I, [C], entered a partnership with two individuals; in a second-hand car company. We had each invested £20,000.
£15,000 was used to prepare the yard (£5000 per partner). After this, partner [A] pulled out, approximately one year since the lease was signed for the yard. No vehicles were purchased during this time. A new partner [D] was brought in to replace him. He was requested by partner B to bring in £20,000, although partner [B], was unsure of the Islamic ruling in terms of equitability in requesting £20,000. To what extent should partner [A] be refunded his money given there was no detailed contract in place to deal with such contingent circumstances?
During a conversation between [B] and [C], who briefly discussed the ethics of this scenario, we had suspended judgement on this until further research. Pertaining to the two original partners, what do you think is the sharia ruling according to Hanafi Fiqh in this regard and what would be optimal in terms of our ethical dealing with [D]? It would be helpful if you were to posit analogical references for further verification.
بِسْمِ اللهِ الرَّحْمنِ الرَّحِيْم
In the name of Allah, the Most Gracious, the Most Merciful
In joint business partnerships (Musharkah), profit and loss are shared. However, in order for the contract to be valid, the parties should be capable of entering into a contract. Also, the contract must take place with the free consent of the parties without any duress, fraud or misrepresentation, etc.
The following conditions will also need to be applied:
Firstly, the proportion of profit to be distributed between the partners must be agreed upon at the time of effecting the contract. If no such proportion has been determined, the contract is not valid in Shari‘ah.
Secondly, the ratio of profit for each partner must be determined in proportion to the actual profit accrued to the business, and not in proportion to the capital invested by him. It is not allowed to fix a lump sum amount for anyone of the partners, or any rate of profit tied up with his investment.
Therefore, in answer to your question, partner B would need to be returned back the capital amount he had invested in the business.
While dealing with partner D, you should know that according to Imām Abū Hanifah, the ratio of profit may differ from the ratio of investment in normal conditions – meaning it can be more or less than the ratio of the actual investment. However, if a partner stipulates that he wants to be a sleeping partner then his profit cannot be more than the ratio of his investment.
Finally, most of the Muslim jurists are of the opinion that the capital invested by each partner must be in liquid form. It means that the contract of Musharakah can be based only on money, and not on commodities. In other words, the share capital of a joint venture must be in monetary form. No part of it can be contributed in kind.
However, according to Imām Malik, if a partner wants to take part in a joint venture by contributing some commodities to it he can do so without any restriction, and his share in the Musharakah shall be determined on the basis of the current market value of the commodities, prevalent at the date of the commencement of Musharakah.
Mufti Taqi Usmani takes the view of Imām Malik in our time. He states that the share capital in a Musharakah can be contributed either in cash or in the form of commodities. In the latter case, the market value of the commodities shall determine the share of the partner in the capital.*
*Introduction to Islamic Finance by Mufti Taqi Usmani
Only Allah knows best
Written by Imam Abdul-Malik Sheikh
Checked and approved by Mufti Mohammed Tosir Miah
Darul Ifta Birmingham