islamic banking (new slids)

8/12/2019 Islamic Banking (New Slids)

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ISLAMIC MODES OF FINANCING

MUSHARAKAH

Hadees-e-Qudsi

Allah Subhan-o-Tallah has declared that He willbecome a partner in a business between twoMushariks until they indulge in cheating or breachof trust (Khayanah)

DefinitionThe word Musharakah in Arabic is Shirkah, whichmeans being a partner.


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In business terminology

Musharakah means a joint enterprise formed forconducting some business in which all partners

share the profit according to a specific ratiowhile the loss is shared according to the ratio ofthe contribution.

Classification of MusharakahIn the terminology of Islamic Fiqh, it has beendivided into two kinds:


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(1) Shirkat-ul-milk (Partnership by jointownership):

It means joint ownership of two or more persons ina particular property. This kind of "Shirkah" maycome into existence in two different ways:

a) Optional (Ikhtiari):

At the option of the parties e.g., if two or morepersons purchase equipment, it will be owned jointly

by both of them and the relationship between themwith regard to that property is called "Shirkat-ul-MilkIkhtiari"


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b) Compulsory (Ghair Ikhtiari):

This comes into operation automatically

without any effort/action taken by the

parties. For example, after the death of

a person, all his heirs inherit his property,

which comes into their joint ownership as

a natural consequence of the death of thatperson.


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Musha in Shirkat-ul-milk

In shirkat-ul-milk when property is jointly ownedbut not divided yet, is called Musha.

Undivided shares or other assets can be used in thefollowing manner:

a) Mushtarik Intifa:

Mutually or jointly using an asset by taking turnsunder circumstances where the partners or jointowners are on good terms


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b) Muhaya:

Under this arrangement the owners will set turns in daysfor example one may use the product for 15 days andthen the other may use it for the rest of the month.

c) Taqseem:Referring to division of the jointly owned assets.

d) Sale of assets

Under a situation where the partners are not satisfied

with Muhaya arrangement, the property or asset jointlyheld can be sold off and proceeds divided between thepartners.


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(2)Shirkat-ul-Aqd (Partnership by contract):

"a partnership effected by a mutual contract

Shirkat-ul-Aqd is further divided into threekinds:

a) Shirkat-ul-Amwal

(Partnership in capital) where all the partnersinvest some capital into a commercial

enterprise.


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b) Shirkat-ul-Aamal(Partnership in services) whereall the partners jointly undertake to render someservices for their customers, and the fee chargedfrom them is distributed among them according to

an agreed ratio.c) Shirkat-ul-wujooh (Partnership in goodwill)

In the Arabic word Wajahat meaning goodwill.

Here the partners have no investment at all. Theypurchase commodities on deferred price, by gettingcapital on loan because of their goodwill and sellthem at spot. The profit so earned is distributedbetween them at an agreed ratio.


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Each of the above three types of Shirkat-ul-Aqd

are further divided into two types:

a) Shirkat-Al-Mufawada:(Capital & labour at

par):

All partners share capital, management, profit,

risk in absolute equals. Every partner who

shares equally is a Trustee, Guarantor and Agent

on behalf of the other partners.


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b) Shirkat-ul-Ainan:

where equality in capital, management or liabilitymight be equal in one case but not in all respect

meaning either profit is equal but not labour or viceversa.

Rules & Conditions of Shirkat-ul-Aqd:

a) The existence of Mutaaqideen(Partners):

b) Capability of Partners: Must be sane & matureand be able of entering into a contract.


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c) The presence of the commodity: This means the

price and commodity itself.

Special conditions

1-goods should be valuable & each member in

Shirkat-ul-Aqd should duly qualify as legally being

eligible of becoming an agent and of carrying on

business eg. A has written a book and owns it, Bcannot sell it unless A appoints B as his agent.

2-The rate of profit sharing should be determined


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Basic rules of Capital in Musharka

The capital in a Musharakah agreement should be:

a) Quantified (Maloom): Meaning how much etc.

b) Specified (Mutaaiyan):Meaning specified

currency etc.

c) Not necessarily be merged:

d) Not necessarily be in liquid form: it can be in

form of commodities


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Management of Musharakah

Every partner has a right to take part in itsmanagement and to work for it.

The partners may agree upon a condition thatthe management shall be carried out by oneof them, and no other partner shall work for

the Musharakah. But the ratio of profit ofsleeping partner should not exceed the ratioof his investment.


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Basic rules of distribution of Profit

The ratio of profit for each partner must bedetermined in proportion to the actual profit.

Not to investment.It is not allowed to fix a lump sum amount ofprofit for anyone of the partners.

It is also allowed that if an investor is working,his profit share (%) could be more than hiscapital base (%).


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It is allowed that if a partner is not working,

his profit share can be established as less than

his capital share.

If both are working partners, the share of

profit can differ from the ratio of investment.

Eg. Zaid & Bakar both have invested Rs.1000/-

each. However Zaid gets 1/3rd of the totalprofit and Bakar 2/3rd, this is allowed.


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Basic rules of distribution of Loss

All scholars are unanimous on the principle of

loss sharing in Shariah based on the saying of

Syedna Ali ibn Talib that is as follows:

Lossis distributed exactly according to the ratio

of investment and the profit is divided according

to the agreement of the partners.


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Termination of Musharakah

purpose of forming the Shirkah has been

achieved.

Every partner has the right to terminate the

Musharakah at any time after giving his partner a

notice that will cause the Musharakah to end.

In case of a death of any one of the partners orany partner becoming insane or incapable of

effecting commercial transaction, the

Musharakah stands terminated.


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Termination of Musharakah without closing the

business

If one of the partners wants termination of the

Musharakah, while the other partner or

partners like to continue with the business, this

purpose can be achieved by mutual agreement.


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DIMINISHING MUSHARAKAH

According to this concept a financier and his clientparticipate either in the joint ownership of aproperty or an equipment, or in a joint commercialenterprise. The share of the financier is further

divided into a number of units and it is understoodthat the client will purchase the units of the shareof the financier one by one periodically, thusincreasing his own share until all the units of the

financier are purchased by him so as to make himthe sole owner of the property, or the commercial

enterprise, as the case may be.


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Diminishing Musharakah is commonly used forthe purpose of financing of fixed assets byvarious Islamic banks.

House financing Car Financing

Plant and machinery financing

Factory/Building financing

Agriculture land financing

All other fixed Assets


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Basic Transaction Structure

The customer approaches the Bank with the

request for Project/Machinery/House financing

The Bank enters into a Musharakah (Joint

Ownership) agreement with the customer and

both of them pay their respective shares to the

seller of the asset. Customer pays rent for the use of banks share in

the property


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The value of Banks share in Musharakahproperty is divided into units, which it sells to thecustomer. Units will be worked out by dividingBanksfinanced amount by number of months for

which finance to be allowed. With each purchase of unit by the customer, the

Banks share in the Musharakah property startsdiminishing, whereas customers share starts

increasing, correspondingly. Finally, the customer becomes the sole owner of

the property after having purchased all units fromthe Bank, along with the rentals thereon.


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House Financing Based on Diminishing Musharakah

The arrangement is composed of the followingtransactions:

1. To create joint ownership in the property (Shirkat-ul-Milk).

2. Giving the share of the financier to the client on rent.

3. Promise from the client to purchase the units of share

of the financier.4. Actual purchase of the units at different stages.

5. Adjustment of the rental according to the remainingshare of the financier in the property.


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Steps in detail of the arrangement

All schools of Islamic jurisprudence have expressly allowed

arrangement to create a joint ownership in theproperty('Shirkat-ul-Milk). Therefore no objection can beraised against creating this joint ownership.

The arrangement that the financier leases his share in the

house to his client and charges rent from him is also aboveboard because there is no difference of opinion among theMuslim jurists in the permissibility of leasing one'sundivided share in a property to his partner but theundivided shares can be leased out to third person

according to Imam Abu Hanifa. while Imam Malik and ImamShafii, hold that the undivided share can be leased out toany person. But so far as the property is leased to thepartner himself, all of them are unanimous on the validity of'Ijarah'.


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The third step in the aforesaid arrangement is that theclient purchases different units of the undivided shareof the financier. This transaction is also allowed.

Now the question is whether this transaction may becombined in a single arrangement or not?

Answer

The answer is that if all these transactions have beencombined by making each one of them a condition to theother, then this is not allowed in Shariah, because it is awell settled rule in the Islamic legal system that onetransaction cannot be made a precondition for another.

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