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What is Musharakah?

Mushrakah or shirkah is the form of partnership where two or more individuals or companies combine their capital to do business by sharing profit/loss. There are two basic types of Musharakah.

  1. Contractual Partnership (شرکۃ العقد)
  2. Non Contractual Partnership  (شرکۃ الملک)

Contractual Partnership:

This kind of partnership may be considered as a proper partnership because two or more individuals or companies enter into a contractual agreement by joint investment and sharing profit and loss. The agreement may be written or oral but written agreement is better due to the verses of surah baqarah.

Non Contractual Partnership:

This is a co ownership and comes into existence by joint ownership of two or more individuals or companies without having a formal partnership oral or written. For example, inherited or gifted asset to such individuals or companies.

Islamic Rules of Contractual Partnership

We will discuss Islamic rules/laws of contractual partnership because this type of partnership is being used by the business community.

Management

Every partner has a right to participate actively in the affairs of musharakah if he wishes.

Every partner is an agent for the other, as all the partners benefit from the musharakah business.

Every partner enjoys equal rights in all respects in the absence of any condition to the contrary.

Distribution of Profit:

The bases for entitlement to the profits of a musharakah are capital, active participation in the musharakah business and responsibility. Profits are to be distributed among the partners in business on the basis of proportions settled by them in advance. The share of every party in profit must be determined as a proportion or percentage. No fixed amount can be settled for any party. The sleeping partner cannot determine profit ratio more than his investment ratio.

Liability of Loss:

The loss shall be borne by the partners according to their capitals. In all forms of musharakah (i.e.limited companies, co-operative societies and partnership) the loss is borne on the basis of capital invested.

Withdrawal of Members

Any member of partnership can withdraw his investment from the business after giving a specific notice period to manage the investment of others. This partnership can be ended by the death of any partner and the heirs will have the right to continue it or to stop it. In a partnership business a partner can be permitted to withdraw and receive his capital back after fulfilling his liabilities as a partner according to terms and conditions settled between the partners. A partner can sell his proportion to others and can exit from the partnership.

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