Definition of musharakah

The Arabic word “musharakah” literally means sharing, participation, and mixing shares of two or more parties. Technically, it refers to a partnership between two or more persons thorough contractual relationship or by operation of Islamic law. In musharakah, all partners will share the profit and bear the loss which arises from partnership.

Musharakah is considered as an ideal contract in Islamic law. The earlier Muslim economists and advocates of Islamic finance emphasized to use musharakah and mudarabah as ideal alternatives to interest-based financing. The Prophet Muhammad (peace be upon him) said: “God the Most High says, I am the third (partner) to two partners as long as one of them does not betray the other; if they betray each other, I leave them” (Abu-Dawud). In another hadith, the Prophet Muhammad ﷺ said: “Allah’s hand is with the two partners as long as one does not betray the other” (Al-Daraqutni).

Types of musharakah

In general, musharakah is divided into two types:

Partnership in joint ownership (Shirkah al-Milk)

It means the joint ownership of two or more persons in a particular property. The basic feature of shirkah al-milk is to mix the ownership either by choice or mandatorily. If two or more persons purchase an asset jointly, they become the owners of that asset. This partnership comes into existence as their own choice. Because, they themselves chose to purchase the asset jointly. In second type of shirkah al-milk, the partnership is established mandatorily or automatically without any effort or action of the parties. For example, after the death of person, all his heirs become the new owners of his property. They become the joint owners through the law of inheritance without any effort or action.

Contractual partnership (Shirkah al-Aqd)

Shirkah al-Aqd is a type of partnership which is established by the mutual contract of the parties. It is most widely used in business transactions and can be translated as “contractual partnership” or “joint commercial enterprise.” Basically, it is an agreement between two or more people to combine their assets, labour or liabilities for the purpose of profit making. All the parties enter in partnership contract willingly and share the profit and loss of the joint venture. In contractual partnership, the partners may contribute capital, reputation or services. From this perspective, the contractual partnership can be further divided into three categories.

(a) Partnership in capital (Shirkah al-Amwal)

It’s a type of partnership where all the partners contribute some capital into the commercial enterprise.

(b) Partnership in services (Shirkah al-Amal)

It’s a type of partnership where all the partners jointly undertake to provide their services / labour and fee charged from the customers is distributed among them according to an agreed ratio. This form of partnership does not require to contribute money / capital. For example, if two persons agree to provide tailoring services to their customers. The wages earned from them will go to joint pool and distributed among the partners according to their agreement.

(c) Partnership in goodwill or reputation (Shirkah al-wujuh)

It’s a type of partnership where the partners have no investment at all. They purchase the commodities on lower deferred price based on their reputation or creditworthiness and sell them on spot. The profit is shared among the partners according to their agreement. In this type of partnership, the partners don’t have to invest in the form of capital. But they need to determine the liabilities of each partner and profit-sharing ratio.

This is a brief introduction of some famous types of partnership contract. In the article, we’re going to learn what are the conditions for partnership and how it works in modern Islamic financial institutions.