Definition

'Musharakah' is a word of Arabic origin which literally means sharing.

The root of the word "MUsharakah" in Arabic is Shirkah, which means being a partner. It is used in the same context as the term "shirk" meaning partner to Allah.

Under Islamic jurisprudence, Musharakah means a joint enterprise formed for conducting some business in which all partners share the profit according to a specific ratio while the loss is shared according to the ratio of the contribution. It is an ideal alternative for the interest based financing with far reaching effects on both production and distribution.

The connotation of this term is little limited than the term "Shirkah" more commonly used in the Islamic jurisprudence. For the purpose of clarity in the basic concepts, it will be pertinent at the outset to explain the meaning of each term, as distinguished from the other. "Shirkah" means "Sharing" and in the terminology of Islamic Fiqh,

In the context of business and trade it means a joint enterprise in which all the partners share the profit or loss of the joint venture. It is an ideal alternative for the interest-based financing with far reaching effects on both production and distribution.

In the modern capitalist economy, interest is the sole instrument indiscriminately used in financing of every type. Since Islam has prohibited interest, this instrument cannot be used for providing funds of any kind. Therefore, 'Musharakah' can play a vital role in an economy based on Islamic principles.

       Types of Shirkah

Shirkah is divided into two major caterogries

• Shirkat-ul-Milk

• Shirkat-ul-Aqd

       Shirkat-ul-Milk

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:

• Optional (lkhtiari): At the option of the parties e.g., if two or more persons purchase equipment, it will be owned jointly by both of them and the relationship between them with regard to that property is called "Shirkat-ulMilk Ikhtiari" I lere this relationship has come into existence at their own option, as they themselves elected to purchase the equipment jointly.

• Compulsory (Ghair lkhtiari): This comes into operation automatically without any effort/action taken by the parties. For example, after the death of a person, all his heirs inherit his property, which comes into their joint ownership as a natural consequence of the death of that person.

There are two more types of Joint ownerships (Shirkat-ul-Milk):
► Shirkat-ul-Ain
► Shirkat-ul-Dain

A property in shirkat-ul-milk is jointly owned but not divided yet, is called Musha. In Shirkat-ul-milk undivided shares or other assets can be used in the following manner:

a. Mushtarik Intifa':
Mutually or jointly using an asset by taking turns under circumstances where the partners or joint owners are on good terms.

b. Muhaya:
Under this arrangement the owners will set turns in days for example one may use the product for 15 days and then the other may use it for the rest of the month.

c. Taqseem:
Referring to division of the jointly owned asset. This may be applied for property where the asset that is owned can be divided permanently for example jointly taking a 1,000 sq. yards plot and making a house on 500 yards by each of the 2 owners.

Under a situation where the partners are not satisfied with Muhaya arrangement, the property or asset jointly held can be sold off and proceeds divided between the partners.

       Shirkat-ul-Aqd

This is the second type of Shirkah, which means, "a partnership effected by a mutual contract". For the purpose of brevity it may also be translated as "joint commercial enterprise."

Shirkat-ul-Aqd is further divided into three kinds:

a. Shirkat-ul-Amwal (Partnership in capital)
Where all the partners invest some capital into a commercial enterprise.

b. Shirkat-ul-Aamal (Partnership in services)
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. For example, if two people agree to undertake tailoring services for their customers on the condition that the wages so earned will go to a joint pool which shall be distributed between them irrespective of the size of work each partner has actually done, this partnership will be a shirkat-ul-aamal which is also called Shirkat-ut-taqabbul or Shirkat-us-sanai or Shirkat-ul-abdan.

c. Shirkat-ul-wujooh (Partnership in goodwill).
The word has its root in the Arabic word Wajahat meaning goodwill. Here the partners have no investment at all. They purchase commodities on deferred price, by getting capital on loan because of their goodwill and sell them at spot. The profit so earned is distributed between them at an agreed ratio.

Each of the above three types of Shirkat-ul-Aqd are further divided into two types:

Shirkat-Al-Mufawada (Capital & labour at par):
All partners share capital, management, profit, and risk in absolute equals. It is a necessary condition for all four categories to be shared amongst the partners; if any one category is not is not shared, then the partnership becomes Shirkat-ul-Ainan. Every partner who shares equally is a Trustee, Guarantor and Agent on behalf of the other partners.

Shirkat-ul-Ainan:
A more common type of Shirkat-ul-Aqd where equality in capital, management or liability might be equal in one case but not in all respect meaning either profit is equal but not labour or vice versa.

All these modes of "Sharing" or partnership are termed as "Shirkah" in the terminology of Islamic Fiqh, while the term "Musharakah" is not found in the books of Fiqh. This term (i.e. Musharakah) has been introduced recently by those who have written on the subject of Islamic modes of financing and it is normally restricted to a particular type of "Shirkah", that is, the Shirkat-ul-Amwal, where two or more persons invest some of their capital in a joint commercial venture. However, sometimes it includes Shirkat-ul-Aamal also where partnership takes place in the business of services.

It is evident from this discussion that the term "Shirkah" has a much wider sense than the term "Musharakah" as is being used today. The latter is limited to "Shirkat-ul-Amwal " only i.e. all the partners invest' some capital into a commercial enterprise, while - the former includes all types of joint ownership and those of partnership.

       Overview of Musharakh as Mode of Finance

'Interest' predetermines a fixed rate of return on a loan advanced by the financier irrespective of the profit earned or loss suffered by the debtor, while Musharakah does not envisage a fixed rate of return. Rather, the return in Musharakah is based on the actual profit earned by the joint venture. The financier in an interest-bearing loan cannot suffer loss while the financier in Musharakah can suffer loss, if the joint venture fails to produce fruits.

Islam has termed interest as an unjust instrument of financing because it results in injustice either to the creditor or to the debtor. If the debtor suffers a loss, it is unjust on the part of the creditor to claim a fixed rate of return; and if the debtor earns a very high rate of profit, it is injustice to the creditor to give him only a small proportion of the profit leaving the rest for the debtor.

In the modern economic system, it is the banks which advance depositors' money as loans to industrialists and traders. If industrialists having only ten million of their own, acquire 90 million from the banks and embark on a huge profitable project, it means that 90% of the project has been created by the money of the depositors while only 10% has been created by their own capital. If this huge project brings enormous profits, only a small proportion i.e. 14 or 15% will go to the depositors through the bank, while all the rest will be gained by the industrialists whose real contribution to the project is not more than 10%. Even this small proportion of 14 or 15% is taken back by the industrialists, because this proportion is included by them in the cost of their production. The net result is that all the profit of the enterprise is earned by the persons whose own capital does not exceed 10% of the total investment, while the people owning 90% of the investment get no more than the fixed rate of interest which is often repaid by them through the increased prices of the products. On the contrary, if in an extreme situation, the industrialists go insolvent, their own loss is no more than 10%, while the rest of 90% is totally borne by the bank, and in some cases, by the depositors. In this way, the rate of interest is the main cause for imbalances in the system of distribution, which has a constant tendency in favor of the rich and against the interests of the poor.

Conversely, Islam has a clear cut principle for the financier. According to Islamic principles, a financier must determine whether he is advancing a loan to assist the debtor on humanitarian grounds or he desires to share his profits. If he wants to assist the debtor, he should resist from claiming any excess on the principal of his loan, because his aim is to assist him. However, if he wants to have a share in the profits of his debtor, it is necessary that he should also share him in his losses. Thus the returns of the financier in Musharakah have been tied up with the actual profits accrued through the enterprise. The greater the profits of the enterprise, the higher the rate of return to the financier. If the enterprise earns enormous profits, all of it cannot be secured by the industrialist exclusively, but they will be shared by the common people as depositors in the bank. In this way, Musharakah has a tendency to favor the common people rather than the rich only.

This is the basic philosophy which explains why Islam has suggested Musharakah as an alternative to the interest based financing. No doubt, Musharakah embodies a number of practical problems in its full implementation as a universal mode of financing. It is sometimes presumed that Musharakah is an old instrument which cannot keep pace with the ever-advancing need for speedy transactions. However, this presumption is due to the lack of proper knowledge concerning the principles of Musharakah.

In fact, Islam has not prescribed a specific form or procedure for Musharakah. Rather, it has set some broad principles which can accommodate numerous forms and procedures. A new form or procedure in Musharakah cannot be rejected merely because it has no precedent in the past. In fact, every new form can be acceptable to the Shariah in so far as it does not violate any basic principle laid down by the Holy Qur’an, the Sunnah or the consensus of the Muslim jurists.

Therefore, it is not necessary that Musharakah be implemented only in its traditional old form.