Musharakah Contract

CategoriesTrade, Business & All Things Money [454]

Please enlighten me with the Islamic view on a business detailed below –
A company is in the business of Leasing, hiring, renting of automobiles and seeks participation from individuals with an amount of Rs. 1.5 lacs on following terms & conditions.
1. The amount will be with them for 5 years term.
2. In returns they will pay Rs. 7000/- per month for 5 years.
3. At the end of the contract, after 5 years, they will pay an additional amount Rs. 50000/-

In the name of Allah, the most Beneficent, the most Merciful.

Answer

There are certain conditions, which are peculiar to the contract of “Musharakah.” They are summarized here:

  1. The proportion of the profit to be distributed between the partners must be agreed upon at the time of entering the contract. If no such proportion has been determined, the contract is not valid in Shari’ah.
  1. 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 any one of the partners or rate any profit tied up with his investment. For example if A and B enter into a partnership and it is agreed that A will receive £10,000 per month as his share of the profit, and the rest will go to B, the partnership will be invalid. The correct basis for distribution would be an agreed percentage of the actual profit accrued to the business.
  1. According to Imam Abu Hanifah (RA) the ratio of profit of each partner may differ from the ratio of capital invested by him. However if a partner has put an express condition in the agreement that he will never work for the Musharakah and will remain a sleeping partner throughout the term of the Musharakah, then his share of profit cannot be more than the ratio of his investment.
  1. In the case of loss, all the Muslim jurists agree on the point that each partner shall suffer the loss exactly according to the ratio of his investment. Therefore, if a partner has invested 40% of the capital he must suffer 40% of the loss not more, not loss, and any condition to the contrary shall render the contract invalid.
  1. 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. (Extracted from An Introduction to Islamic Finance, Mufti Taqi Usmani, p.35- p.39)

With regards to your question to put certain conditions to willing investors before they participate in investing into the business is permissible. However, it is important that the aforementioned conditions are met for a valid musharakah contract.

Only Allah Knows Best.

Mohammed Tosir Miah

Darul Ifta Birmingham

About the author