BAYERO UNIVERSITY, KANO

FACULTY OF LAW

LECTURE NOTE ON

ISLAMIC COMPANY LAW (LAW 4307)

DELIVERED BY: MALLAM ZAKARIYYA MUSTAPHA

SEMESTER: SECOND

LEVEL: 400

GENERAL INTRODUCTION

Basically, the principles of Islamic Company Law are built on “profit” and “loss” sharing and

the concept of investment. Particularly, looking at the issue of Islamic banking system, the

area encompasses Sharikah (partnership) and Mudaraba. The latter is where the two (2) or

more pull capital for investment targeted at profit making, how to contribute and share the

capital, profit and loss. Sharikah is divided into three (3);

SHARIKATUL IBADA

This simply means permissibility from the word muba. Where members of a particular

community are allowed to Share the ownership of some properties like barren land, landed

property.

SHARITUL MILK

This means co-ownership, here it can be optional or compulsory. Optional where two or more

people agree to pull their resources and where it’s given as a gift while compulsory is where

the mutual agree is not material, for instance

SHARIKATUL AQAD

This is the main sharikah where two or more pull their resource together for investment and

this is where the diverse Jurists opinions lie. This is also divided into three;

1. Sharikatul Amwal; derived from the word mal (money). This is where the majority

argument lies with regards to money below.

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2. Sharikatul Abdan; this is where entrepreneurship comes up. This basis of

contribution here is based on skills e.g. Legal practitioners.

3. Sharikatul Wujub; from the word wajb where the forces of parties are used as capital,

thus their trustworthiness or credit worthiness is the basis upon which their profits are

determined.

To the majority, what amounts to investment or contribution on the basis of sharikah is in the

form of cash. This group believes any contribution other than money is not valid based on the

ground that it’s the extent of the contribution that their loss and profit can be determined.

On the basis of “Mudaraba”, the capital cones from one of the parties and the other party is

expected to invest the capital. Rabbal Mal is he who gives the capital and the one who

invests is known as the Addin. From the moment the capital us handed over, the rabbal mal

cannot participate except where there is loss. Generally, he takes the loss except is negligence

can be established, but profit is shared between the two as agreed.

CONCEPT OF RIBAH

It’s not allowed to generate money directly from money without investment. This means you

must expose the money to investment in order for it not to be interest. Therefore, in an

attempt to run away from the concept of commercial banking system, Jurists developed the

idea of Islamic banking system where the above principle will be used in order for banks to

issue their products to customers. Mostly, Islamic banks do not offer loan but deal on the

basis of investments, where they give you money to invest and share the profit and loss and

vice versa.

How Islamic Law Views the Concept of Ribah and What Amounts to Ribah?

The way Islamic banks use these principles in dealing with their customers will also be

looked at. For instance, besides the two main principles, there is what B s known as

diminishing sharikah (diminishing partnership) where the bank will compliment the money

youdo not have agreeing that you will take possession as a tenant to the tune of the bank’s

contribution. Then, you will agree to pay the first year rent to the bank to the tune of your

contribution from the rent.

Secondly, the bank’s contribution will be divided into small units to be paid in instalments on

a monthly basis and as you pay the instalments, the bank’s interest depreciates while yours

increases. This is one of the ways they offer their products to their customers.

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Another way is “Mubaraha”, for instance, you need a truck but do not have the money but

you have security, a commercial bank would not care what you do with the money because

they are only interested in the collateral (security you will give). But if you approach an

Islamic bank and they are satisfied with the security, they will give you two (2) options;

a. You give us the specification of the truck; or

b. Look for the truck property yourself

And come back and negotiate the price of the property haven inspected it and under the

concept of Murabah (cost plus profit), the bank will agree with you on the price (for instance,

if it’s 5million, they will buy you the truck and they will add their profit and the payment of

any services in the proceeds and this will be the actual value of the truck that you will pay

back in instalment). This is used in order to runaway from interest.

The fundamental difference between profit and interest is where you give cash and accept

something more in return without exposing the capital to the risk of investment while profit

exposes the capital to the risk of the investment before returning increased.

When it comes to classification of ribah, it is divided into Ribah al Fuddiand Ribah all

Masiha. In shariah, for you to benefit you must expose your capital to market and investment

risk. Additionally, under shariah, there is a prohibition of unethical investment (e.g. maisar

transaction or garar, investment in pigs and alcohol) as well in addition to prohibition of

interest. So it is considered as wrong because commercial banks deal in unethical dealing and

the money is illegal. E.g. the Hadith of Sayyidna Abubakar and his servant who wanted to

emancipate himself and brought money from an illegal source and Abubakar puked his food

because of the source.

Likewise, as a way of Sadduzzari'a, it does not stop at the unethical investment or working

with the commercial bank but also encourage it by way of wanting to see your business

thrive. However, on the other hand, it is held that the risk the Ummah is exposed to is higher

than the loss, so jurists held it to be allowed but find a way of discouraging the

encouragement of engaging in unethical dealings.

PARTNERSHIP

In Arabic, the word “Partnership” stands for “sharika” or “shirka” which literally means

mixing (Ikhtilat). It therefore connotes mixing capital or shares or capital found in a mixed or

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mingled state so that one cannot distinguish from another. Technically however, sharikah is

divided into;

1. Sharikatul Ibaha

2. Sharikatul Milk, and

3. Sharikatul Aqad.

SHARIKATUL IBADA

Al – Ibaha is derived from the word “Mubah” which means permissibility. Sharikatul ibaha

means common right of the people in ownership by acquisition or gathering of things that are

permitted to be gathered or acquired and are not originally owned by a single individual. For

instance, a barren land in a community, fishing in a river, etc.

SHARIKATUL MILK (CO-OWNERSHIP)

This is where two or more persons are proprietors of a thing and it can be either optional or

compulsory. In the case of optional, the consent of the parties in acquiring the property is

required. For example, where they make a joint purchase of a specific article or where it is

presented to them as a gift and they accept it. While compulsory sharikat is where parties

become proprietors of some properties without any contractual intention. For example,

inheritance.

SHARIKATUL AQAD

According to Hannafi jurists,

“It is an agreement between two or more persons for common participation and

profit”.

In Maliki School, Sharikatul Aqad is,

“Permission from each of the participant to other(s), for transaction in his wealth and

in their own behalf while retaining the right to transact personally (in such wealth)”.

To the jurists in Shafi'i School, sharikatul Aqad in its literal meaning is

“Mixing (Ikhtilat) and technically it is undivided right in a single thing or it is a

contract implying this”.

In Hambali School, sharika means

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“Participation of two or more persons in transaction”.

In addition to the above, contemporary jurists also try to define Sharikatul Aqad in a more

comprehensive way. For instance, Ali Alkhafif defines it to mean;

“A contract between two or more people or participation in capital and its profit or

for participation in profit without participation in capital”.

Also, Muran Akhsankhan Muyazi defines it as;

“A contract between two or more persons for participation in capital and its profit, or

participation in transaction in someone else’s capital and its profit, or participation

in profit without participation in capital or transaction”

Finally, Prof. N A Ahmad defined sharikatul aqad as;

“A contractual agreement between twobor more persons to regulate their relationship

with regards the formation of an enterprise which specifies their contributions to the

capital of the venture as well as sharing its profit and liabilities”

Legality of Partnership

Partnership existed in Arabia prior to the advent of Islam and with the coming of the Holy

Prophet (SAW), the concept was legalized. However, with certain adjustments and

modifications to be in line with the principles of Islamic commercial jurisprudence.

The legality of Musharaka (partnership) is traced from the Holy Qur'an and the Sunnah of the

Holy Prophet (SAW). From the Holy Qur'an in 4:12, Allah the Most Exalted says;

“If more than two, then they share in a third (of the estate)”

In this verse, Allah the Most High is talking about the inheritance of siblings benefiting from

the estate of Khalala (a person whose inheritance is in question and he left neither ascendants

nor descendants). Each of the siblings gets a sixth, but if they are more than two they share in

a third. It can be seen that the verse automatically renders the siblings partners in this instance

and they remain so in as much as the property has not been distributed. In Q 38:24, Allah the

Exalted says;

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“And verily many partners oppress one another except those who believe and do the

righteous deeds and they are few”.

This verse under study is on the analysis of Prophet Dawood's ruling on the matter brought

before him when he retired from his official duties to his private chambers for meditation.

The main issue placed before Prophet Dawood for determination was that one of the two

brothers was aggrieved when the second brother asked him to surrender his only one sheep to

the latter who had 99sheeps for keeping. The Prophet decided that it was wrong for members

under a partnership agreement to justifiably take advantage of one another.

The decision clearly shows the legality of partnership but that wrongful conversion is not

allowed in Islam as evidenced in the Holy Qur'an 4:29 where Allah says;

“O you who believe, eat not your property among yourself unjustifiably except it be a

trade among you by mutual consent”. See also Q 2:188

Another justification for musharakah was derived by Muslim jurists from the scenarios of

Ashabul Khafi (people of the cave). They were youths who accepted Islam and avoided the

prosecution of their godless king. They found a cave on their way which they used as a

hideout where they slept for several years and when they woke up and came back to their

sense, they realised that they were seriously in need of food and remembering that they had

some coins jointly owned by them, they decided to send one of them to the nearest city for a

solution. Then the Qur'an says in Suratul Khaf, Q 18:19

“.... So send one of you with these silver coins of yours to the town, and let him find

out which of the good lawful foods and bring some of that to you”.

One of them was accordingly sent to the city for that reason using the join money for their

joint benefit. This clearly shows the general principle of sharikah which is contribution by

members to form a common property, to be invested by all or some of the contributors for

their benefit.

Legality of Sharikah from the Sunna of the Prophet (PBUH)

1. Narrated Abu Huraira (RA) that Allah’s messenger (SAW) said;

“Allah the Most High said ‘I am the third of every two partners as long as neither

one belongs the other, if one of them betrays the other, I leave that partnership”.

2. Narrated Assa'id Al Makhzumi (RA), I was a partner with the Prophet (SAW) before

the prophethood and when the day of conquest (of mecca) came, he said:

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“Welcome my brother and my partner (marhaban bi kanwa ...)”.

In another version as reported by Ibn Majah, Al Makhzumi came to the Prophet

(SAW) after the conquest of mecca and said;

“You were my partner in business and what a nice partner you were for you

did not cheat me nor nid important matters on the business to me”.

This tradition clearly shows that Islam as a religion does not in any way disturb the

legality of musharaka as it was practiced before the advent of Islam, provided all legal

contributions are complied with.

3. It was also narrated from Abdullahi bin Masood (RA);

“Amar, Sa'ad and I agreed to be partners in whatever we would get of booties

of the day of Badr. Then Sa'ad brought two captives (from the unbelievers) but

neither Amar nor I brought anything”

4. It was narrated by Suleiman bin Abu Muslim who said;

“I asked Abu Minhal about money exchanged from hand to hand, he said ‘I and a

partner of mine bought something partly in cash and partly on credit' Al Barra bin

Azim passed by us and we asked about it, he replied ‘I and my partner Zayd bin Al

Arqam did the same and went on to the Holy Prophet (SAW) and asked him about

it, ‘take what was from hand and leave what was on credit”

General Conditions of Sharika

1. Mutual Agreement: In shariah, the requirement of free will is paramount in

determining the validity or otherwise of any contractual relationship, this may be

determined expressly or by necessary implication. All other requirements of a valid

contract known to Islamic jurists are basically needed under sharikatul aqad, and this

includes; ijab wal qubul, absence of duress and undue influence (Ikrah) among others.

Equally, parties to a partnership must be sane and must have the capacity to exercise

discretion (ahadiyatul ada'a).

2. Enjoying the Capacity of Principal and Agent: In partnership, each partner as a

matter of general rule must enjoy the capacity of a principal on one hand and that of

an agent on the other hand. The reason being that each partner is a principal in respect

of his own contribution to the partnership and an agent to the extent of the other

partner’s contribution.

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3. Formation of Capital: Capital of a partnership must be formed through contribution

by all members which is a mandatory requirement according to the Muslim jurists. In

sharikatul amwal, money is the capital while in sharikatul abdan, profession and

entrepreneurial skill and ability form the capital. In the case of sharikatul wujuh, it’s

the trustworthiness and credit worthiness of each member that form the capital of the

sharikah. Irrespective of the type of partnership, the moment the required capital is

formed, it becomes jointly owned by all the partners. Every partner must participate in

the investment and any condition rendering a partner dormant or inactive, for the

purposes not allowed. Any liability incurred by a partner in the course of an

investment is deemed incurred by the partnership and a partner can only be personally

liable where he acts negligently or ultra vires to the terms and powers specified by the

terms of the sharikah.

4. Profit Sharing: Profit sharing is another basic condition for sharikah. It is

fundamental that a contract of partnership shall state a condition guaranteeing each

partner a share of a profit realised in the course of investment. The jurists render

invalid any condition tampering with the right of a partner to share profit realised.

According to Imam Muhammed Taaqimaani;

“The proportion of the 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 shariah”.

Islamic law mandates that the determination of the ratio of the profit for each partner

is by the actual profit accrued and not a fixed amount of money. The correct formula

for the distribution of profit should therefore be an agreed percentage of the actual

profit accrued to the partnership and to be generally determined by the quantum of

each partner’s contribution.

However, Muslim jurists are not in unity as to whether the ratio of profit of each

partner must tally with the ratio of his contribution of the capital invested. According

to Imams Maliki and Shafi'i, the law is that each partner should take a share of the

rate of the net profit proportionate to his contribution in the capital and any agreement

entitling a partner to take more share or mandating him to take less than what tallies

with his contribution automatically renders the sharikah void an initio.

In the opinion of Hambali School, what matters most is the consent of the partners

freely given. Therefore, a partner may agree to take a profit from the net profit

accrued different from the ratio of his investment. A partner therefore according to

Imam Hambali may take 70% of the profit realised even though his contribution is

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just 30% leaving the other partner(s) who contributed up to 70% to enjoy only 30% of

the profit.

The third and last view is opined by Imam Hannafi, in trying to reconcile the above

two different views, he maintained that in a normal circumstances, the ratio of profit

may differ from that of investment and because he believes that one can be a sleeping

partner, to him where an express condition is provided in the contractual agreement

that a partner will never work or participate in the process of investing the capital of

the musharakah, then his share of the profit can go below but not beyond the ratio of

his investment. To further portray their point, Hannafi's argued that in certain types of

sharikah, such as sharikatul wujuh and sharikatul abdan, equal distribution of profit

may not even be possible because the extent of the contribution of the partners

towards raising the required capital of the partnership i.e. skills and trustworthiness

must respectively differ, in which the basis for the distribution of any profit realised

must equally differ.

5. Sharing of Loss: The concept of limited liability is not known and alien to Islamic

law of finance. Hence, investors under Islamic law are absolutely exposed to all

liabilities incurred by their businesses. Accordingly, to Imam Ibn Quddama, Islamic

jurist unanimously agree that each partner shall suffer the less according to the extent

of his contribution in the capital, simplicita and any stipulation to the contrary renders

the entire contract invalid. This principle is contained in the famous juristic maxim

saying;

“Profit is based on the agreement of the parties, but loss is always subject to the

investment”.

In the light of the above, a member who contributes more to the capital will have

more liabilities than a member who contributes a lesser amount. Stressing this point,

Imam Ali Alkhafif writes:

“Shortage or losses will always be distributed in proportion to capital proper.

All Imams agree on this in spite of their belonging to different schools of

thought. Any condition agreed in contravention of this principle will be

declared as null and void and will not be executed”.

Types of Sharikatul Aqad

Muslim jurists have identified three types of Sharikatul aqad;

1. Sharikatul Amwal

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2. Sharikatul Abdan

3. Sharikatul Wujuh

SHARIKATUL AMWAL

This is a partnership where two or more persons agree to form an association for business

activities by contributing some specified amount of money in cash in raising the capital

otherwise known as asl (the capital).

The nature of the capital

From the nature of the partnership, what constitutes the capital is money in currency in the

form of dinar or dirham, gold or silver or in our modern time, in the form of the currency of

the country where the partnership is formed in Naira and Kobo in the case of Nigeria.

Majority of the jurists opined that the capital to be contributed by each partner must be in

liquid form. This means that the contract of Musharaka can only be based on money and not

commodities. Based on this according to the majority, the share capital of Musharaka must be

in monetary form and no contribution in kind may be accepted.

However, to the minority, Arud or money worth could be accepted as valid contribution in

forming the capital of Musharaka.

To Imam Maliki, liquidity of capital is not a condition precedent or a sine qua non for the

validity of Musharaka. Hence, contribution in kind may be accepted provided that its extent is

specifically determined by way of evaluation according to the market price prevalent at the

date of the contract. This is also the opinion of Ibn Quddama, a Hambali jurist.

But to Imams Ahmad bin Hambal himself and Abu Hanifa, if anything other than money or

currency is used or accepted as contribution for sharikah, then the whole transaction and

agreement stands invalid. To fortify their position, the jurists have advanced two reasons:

a. That it is an established principle of law that in Musharaka the capital must be joined

in such a way that it cannot be separated. But by the time commodities are accepted as

contributions of the partners, then shares of each partner are always distinguishable

from the shares of the others. For example, where parties agree to open a private

school and partner A contributes a building or premises for that purpose and partner B

contributes a school bus, notwithstanding any partnership agreement, each one of the

two commodities is the exclusive ownership of its original owner. And for that, if any

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of the properties is sold, the proceeds realized should definitely go to the person who

owns it and not the partnership. Also, in as much as the property of each partner is

distinguished from that of the other, then no partnership exists. But if the capital is

formed by way of contribution of money, the case will be different as put by Imaam

Alkasani:

“If the capital invested by every partner is in the form of money, the same

capital of each partner cannot be distinguished from that of the other because,

the unit of money are not distinguishable. Therefore, they will be deemed to

form a common pool and thus, the partnership comes into existence”.

b. According to these jurists, there are a number of situations in a contract of Musharaka

where circumstances will dictate for liquidation and redistribution of the share capital

to each partner. And if the share capital is in the form of commodities, then

redistribution cannot be possible because the commodities may have been sold at that

time. And if the payment is to be made to the partner who made the contribution on

the basis of the current value of the property, then the value may have increased,

therefore enjoying all the profits of the partnership, leaving the other partners with

little or nothing to take home. In an event where the value of the commodities

decreases, then that partner with the same property will lose.

Imam Shaafii has in fact advocated that in addition to the basic requirement that the capital

must be formed in currency, such currency must be in the same denomination. Thus, if

members are to make contribution in dollars for instance, then all other members must also

contribute uniformly. In other words, it is not allowed for some members to pay in dollars

while others pay in pound.

While responding to the above position, Maliki School allows members to make

contributions in currency, in money worth property (Arud) or to combine the two. Thus, to

Imam Maliki, a member is free to make his contribution with any valuable thing, money or

otherwise. Jurists in Maliki School further maintain that what matters as a contribution in a

partner as commodities is the value of the property at the time of entering the contract, and

that remains the extent of his contribution all through. And in the event of winding up, the

commodities will be valued for and sold out for the purposes of determining the capital of the

partnership as well as its profit and loss. If the sharikah is terminated, that shall remain the

exact contribution for the purposes of sharing loss and profit. And in case the value of the

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property changes, that shall be regarded as a change in the capital of the partnership and shall

be treated either as profit, where it increases, or as loss, where it decreases.

They further argued that in payment of Zakaat, a purely religious matter, the value of

property may be considered for the calculation of Nisab and if this is allowed for religious

matters, it must be equally allowed in Mu'amalat.

To Imaam shaafii, while trying to respond to Imams Hannafi and Hambali, divided

commodities into two kinds, to wit;

1. Dhawaatul Mithli: This means commodities which, if destroyed, can be compensated

with similar commodities. For instance, 200kg of rice.

2. Dhawaatul Qimi: This means commodities which cannot be compensated by similar

commodities. For example, if Mr. A kills Mr. B's camel, the latter cannot be

compensated with similar animal but may only be paid its price because no two

camels are the same.

On this classifications, Imam shaafi’i opines that partners may contribute commodities under

the first classification i.e. Dhawaatul mithli but not the second category i.e. dhawaatul qimi.

The philosophy here is that, in the case of dhawaatul mithli, redistribution of capital may take

place by giving to each partner similar commodities he had invested.

Imaam Abu Hanifa while responding on this issue argued that the commodities falling under

the category of dhawaatul mithli can form part of the share capital only if it is mixed together

after contribution by each partner in a way that the commodity of one partner cannot be

distinguished from that of the other.

From the above, it could be seen that to

Imam Malik, money, money worth or the combination of the two can form the capital of

sharikatul amwal. While money worth can only be accepted to Imam Shaafi’i if the

commodity is from the category of dhawaatul mithli.

To Imaam Abu Hanifa, commodities can only be accepted if it is mixed together.

Conduct and Management of Sharikatul Amwal

The moment the capital is jointly contributed, then its joint ownership is established and that

generally, all members must actively participate in the process of investment. If all the

partners agree to work toward investing the capital, then each one of them shall be treated as

the agent of the other in all activities related to the business. And any work done by any one

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of them in the normal course of business shall be deemed to be authorized by all the partners.

This is to say, all his transactions bind the other members. His discharge of any obligation is

regarded as the discharge of such obligation by the other members of the Sharika.

Similarly, any loss incurred by any partner in the process of making the investment is

regarded as being incurred by the entire members of the partnership. A member is however

liable for any loss he incurred in the course of managing the capital of the Sharikah where he

acts negligently or outside his authorities or terms of the partnership agreement.

It should be noted that all reasonable, simple losses incurred by any one of them shall be

acceptable. For example, buying a commodity at more than its market value. But grave and

unreasonable losses which fall outside the estimation of people of the same profession are not

acceptable and the partner who incurred them will be personally liable.

However, to some jurists, partners may agree on a condition that the partnership be managed

by one of them and none of the partners other than him shall work for the Musharaka. This is

known as Sharikatul Inaan (limited or corporative partnership). But in the case of a sleeping

partner, he shall be entitled to the profit only to the extent of his contribution.

SHARIKATUL ABDAN, AMWAL AND SINA'A

Amwal; Where partners are required to contribute money worth (Asl or Arud) toward the

formation of the capital of partnership.

Abdan; Neither money nor money worth is required. It require two or more person of the

same or different profession agreed to join hands and work together on the condition that

whatever they get out of the joint venture will be shared among them. This type of

partnership is also called Mannual Partnership.

According to Shafi'i School, Sharikatul Abdan, is invalid because the term Sharika derive its

name from the act of contributing capital for investment, therefore establishing the

indispensability of capital in any of Sharika and that capital is lacking in Sharikatul Abdan,

and this implies that it is not recognised by Shariah. They further argue that Sharikatul Abdan

is invalid because of the element of Gharar or Uncertainty, as there is no guarantee that

partner will get work from the client.

Majority Jurist, Maliki, Hannafi and Hambali argue that Shrikatul Abdan is valid and

permissible on the following ground;

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a. That it was reported that Ibn Masudd;

“I, Ammar and Sa'ad become partner in what we would get from the booties of the

battle of Badr, Sa'ad then brought 2 prisoners but I, and Ammar did not bring any

things”.

Commenting on this Hannafi said the Prophet (SAW) made them on the ownership of

the prisoners held hence this hadith prove the permissibility of Mannual Partnership.

b. If Sharikatul Amwal is legalise for the purpose of developing existing capital then

Sharikatul Abdan should also be allowed for the purpose of developing capital itself.

With regard to the objection that partner may not get work, it is argued by the majority that,

generally people get work whenever they formed an association of this nature or kind.

Although sometimes they may not get it, but this is an exception to the general rule and

principle of Shariah are established on general rule rather than exceptions.

Maliki and Hambali, make it a condition that only people of the same skill and profession

can form this kind of Sharika, for e.g. Sharikatul Abdan can only be formed by a Legal or

Medical doctor but not between Legal and Medical doctor.

The main agreement is that the work agreed for by either partner is binding upon him and

also open the other partner, so much so that the client may require it performance from either

partner as each member is entitle to demand the payment for the job performed from the

employer.

Where one member cannot perform the job because of lack of skill and expertise for been of

different profession, this brings uncertainty which invalidate the Sharika.

Hannafi allowed Sharikatul Abdan to comprised people of different profession, arguing that

if one member can execute the work, that would be regarded as been executed by all the

members and the fact that one member can execute it, it's enough to allow the fear the

employer may run the risk that the job may not be performed.

It must be pointed out that the view of Hannafi is more acceptable and more realistic. What is

important is that people come together to exhibit their skills and expertise to perform certain

jobs and share the gain jointly. Therefore there is nothing contradictory to the latter's and

spirit of Shariah to invalidate an association of different profession.

What is important is that, the job has to be done by any of the member and that shall be

regarded as been jointly executed by the entire members. It may be argue that the complicity

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of modern time brings about jobs which are complex in their nature require the given of

helping hand by different profession and this can be achieved by having recourse to the

opinion of Hannafi.

The conduct of Sharikatul Abdan

Sharikatul Abdan is equivalent to a partnership by reciprocity by its nature, with respect to

the members’ obligations. The moment partners get into partnership the work accepted by

one of them becomes obligatory to be accepted by the others. This is because, the

performance of the work is incumbent upon the other parties. That is to say, any business

engaged in by any member is incumbent upon the others too, as the client may demand its

performance from any member. As such, each member, as a rule, is under a duty to discharge

and execute any work accepted by any member. Equally, each member is entitled to demand

payment from the employer for the job performed; payment to any member is treated a good

payment for the executed job.

Profit sharing

This kind of Sharika admits inequality of profit sharing. This is because there is in reality no

profit but gain, and gain does not bear the denomination of profit except where the stock and

gain are of the same nature. And in this case, they are not of the same nature because the

capital is in industry and the return so acquired therefore, not profit but merely a return of

industry.

Furthermore, it is very likely that some of the members may do more work than the others,

especially where they are of different professions. In any case, what is to be pointed out is

that it all depends on the partners to set out how to distribute the gain amongst themselves.

They may decide to share equally or otherwise. Whatever agreement is reached, that shall

regulate the distribution of the gain. If one of the partners becomes ill or is unable to execute

any job or to realize any gain, then the gain realized by the others will still be divided

between the partners. This could be seen in the Hadith of Ibn Masood RA.

In the case of sickness, the healthy partner demands the sick one to appoint a new worker as a

substitute. The latter is under a legal duty to do so, because the partnership is based on

manual work on the part of both of them. Therefore, if one of them is unable to work, he has

to appoint another in his place for the validity of their contract to be maintained. And if the ill

partner refuses to appoint someone in his place, then the other partner can determine the

whole partnership.

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SHARIKATUL WUJUH

This is known as partnership upon personal credit worthiness. It is a partnership in which

members provide no capital but, they are reputable enough to purchase trade goods for

deferred payment and share whatever loss or gain in accordance to what they have previously

stipulated. As no capital is required in this specie of partnership, partners purchase and sell

goods depending on their good reputation, covenant and people's trust in them and finally

share profit and loss respectively in accordance with their agreement. Like in the other types

of partnership, in Sharikatul wujuh, stipulations on the mode of division of profit and loss are

fundamental because, one of the partners may be more reputable and trust worthy than the

others. So he may deserve to have a larger share then that of the others. In such a case,

partners in Sharikatul Wujuh are to stick by making specific references to the conditions and

stipulations agreed upon at the time of entering the contract.

On this type of partnership, Imam Al Sharaksi has this to say

“As for Sharikatul wujuh (that is Sharikah with credit worthiness), which is also

called Sharikatul Mafaalis (Sharika of the insolvent, bankrupt or those reduced to a

financial state of copper coins), it is a partnership with two people with capital upon

the condition that they will buy on credit and sell (for cash). It has been called by this

name on the grounds that they employ their credit worthiness, because credit sales

are made only to those who have standing among the people (traders)''. See Kitabul

Mafsu

The validity of this type of Musharaka is also a subject of Juristic controversy.

To Imam Hanifa it is valid under Islamic law provided all the requirements of a valid

contract are satisfied. To him, the followings are the necessary conditions to be satisfied in

terms of loss and profit sharing for the validity of this type of Sharika;

1. The share of the partners in the goods purchased must be specified.

2. Entitlement to profit is based upon liability to bear loss which depends on the extent

of the share of each partner in the purchased property. Therefore, a partner with half

the share of the property is entitled to a half of the net profit realized after selling the

goods.

It should be noted that Imam Hannafi is the only Jurist among the four Sunni schools that

legalizes this type of Sharika.

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To Imams shaafii and Maliki, Sharikatul wujuh cannot be recognized because to them, the

main purpose of any type of partnership is the mixing of the capital which is achieved only

with tangible capital such as cash or labour, and which is lacking in this type of Sharika.

While responding to the above, Imam Hannafi maintains that this type of Sharika is built

upon the principles of agency i.e. Wakalah and no principle of Shariah prohibits same.

Management of Sharikatul Wujuh

After the formation of this Sharika, partners accept supply of goods on credit basis and after

selling the goods, they return the price money and share the profit amongst themselves. Once

any good is supplied, it becomes the responsibility of all the members to sell it and any action

of any member is regarded as that of the entire member of the partnership, since he transacts

on behalf of himself and the other partners. Any payment made to or by any partner is a good

payment to or by the entire members of the partnership.

However, a partner may be compelled by the law to bear liability where he acted negligently

or ultra virus the terms of the contract.

TERMINATION OF SHARIKA (PARTNERSHIP)

The right of a partner to bring to an end the lifespan of a partnership is central. Every member

is entitled to it as of right. This is so because Sharikatul aqad is built on consensus. It can be

mutually or unilaterally terminated. Many jurists are in unity on this point.

However, jurists differ on the issue of the formula or procedure for the exercise of the right.

To Imams shaafi’i and Hambali, any partner can terminate the contract at any time. This is

the opinion of Imam Annawaawi.

To Imam Ibn Quddama, Musharaka is one of those contracts in law in which a partner can

freely enter and freely unbundle himself from the contractual agreement. He was quoted

saying

“Sharika is one of those non-synallagmatic contract which has is nullified by the one

of the partners terminating it”.

The general position of the law is that a contractual agreement entered into by way of deed

can only be set aside by another deed. And such types of contracts are in law known as

synallagmatic contracts.

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According to Islamic jurists, contract of partnership does not fall within this range.

The majority view of Hannafi School however, qualified this right to terminate. The jurists

here maintained that although a member has the inherent right to terminate his membership

from any type of contract, in Sharikatul aqad. The right must be exercised in such a manner

that the termination will in no way prejudice the interests of the remaining partners.

Therefore, the right must be exercised only when all the goods and the capital of the sharika

have been converted into cash for easy settlement of amount. Writing on this point Imam

Alkasani said;

“Sharika is a non-synallagmatic contract (not reciprocally binding), any of the

partners is entitled to terminate it any time, but the decision to terminate is valid only

when taken in the presence of co-partners i.e. to their knowledge and confirmation”.

On the right of a partner to terminate a partnership, jurists in Maliki School have two

different views;

a. The first view is attributed to ibn Rushd saying that

“Sharika is non synallagmatic and can be terminated by any of the members

at any time”.

b. While the second opinion is to the effect that, Sharika by its nature is a contract which

reciprocally binds the members. Hence, it cannot be terminated until the business for

which it is formed is completed. This is the opinion of the majority of the Maliki

jurists.

Generally, Partnership could be terminated through any of the following non exhaustive

ways;

1. By Notice: Every partner has the right to terminate the Musharaka at any time after

giving a proper notice to this effect. Here, the distribution of the asset of the

partnership is to be made ''pro-rata'', if the assets of the Sharika are in cash form. But

in an event where the assets are not in cash form, then they may agree either on the

liquidation of the asset or their petition between the partners as they are. In the case of

a dispute between the parties i.e. some of the partners calling for liquidation while

others advocating for partitioning, then the latter opinion prevails. But if the assets are

such that cannot be separated or partitioned, for instance machineries, then it shall be

sold out and the proceeds realized be distributed pro-rata.

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2. By Death: If any of the partners dies during the currency of Musharaka, the contract

stands terminated to the extent of the deceased share capital. If the partners are only

two, the whole partnership collapses. But in an event where the partners are more than

two, then the existing or living partners proceed with the partnership. In any event, the

deceased partner's legal heirs will have the option to either withdraw or to continue

with the partnership subject to the consent of the other partners.

3. Insanity: If any of the partners becomes insane (majnoon), the partnership is

terminated to the extent of his contribution. Where the partners are only two, the

partnership is automatically dissolved. But in the case of more than two partners, the

interest and or the liability of the insane member will be severed and the business

proceeds.

4. Sickness: Any ailment, illness or sickness rendering a partner incapable of acting on

commercial bases visa vies the partnership terminates the partnership. But if they are

more than two then the capable ones will carry on with the business.

5. Illegality: A contract of partnership will come to an end where the parties embark on

a transaction that is considered invalid or illegal in the light of the principles of

Islamic financial jurisprudence. For example, where the nature of the partnership is

valid an initio, but then the members introduced some illegal transaction for instance,

dealings in Usury(Ribah), Gambling(maisar), Risk (Garar), the entire partnership

becomes invalid and hence terminated.

6. Natural Disaster or Calamity: Where this befalls the entire capital or asset of the

partnership, then that particular relationship becomes terminated.

8th SEPTEMBER, 2016

MUDARABAH

“Mudarabah” is a special kind of partnership where one partner gives money or capital to

another for investing it in a commercial enterprise and manages the investment using his own

managerial skills and professional expertise. The investment comes from the first partner who

is called “rabb-ul-mal” (owner of capital), while the management and work is an exclusive

responsibility of the other who is called “mudarib” (business or investment manager).

The word mudarabah is derived from darab or darabah meaning to travel seeking livelihood

or to travel for business or to earn a living. Mudarabah in this context also means Qirad that

is to provide someone with capital to work on from your own resources and give him a

certain share of the profits for his labour.

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Legality of Mudarabah

The following authorities generally attest to the validity of Mudarabah;

From the Holy Qur’an;

Suratul Muzammil Q 73:20

“...others travelling through the land seeking of Allah’s bounty...”

This is a portion of the verse that cites some categories of Muslims that have valid excuses

preventing them from observing night prayers; the sick and travellers seeking Allah’s bounty,

profits and business.

Suratul Jumuah Q 62:10

“Then when the (Jumu’ah) salat (prayer) is ended, you may disperse through ther

land, and seek the bounty of Allah (by working)...”

Dispersing through the land to resume includes mudarabah because it means travelling

through the land seeking a living or for business, and the busdiness is mainly sales and

purchases.

From the Prophetic Hadiths;

Ibn Abbas (RA) is reported to have said;

“Al-Abbas ibn Abdul Muttalib (RA), whenever he gives out capital on mudarabah

basis he would stipulate to his partner not to travel with it across water or tio descend

with it in any valley or to buy with it certain type of animal. He further stipulated that

in case he violates these conditions he has to be liable for it. When this condition was

reported to the Prophet (SAW), he endorsed”.

Endorsing the conditions in this hadith is an implicit endorsement of mudarabah itself.

In addition, when the Prophet (SAW) was sent with the message of Islam, people were

practicing mudarabah and he never prohibited them which is a tacit approval. Moreover, the

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Prophet (SAW) himself did business as mudarabah before he was given the message of

Islam. He was mudarib with capital provided by Sayyidah Khadijah (RA) (first wife of the

Prophet, SAW) almost a year before he married her. And when he was given the message of

Islam, he narrated the incidence of mudarabah which is a way of tacitly endorsing the

practice after the revelation of the message of Islam. It is therefore the ijma (consensus) of

Muslim Jurists that mudarabah is a legal and valid mechanism of conducting business in

Islamic law.

Differences Between Musharakah and Mudarabah

The differences between sharikah and mudarabah can be stated as follows;

1. The investment in sharikah comes from all the partners, while in mudarabah,

investment is the sole responsibility of rabb-ul-mal.

2. In musharakah, all the partners can participate in the management of the business and

can work for it, while in mudarabah, the rabb-ul-mal has no right to participate in the

management which is carried out by the mudarib only.

3. In musharakah all the partners share the loss to the extent of the ratio of their

investment while in mudarabah, the loss if any, is suffered by the rabb-ul-mal only,

because the mudarib does not invest anything. His loss is restricted to the fact that his

labour and skills have gone in vain and his work has not brought any fruit to him.

However, this principle is subject to a condition that the mudarib has worked with due

diligence which is normally required for the business of that type. If he has worked

with negligence or has committed dishonesty, he shall be liable for his loss caused by

his negligence, dishonesty or misconduct.

4. The liability of the partners in musharakah is normally unlimited. Therefore, if the

liabilities of the business exceed its assets and the business goes in liquidation, all the

exceeding liabilities shall be borne pro rata by all the partners. However, if all the

partners have agreed that no partner shall incur any debt during the course of the

business, then the exceeding liabilities shall be borne by that partner alone who has

incurred a debt on the business in violation of the aforesaid condition. Contrary to this

is the case of mudarabah, here, the liability of rabb-ul-mal is limited to his investment,

unless he has permitted the mudarib to incur debts on his behalf.

5. In musharakah, as soon as the partners mix up their capital in a joint pool, all the

assets of the musharakah becomes jointly owned by all of them according to the

proportion of their respective investment. Therefore, each one of them can benefit

from the appreciation in the value of the assets, even if profit has not accrued through

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sales. The case of mudarabah is different, here, all the goods purchased by the

mudarib are solely owned by the rabb-ul-mal, and the mudarib can earn his own share

in the profit only in the case he sells the goods profitably. Therefore, he is not entitled

to claim his share in the assets themselves, even if their value has increased.

Types of Mudarabah

The nature of the mudarabah agreement with respect to the extent of powers enjoyed by the

mudarib determines the type of mudarabah. In this regard, there are basically two (2) types of

mudarabah;

1. Mudarabah al-muqayyadah (restricted mudarabah); this is where the rabb-ul-mal

specifies a particular business for the mudarib in which case he shall invest the money

and in that particular business only.

2. Mudarabah al-mutlaqah (unrestricted mudarabah); this is where the rabb-ul-mal

authorises the mudarib to invest the money in any business he deems fit. The rabb-ul-

mal left it open for the mudarib to undertake whatever business he wishes.

Conditions for Validity

Parties, Formation and Capital of Mudarabah Contract

Parties must be of full and complete legal capacity. A rabb-ul-mal can contract mudarabah

with more than one person through a single transaction. It means that he can offer his money

to Mr A and Mr B both, so that each of them can act for him as mudarib and the capital of the

mudarabah still be utilized by both of them jointly, and the share of the mudarib shall be

distributed between them according to an agreed proportion. In this case both mudaribs shall

run the business as if they were partners inter se.

The mudarib or mudaribs, as the case may be are authorised to do anything which is normally

done in the course of that business. However, if they want to do an extraordinary work which

is beyond the normal routine of the traders and or businessmen in such kind of business, they

cannot do so without express permission from the rabb-ul-mal.

Capital of Mudarabah

The capital for mudarabah business must be lawful (halal) within the purview of Islamic law.

There are fundamental prohibitions which must be avoided in all their ratifications, in all

Islamic business so all so in mudarabah. Such business includes among others pork and its

related products, illegal arms deals, illegal drugs and tobacco etc. The halal mudarabah

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business must not involve riba (interest and usury), gharar (risk, uncertainty and hazard) and

maysir (gambling and speculation). For all commercial activities to come within the fold of

shariah, these things have to be avoided and at all cost.

Distribution of the Profit

It is necessary for the validity of mudarabah that the parties agree right at the beginning on a

definite proportion of the actual profit to which each of them is entitled. No particular

proportion has been prescribed by the shariah, rather, it has been left to their mutual consent.

They can share the profit in equal proportions, and they can also allocate different proportion

for thr rabb-ul-mal and the mudarib. However, they cannot allocate a lump sum amount of

profit for any party, nor can they determine the share of any party at a specific rate tied up

with the capital. For example, if the capital is #100,000 they cannot agree on a condition that

#10,000 out of the profit shall be the share of the mudarib, nor can they say that 20% (or any

percentage) of the capital shall be given to rabb-ul-mal as profit. However, they can agree

that 40 % (or any percentage) of the actual profit shall go to the mudarib and 60% (or any

percentage) to the rabb-ul-mal or vice versa.

It is also allowed that different proportions be agreed in different situations. For example, the

rabb-ul-mal can say to mudarib, “If you trade in rice, you will get 50% of the profit and if you

trade in vegetable, you will have 33% of the profit”. Similarly, he can say “If you do the

business in you town, you will be entitled to 30% of the profit, and if you do it in another

town, your share will be 50% of the profit”. Apart from the agreed proportion of the profit, as

determined in the above manner, the mudarib cannot claim any periodical salary, unless

agreed to by the parties at inception of the contract.

Termination of Mudarabah

The contract of mudarabah can be terminated any time by either of the two parties. The only

condition is to give a notice to the other party. If all the assets of the mudarabah are incash

form at that time of termination, and some profit has been earned on the principal amount, it

shall be distributed between the parties according to the agreed ratio. However, it the assets

of the mudarabah are not in the cash form, the mudarib shall be given an opportunity to sell

and liquidate them so that the actual profit may be determined.

There is difference of opinion among the Muslim jurists about the question whether the

contract of mudarabah can be effected for a specified period after which it terminated

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automatically. The Hanafi and Hanbali schools are of the view that the mudarabah can be

restricted to a particular term, like one year, six months, etc after which it will come to an end

without a notice. On the contrary, Shafi’i and Maliki schools are of the opinion that the

mudarabah cannot be restricted to a particular time.

However, this difference of opinion relates only to the maximum time limit of the mudarabh.

Can a minimum time limit also be fixed by the parties before which mudarabh cannot be

terminated?

No express answer to this question is found in the books of Islamic Fiqh, but it appears from

the general principles of Islamic commerce that no such limit can be fixed, each party is at

liberty to terminate the contract whenever he wishes.

Note that this unlimited power of the parties to terminate mudarabah at their pleasure may

create some difficulties in the contract of the modern commercial ventures because most of

the commercial enterprises today need time to bring fruits. They also need constant and

complex managerial efforts. Therefore, it may be disastrous to a project if the rabb-ul-mal

terminates the mudarabah right in the beginning of the enterprise. Specially, it may bring a

severe set-back to the mudarib who will earn nothing despite all his efforts, therefore, if the

parties agree when entering into the mudarabah that no party shall terminate it during a

specified period except in specified circumstances, it does not seem to violate any principle

of shariah, particularly in the light of the famous hadith already quoted which says;

“All the conditions agreed upon by the Muslims are upheld, except a condition which

allows what is prohibited or prohibits what is lawful”.