Al- Sadiq (A.

S) Institute of Islamic Banking, Finance &Takaful

By: Jawaid Iqbal

Rajab 11, 1429 Tuesday 15 July, 2008


“Shirkah” / (Shirkat) means “Sharing” in the terminology of Islamic Fiqh.

Technically: Commingling by two or more persons either their money or work or
obligations to earn a profit or a benefit or a yield or appreciation in value and
to share the loss if any according to their proportionate ownership.


Basic Features


Mixing of Capital Use of Capital in Enterprises

Rights and Responsibilities

Sharing


SHIRKAT AND ITS COMPARISSION WITH AN INTEREST BASED ECONOMY
First point:
In interest based economic system, lender lends its
feels free, as he asked for risk free return on his
with Shirkah based lending both parties share their
both parties remain conscious/ alert regarding risk
money to the borrower and
investment. While comparing it
risk and reward. In Shirkah
and return of the business.
Second point:
Interest based economic system is based on injustice, because in this system
lender never consider facts if borrower fail to generate profits. Borrower is
totally bound to return principle among interest, even he suffered loss. In case
if borrowers earn huge profit, they are only liable to pay fixed return to the
lenders (i.e. 5% only); and whole profit can be enjoyed by themselves (i.e 95%
remaining)
Second point:
The Shirkah based on justice. Financer and borrower both enjoy from earned profit
and suffer loss.
Third point:
In interest based economic system money circulates in few ands that’s why poor
becomes poorer and vice versa (rich become richer) While in Shirkah money
disperses/ circulates in the society.
Fourth point:
In interest based lending system, some times lender appreciates delay in repayment
of loan from the borrower. Like in Credit Cards. While in Shirkah it not possible
to think so.
Types of Shirkah
Shirkah

Shirkat-ul-Milk

Shirkat-ul-Aaqd
Shirkat-ul-Milk (Joint ownership)
 Joint

ownership of two or more persons in a particular property with out any commercial
intention.
Types of Shirkat-ul-Milk
Shirkat-ul-Milk

Shirkat-ul-Milk Optional (Ikhtiary)

Shirkat-ul-Milk Compulsory (Ghair Ikhtiary)

Types of Shirkat-ul-Milk
1.

Shirkat-ul-Milk Optional (Ikhtiary)

This comes into operation by the option of parties e.g., purchase of asset with
mutual consent.

2.

Shirkat-ul-Milk Compulsory
Ikhtiary)

(Ghair

This comes into operation without any action taken by the parties e.g., ownership
of heirs on the inherited property.
Shirkat-ul-Aqd
(Joint venture/Partnership)
 Joint

venture of two or more persons in a particular property with commercial intention.

Types Of Shirkat-ul-Aaqd
Shirkat-ul-Amwal Shirkat-ul-Aaqd Shirkat-ul-Aamal Shirkat-ul-Wojooh


Shirkat-ul-Amwal (Partnership in capital) Where all the partners invest some

capital into a commercial enterprise. Shirkat-ul-Aamal (Partnership in services)
Where all partners jointly undertake to render some services for their customers.

Shirkat-ul-Wojooh (Partnership in goodwill) Where the partners have no investment

at all, they purchase commodities on deferred price by their goodwill and sell
them on spot.
Types Of Shirkat-ul-Aaqd
All the three are further divided in to two types:
Shirkat-ul-Amwal Shirkat-ul-Aamal Shirkat-ul-Wojooh

Shirkat-ul-Mufawadah

Shirkat-ul-Ainan
Types Of Shirkat-ul-Aaqd
1-Shirkat-ul-Mufawadah:
Where capital, profit, loss and management are equal among the partners.

Equal Management Profit & Loss – 50%

Equal Management Profit & Loss – 50%

Capital – 100

Capital – 100
Types Of Shirkat-ul-Aaqd
2-Shirkat-ul-Ainan:
Where partners are unequal in the one or more of the following .
Mgt. Control 40% Loss – 70% Profit – 50% Mgt. Control 60% Loss – 30% Profit– 50%

Capital – 70

Capital – 30


Permanent Musharaka: Permanent Musharaka is a partnership of permanent nature i.e.

a going concern. Temporary Musharaka (redeemable) Musharaka can be for a limited
time period, after that it will be redeemed. Redemption of Musharaka will take
place through sale of shares from one partner to other partner or third person.




Diminishing Musharaka It is a form of partnership in asset both movable and

immovable. In this Musharaka one partner to buys the share of the other partner
gradually until the ownership of the subject matter is completely transferred to
him. According to this concept, a financer (bank) and its client participate in a
joint commercial enterprises or property or asset.
Capital
It should be a money or asset  The value should be agreed upon if it is a tangible
asset  Different currencies should be converted or valued into the currency of
Shirkah  Should be known either in advance or before the time of profit/loss
determination.  Should under the disposal of the manager  Debt alone can not be
contribution in Shirkah  It can be varying among the partners

Management of Partnership  In Principle each partner has right to take in
Musharaka management.  The partners may appoint a managing partner by mutual
consent.  Some of the partners may decide not to work for the Musharaka and work
as sleeping partner.  It is not allowed to specify a fixed remuneration to a
partner Musharaka who manages funds or provides some form of other services, such
as accounting.  However, it is permissible to give him a greater share of profit
than he would receive solely on the basis of his share in the partnership capital.
 According to a view it is also permissible to appoint his as an employee and
giving him remuneration for his services.
Profit Sharing Ratio  Ratio or the basis for sharing profit should be decided in
the beginning of partnership.  Profit should be allocated in percentages of
earning and not in a sum of money or a percentage of the capital or investment. 
It is not necessary for sharing profit according to proportionate capital
contribution.  A sleeping partner cannot share in the profit more than the
percentage of his capital.  The partner may at the later stage agree to change
the profit sharing ratio, and on the date of distribution, a partner may surrender
a part of  his profit to another partner.  One partner can cap his share of
profit -Tiers profit.
Sharing of Loss


In case the business incurs a loss, all partners will have to share the loss in
exact proportion to their investment
This rule is based on a saying of Hazrat Ali (A.S):

“Profit is based on agreement of the parties, but loss is always subject to the
ratio of investment”
Mudaraba

Musharaka

The contribution comes from Rabbul Maal (the investor). The Rabbul Maal (investor)
is not permitted to manage the business. The Mudarib will only manage the
business. The Mudarib can also invest in the capital of Mudarabah.

The contribution comes from all partners in form of cash, commodities, services or
liability in the case of reputation partnership.
The work, as a general rule, is to be done jointly by the parties. A partner or
some partners may be sleeping.
Musharaka Model
Depositors
Profits Deposits

Bank
Equity

Weightage System
Profits

Pool of Funds
Profits
Financing

Businesses/Corporates


Musharaka could easily be used as a vast mode of financing for almost every
financial need. Below are some fields where this mode can easily be applied: 
Project Financing  Long-term Finance  Running Finance (limited scope) 
Investment Banking  Redeemable capital investment
Partner

Profit
Share Profit Share Profit

Bank