Musharakah

Musharakah is a type of Shirkah al-Amwal which literally means sharing. In the context of
business, it refers to a joint enterprise in which parties share the profit and loss of the enterprise.
It plays a vital role in financing business operations based on Islamic principles, which prohibit
making a profit on interest from loans. Musharakah may sometimes include Shirkah al-Amal,
where a joint partnership is formed to render some services without requiring any capital
investment.
Musharakah allows each party involved in a business to share in the profits and risks. Instead of
charging interest as a creditor, the financier will achieve a return in the form of a portion of the
actual profits earned, according to a predetermined ratio. However, unlike a traditional creditor,
the financier will also share in any losses. The relationship established between parties, in
Musharakah, is by a mutual contract; hence, all the necessary ingredients of a valid contract
must be present. However, there are number of conditions that apply specifically to the contract
of Musharakah.
In fact, the capital to be invested in a joint venture can be unequal between the partners and
should preferably be in cash. If it were to be based on commodities or other Shariah-compliant
assets, the market value prevalent at the time of the contract would have to be appropriately
valued with the mutual consent of all the partners in order to determine the share of each of
them. The commodity should be compensable by similar commodities or assets in quality or
quantity, in case it could be destroyed. Otherwise, its price should be paid. The capital may also
be in the form of equal units or shares representing currency. And if partnership capital involves
a variety of currencies, it must be translated into the currency of the enterprise at the current
rate. Finally, Debts or receivables alone cannot form part of the capital until they are received,
although, they may become part of the capital contribution where they become inseparable from
the other assets of the business.
Moreover, the proportion of profit to be distributed among the partners must be determined and
agreed upon at the time of the contract. Otherwise the contract wouldnt be valid. And it is
necessary that each partners share in the profit is exactly equal to the proportion of initial
investment into the partnership. The ratio of profit distribution may vary, however, for non-active
partners, who only contribute capital. A party which has no capital invested in an enterprise does
not have to share its loss. The partnership would also be invalid if a partner were to receive
regular payments of a fixed, pre-determined amount as a percentage of its investment. In
addition, a person can become a partner in a running business having fixed assets by investing
capital in cash or kind; it is also allowed to merge various partnership businesses. Valuation of
the fixed assets will be based on their fair value agreed upon by the partners.
Further, Musharakah is not a binding contract and any partner may unilaterally terminate it
unless provided otherwise in the contract. It is agreed upon by the Muslim jurists that a
partnership is terminated if one of the partners terminates the partnership or if one of the
partners dies or becomes insane. If the remaining partners want to continue the business under
any of these cases, it is possible with mutual agreement. The remaining partners would have to
purchase the share of the out-going partner.