

and some profit has

been earned on the
principal amount, it shall
be distributed between
the parties according to
the agreed ratio.
If the assets of the
mudarabah are not in
cash form, the mudarib
shall be given an
opportunity to sell and
liquidate them, so that
the actual profit may be
determined.

Combination of Musharakah and

Mudarabah
A contract of mudarabah normally presumes
that the mudarib has not invested anything to
the mudarabah. He is only responsible for the
management, while all the investment comes
from the rabb-ul-mal. Sometimes the
Mudarib wants to invest some of his money
into the business of the mudarabah, in such
case the musharakah and the mudarabah are
combined together.

Combination of Musharakha and

Mudarabah
Example:
A gives B $100,000 in a contract of
mudarabah. B then added $50,000 with the
permission of A. This type of partnership will
be treated as a combination of musharakah
and mudarabah. The mudraib is a sharik, so
he gets s a certain percentage of profit on
account of his investment as a sharik and
another percentage for his management and
work as a mudarib.

Murabahah (Set Profit Sale)

Definition of Murabahah:

It is a sale contract, with a set increment on

the original price, agreed upon by the two
parties.
It is a particular kind of sale where the seller
expressly mentions the cost of the sold
commodity he has incurred, and sells it to
another person by adding some profit.

Rules of Murabahah
1. The original price should be made known to the
second buyer
2. The profit should be made known
3. All the expenses incurred by the seller in
acquiring the commodity like freight, custom duty,
etc. Shall be included in the cost price, and the
mark up can be applied on the aggregate cost.
4. No usurious dealing is involved, as the increment
of money in usurious dealings is prohibited in
Islam.

Rules of Murabahah
5. The first contract should be legal. This is
because the second (set profit) sale is based
on the first contract, so if the first contract is
illegal the second contract is also illegal.
6. The first buyer must own the commodity before
he sells it to the second buyer.
7. The commodity must come into the possession
of the first buyer whether physical or
constructive, in the sense that the commodity
must be in his risk, though for a short period.

Ijarah (hire)
Definition of Aqd alIjarah:
It is a contract on
using the benefits or
services in return for
compensation.

Ijarah (hire)
In the Islamic jurisprudence the term Ijarah is
used for two different situations:
1.

It means to employ the services of a person

on wages given to him as a consideration for
his hired services.
The employer is called Musfajir, the
employee is called Ajir
If A has employed B in his office as a
manager or as a clerk on a monthly salary, A
is the mustajir and B is an ajir.

Ijarah (hire)
In the Islamic jurisprudence the term Ijarah is
used for two different situations:
2.

Relates to the usufructs of assets and properties

Ijarah in this sense means to transfer the
usufruct (using the benefit) of a particular
property to another person in exchange for a
rent claimed from him.
The term Ijarah is analogous to the English
terms leasing
The lesser is called mujir
The lessee is called Mustajir.
The rent payable to the lesser is called Ujrah.

Ijarah (hire)

The rules of Ijarah in

the sense of leasing is
very mush similar to the
rule of sale, because in
both cases something is
transferred to another
person for a valuable
consideration.

The only difference

between Ijarah and sale is
that in the sale case the
corpus of the property is
transferred to the
purchaser. While in the
case of Ijarah the corpus
of the property remains in
the ownership of the
transferor, and only its
usufruct, the right to use
it, is transferred to the
lessee.

Basic Rules of Leasing

1.

2.

3.

4.
5.

Leasing is a contract whereby the owner of something

transfers its usufruct to another person for an agreed
period and at an agreed consideration.
The subject of lease must have a valuable use.
Therefore things having no usufruct at all con not be
leased.
It is necessary for a valid contract of lease that the
corpus of the leased property remains in the ownership
of the seller, and only its usufruct is transferred to the
lessee.
The period of lease must be determined in clear terms.
The lessee cannot use the leased asset for any
purpose other the purpose specified in the lease
agreement

Basic Rules of Leasing

6.

7.

8.
9.

The lessee is liable to compensate the lesser

for any harm to the leased asset cased by any
misuse or negligence of the part of the lessee.
The leased asset shall remain in the risk of the
lesser through out the lease period in the sense
that any harm or loss caused by the factors
beyond the control of the lessee shall be borne
by the lesser.
It is necessary for a valid lease that the leased
asset is fully identified by the parties.
If the leased property is insured it should be at
the expense of the lesser and not at the
expense of the lessee.

Basic Rules of Leasing

10.

The Ijarah itself should not contain a

condition of gift or sale at the end of the
lease period, because due to the Islamic
jurisprudence one transaction cannot be
tied up with another transaction.

However the lesser may enter into a unilateral

promise to sell the leased asset to the lessee at
the end of the lease period.

Bai Muajjal (Sale on Deferred

Payment Basis)

1.
2.

A sale in which the parties agree that the

payment of price shall be deferred.
The Rules:
Bai Muajjal is valid if the due date of payment
is fixed in an unambiguous manner.
The due time of payment can be fixed either
with reference to a particular date or by
specifying a period like three months if the
time of payment is unknown or uncertain, the
sale is void.

Bai Muajjal (Sale on Deferred

Payment Basis)
3.
4.

5.

The deferred price may be more than the cash

price, but it must be fixed at the time of sale.
Once the price is fixed it cannot be decreased
in case of earlier payment nor can it be
increased in case of default.
If the commodity is sold on installments, the
seller may put a condition on the buyer that if
he fails to pay any installment on its due date,
the remaining installments will become due
immediately.

Bai Muajjal (Sale on Deferred

Payment Basis).
6.

7.

In order to secure the payment of price the

seller may ask the buyer to furnish a
security whether in the form of a mortgage
or in the form of a lien or a charge on any of
his existing assets.
The buyer can also be asked to sign a
promissory note or a bill of exchange but
the note or the bill cannot be sold to a third
party at a price different from its face value.