Syariah parameters to Musharakah contract: A Comment

Che Noraziah Arshad1

College of Business
Universiti Utara Malaysia
06010 Sintok, Kedah Darul Aman
Fax: + 604-928 6406
e-mail: noraziah.ca@uum.edu.my

Abdul Ghafar Ismail2

Islamic Economics and Finance Research Center
School of Economics
Universiti Kebangsaan Malaysia
Bangi, 43 600 Selangor DE, Malaysia
Fax: + 603-8921 5789
e-mail: agibab@ukm.my

Review Journal:
In Islamic finance, law and shariah framework is very important, even
indispensable in promoting Islamic finance in this era. We know that lately
Islamic finance has many emerging and developing countries. Thus the
legal framework and Shariah must be offset. In addition, both the law and
shariah are interrelated. In identifying the need to introduce a standard
that is acceptable and that goes for the Islamic finance industry, the
Malaysian central bank (or Bank Negara Malaysia) has introduced a
number of parameters.1 Parameter Standardization is seen as necessary
to avoid conflict and not consistent between different fatwa decisions and
1 State Bank has issued several guidelines parameters draft consultation paper
on Ijarah (SPRC 2) and Murabahah (SPRC 1) in July and August 2009. In fact, BNM
in December 2009 published a draft concept paper additions - "A Shariah
Parameter Reference 3 (SRPC 3 ) "- Mudharabah contract

their applications with these institutions with the aim to activate the role
of Shariah supervisory board of Islamic financial institutions. BNM states
that the purpose of these guidelines is intended to achieve and
harmonization of Islamic finance practices and to promote the efficiency of
the operation. recently, Bank Negara Malaysia has issued Draft Shariah
Parameters in Musharakah contract in July 2010. Since the version of the
draft is still undergoing some changes. This paper will make critical
comments of their guidelines. and also the same time, this comment is
important for several reasons. First, this paper can be used to provide
guidelines on the nature and characteristics of Musharakah contract to the
Islamic financial services industry, for a variety of financial instruments,
including financing and investment. Secondly, this paper also discusses
specific definition on the basis of legitimacy in adopting Musharakah
contracts are described to facilitate understanding of the Shariah contract
requirements.
Terms and conditions in this paper derived from the text of BNM and
argued by two scholars of Islam: Maulana Taqi Usmani and Wahbah
Zuhaili. Terms and conditions outlined in this parameter be a general
guide to the petition Musharakah contract. So, every practice by the
Islamic financial institutions that are not listed in the parameters that do
not contrary to the terms and conditions outlined in the parameter. Finally,
this research also studied the effects of parameters on the performance of
the Islamic Musharakah contract in a variety of anchors: BNM Shariah
parameter vs. other Islamic scholars.
A Review of Shariah Parameters for Contract Musharakah
In the classical fiqh, discussions on the financial transaction involves two
main elements, namely, the definition, legitimacy, and terms and
conditions of financial transactions.
Definition
Musharakah is a word derived from the Arabic meaning of partnership.
The Mejella (1329) defines it as an "Agreement on association with the

mother country requirements and benefits be the same between two or

more people". Meanwhile, Ibn Arfa (1984) is defined as: "An agreement
between two or more persons to carry out certain business with the
objective of sharing profits with joint investment". One more member of
the law of Islam, Mohammad Akram Khan (1990) defines Musharakah or
partnership as: "A contract between two people who threw finance
company business to make a profit".
Based on the above definition, the ideas of partnership are: first, to
contribute capital to the company or business, whether new or existing, or
the owner of the property or assets to move, either temporarily or
permanently. Thus, a partnership that can be used in the case of large
users to realize the investment funds for short term or long term. Second,
to share profits over the business with section loss. Thus, the partnership
should be defined as a contract between two or more people running a
business in particular with a view of not only share the profits but also
losses and liability.2 Third, friends sharing and control how the investment
is managed. Fourth, the obligations in this partnership is not limited. So,
every partner is solely responsible for actions and other commitments in
financial matters.
The Legitimacy of the Musharakah Contract
Musharaka contract validity was established based on the Qur'an, the
Sunnah of Prophet Muhammad (SAW) and ijma 'ulama of Islam. Although
most jurists agreed on the necessity Musharaka, the majority believe that
it is legitimate and compliant sharia. The following verse from the Qur'an
in general demonstrate the validity musharakah. "... But if more than one,
then they allied in the third part ..." (Al-Nisa ': 12)
This verse specifically emphasizes the sovereignty of the Islamic heritage.
However, in a general context, Islamic jurists have regarded the text as
containing a general requirement any form of partnership. And, verily

2 See the view of Umar Chapra (2002)

many are the partners (in bisiness) oppress one another, except those
who believe and do righteous good deeds, and they are few.
Based on both, Surah al-Nisa and al-Sadd, in these verses, Allah describes
the treasure partnership. If a person dies without leaving ascendants or
descendants; but she had brothers and sisters more than two in number;
then they will share one-third of the treasure mortal. So, based on that,
the cooperation between the wealth is in the sharia law (Al-Kawamelah,
2008). Shariah scholars generally agree on the validity of the sale
contract, combined with the lease contract. Also, there is no clear text in
the shariah prohibits Musharakah. Wisdom in partnership allow clear.
Contracts that allow individuals to combine their properties in a way that
allows them to generate more wealth than they can produce each
individual. It was understood from history that the Prophet Muhammad
SAW approved of cooperation that exists between Zaid Ibn Arqam and
alBarra 'Ibn' Azib but not approved their efforts into the business activities
of the silver purchase on credit. The above type of partnership has been
practiced throughout history Muslims without protest from the jurists.
Imam Ibn al-Munzir in his book al-ijma ': "And they (Muslim jurists) agree
on the validity of a partnership in which each one of the two partners to
contribute capital in the dinar or dirham, and colleagues mixed the two
mothers to form a treasure that can not be distinguished, and they will sell
and buy what they see as (beneficial) for business, and the surplus will be
distributed among them while the deficit will be covered with them, and
when they actually run (set), partnerships legitimate. "
Terms and Conditions of Contract Musharakah
Parameters

in

musharakah

include

capital,

management,

profit

partnership, partnership losses and businesses alike. These parameters

will also be discussed in the context of other scholars view. Discussion of
each parameter is as follows:
1) The capital contribution by all partners

The necessary condition for the legitimate Musharaka capital is as

shown below BNM parameters are: i) should be easily available; ii) to
be contributed by all partners; and iii) may be in the form of financial
assets such as cash or non-financial assets including assets assets.
Monetary significant and not significant different denominations of
currency should be evaluated based on the currency agreed by the
partnership after the expiration of the contract.
Capital in the form of non-financial assets should be assessed based
on the assessment that determined by a third party which may include
the competent bodies, expert or appraiser, or as agreed by the
contracting parties at the time the contract was made.
They have the option to terminate the agreement or may agree to
revise the agreement was based on a real capital contribution.
musharakah capital comprising financial and non financial assets
invested by each partner should blend represent the collective rights of
each partner.
Musharakah agreement may impose conditions that forced the
partners to offer redemption share capital partners to colleagues that is
based on specific agreements and requirements. musharakah new
friend can enter during the contract period is subject to approval by the
existing partners.
2) Business management musharakah
BNM indicates that, Musharaka effort can be controlled in the
following ways: i) management by all partners; or ii) Management by a
colleague or a single partner; or iii) management by third parties. The
management is entitled to the agreed remuneration for their services
as managers in addition to its share of the partnership profits as a
partner. In addition, the agreed remuneration may also be in the form
of greater profit sharing ratio.
Based on this view Taqi Usmani, musharakah normal principle is that
each partner has the right to take a portion in managing it and work for
it.

However,

partners

can

agree

with

the

requirement

that

management must be committed by one of them and no other allies

must work to musharakah.
3) The rights of partnership profits

BNM view of profit, should be measured as the amount that exceeds

the capital after refusing the costs and expenses that can be attributed
to the efforts Musharakah. The ratio of profit sharing can be checked
for any agreement with friends or be subject to certain benchmark
agreed by partners such as the case in question. The advantage is
expressed in the form of certain percentage can not be attributed to
the amount of capital.
Mechanisms to estimate the profit on capital musharakah used may
be flagged floor to conventional practices benchmark, but are not
limited to Base Lending Rate (BLR) to determine the indicative profit
rate.3
Benefit ratio for each pair should be determined by the level of real
profits earned by the business, and not in accordance with the level of
capital invested by him.4 He is not allowed to set the amount of money
at a time for any one from friends, or any price gains tied to
investment.
If the amount of protection will be paid at once or a certain
percentage of the investments it has agreed to every one of my
friends, it must be clearly stated in the agreement that he would be the
final solution at the end of the period, which meant with it that the
amount provided by each partner must be counted as 'payment
account' and will be adjusted to the real advantage that he could
qualify at the end of the period. But if there is no actual benefit
received or less than expected, the amount spent by the partners will
need to be restored.
4) Partnership losses Based on the view
BNM, bear capital losses when a capital asset (investment or
properties) to reduce the value. Losses are not aware that the assets
are sold at a price lower than the purchase price. That loss is divided
on the basis of pari-passu among friends and balanced with capital
contributions. Third parties may promise to bear the loss of a partner.
Certain conditions on a third party guarantee capital is as follows: i)
3 Actual valuation i.e valuation based on actual value of assets.
4 Constructive valuation I,e valuation based on fair value of assets.

legal capacity and financial solidity as a third party as a guarantor must

be free of contract musharakah and friends; ii) Guarantees should not
be given in consideration to not be associated in any way with
musharakah contract; iii) a third party guarantor can not hold a
majority ownership guaranteed party; and iv) the secured party can not
hold majority ownership of a third party guarantor.
Losses in the partnership contract by Wahbah scholars should be
divided by the ratio of the obligations specified in the example contact
one of them will take two-thirds of the work and the other will take a
third. Thus, both profits and losses should be divided based on the
same formula, which is equal to the share of the liability.
5) business partnerships
Musharakah effort must be based on shariah and can be done in
various sectors such as trade, agriculture, construction, manufacturing,
investment and services. Musharakah contracts can be applied to noncommercial

activities

are

not

profit-oriented.

pre-contract

costs

incurred to conclude contracts Musharakah like handling technical and

financial feasibility study possibilities for businesses Musharakah
Islamic financial institutions may be subject to the approval of the
insured customers second.
Thus, the ownership of the treasure partners thought to play
through a legal proxy for the parties he's a friend, and if the treasure it
is to perish in hers, she did not have to pay any compensation. In
addition to the above parameters, BNM also introduced enhanced
features that follows musharakah contract.
6) The existence and implementation of the Musharakah agreement
BNM stressed legitimate Musharaka contract will conclude with the
offer and acceptance between partners and can be expressed through
the appropriate documentation. A party to a contract Musharakah will
complete the contract in person or through an agent.
7) Termination and dissolution of the Musharakah agreement
BNM agreed that the partners mutually agreed to terminate the
contract at any time unless otherwise stated in the Musharaka
agreement. Upon termination of the agreement Musharakah, partners
can opt to take over the entire assets of the partnership musharakah.
Such provisions may arise from losses due to competitive conditions

that inhibit the partnership continue for the remainder of that period or
from being in the ongoing business.
Death or bankruptcy of one of the partners must terminate
Musharaka contract. Musharaka financing agreement between the
Islamic financial institutions with customers stating that the agreement
be terminated if one of the following conditions: (a) Both partners
mutually agreed to terminate after determining the liability of each
partner; (b) After the death of the client; (c) Court order to end the
musharakah acquired by Islamic financial institutions; (d) Losses
Important capital incapacitates the partnership; (e) Bankruptcy or
insolvency of the customer; and (f) Any violation of the terms of the
agreement by each partner.
It is a real liquidation, the assets can be sold at market price and the
proceeds will be used as follows: i) payment of the cost of liquidation;
ii) Payment of financial liabilities due to the partnership; and iii)
Distribution of all the existing assets, if any, between friends in the
ratio of their capital contribution.
In this case, if the Musharakah assets are in cash form, all of them
will be distributed pro rata between the partners. But if the assets are
not dissolved, the partners can agree whether the liquidation of assets,
or distribution or partitioning them between friends because they are.
However, the termination of the case musharakah without closing a
business, if one partner wants to termination musharakah, while
friends or other colleagues who wish to continue with the business, this
goal can be reached by mutual consent.
So the conditions seemed to be allowed, and it can be supported by
the general principles established by the Prophet Muhammad (SAW) in
the famous hadith:
"All the conditions agreed by the Muslims enforced, unless
conditions allow what is forbidden or forbidding what is legal."
Reviews about BNM Parameter
Since the guidelines do not focus on the type of Musharaka, with it, the
issue of conflict of this contract has also been recently voiced since
become Islamic finance transactions. To determine the accuracy of this
categorization, a person must have a general understanding of the
concept of Musharaka, and in particular the category of the three types of

contracts Musharaka: Shirkat al Aqd (partnership contracts), Shirkat al

Milk

(shared

ownership)

and

musharakah

Mutanakisah

(reduced

musharakah) .In addition, the parameters also creates implications up

investment and financing. their comments will be discussed separately
below.
a) Shirkah al Aqd (partnership contract)
In the context of shariah financing obedient, shrikat al AQD means
forming a business partnership in which all partners equally share
profits or losses generated by the joint venture. For example if two
people agree to run illegal services to their customers with the proviso
that the salaries earned will go to the pool together so, which should be
divided between them, regardless of the quantity of work each partner
has actually been done.
b) Shirkat al Milk (shared ownership)
Shirkat-ul-milk is a form of partnership in which both partners are
promised 'to buy equity shares of other partners gradually so that the
degree of equity shares fully transferred to him. This transaction begins
with the formation of the partnership something, then buy and sell
equity occurred between the two partners. This type of syirkah can
come in the form of two different ways, and the obligatory choice.
i) Options (ikhtiar): the choice of the parties, for example, if two or
more people to buy the equipment, it will be jointly owned by both
them and the relationship between them in connection with a
property called Shirkat-ul-Milk optional.
ii) Mandatory (Ghair optional): This came into effect automatically
without any effort or action taken by the parties.
c) Musharakah Mutanaqisah (Reducing Musharaka)
Musharakah mutanaqisah Partnership (MMP) contract, on the other
hand, is based on decreasing the concept of partnership. MMP consists
of

three

contracts,

for

example

Musharaka,

Ijara

and

bays.

Mutanaqisah Musharakah can be used in housing finance products.

Based on the concept of ownership of enterprises, banking institutions
renting those properties to customers who seek to gradually acquire
full ownership of assets from a banking institution within the agreed
time.

Implications for investment and financing

In this section, the implications of investing and financing Musharakah
contract will be discussed. The aim is to assess the performance
Musharakah (equity participation) in terms of profit and risk management
to investigate musharakah identify barriers and factors that influence the
decision-making process.5
a. Implications for investment
Musharakah contract is very similar to the conventional meaning of
partnership arrangements in which each party contributes capital in
some capacity and each partner has the right management in
proportion to their investment. However, part of the profit for each of
these partners have been selected as part of the final profit number
instead of the ratio of invested capital.
b. Implications for the financing models
The theory of Islamic banking is based on the concept of partnership
profits and losses (PLS) through financial musharakah mode. Still need
for additional legislation again to fully realize the objectives of Islamic
banking. No law has been introduced to determine the mode of
financing PLS in musharakah. Noted that when there is a conflict
between Islamic banking and legal frameworks that exist, both wins.
As we can find, there are three main areas in which Islamic banks
find it difficult to finance under the PLS: a) take part in projects of longterm and low-yield, b) Financing a small business, and c) Provision not
loans that take part to the bank's business direction.
Conclusion
Their instruments in Islamic banks, not only just by profit-motive but
along with the socio-economic objective too. Thus, the distribution of
credit in terms of conventional banking is directed by very supportive, big
industry, while in the system of partnership profits, the financial banks will
be more fair and equitable.

5 See Ahmed (2002).

This is because the criteria for the distribution of credit is the

productivity of the project and by that, the funding will go to projects that
are more productive, even the credibility of the company is lower. So, with
parameters for musharakah Sharia, Islamic institutions can help and
contribute to the socio-economic development of the country. Features
that were identified in this parameter should serve to help the Islamic
financial services industry to recognize, understand, apply and distinguish
contracts from other contracts are widespread in the industry.
Reference
Al-Qur'an
Che Noraziah Arshad. Abdul Ghafar Ismail (2010) Shariah Parameters for
Musharakah Contract: A Comment. International Journal of Business
and Social Science, Universiti Utara Malaysia.
Aziz. ZA, (2007) Law & Shariah issues in Islamic Financial Services. 3 rd
IFSB Seminar on Legal Issues: Survey on Law and Syariah Issues in the
Islamic Financial Services Industry, BIS Review, Kuala Lumpur.
Ahmed, Mahmood (2002) The need for separate regulations for Islamic
banks in Bangladesh, in The Bangladesh Today and The Independent.
Al-Kawamelah, Nur A. Karim (2008) musharakah and contemporary
practice: Jordan Islamic Bank as an example, the Dar al-Nafa'is, Jordan.
Akram Khan M. (1990) The term Islamic Economics, Mansell, London, p.
100.
Bank Negara Malaysia (Bank Negara Malaysia) (2007) Characteristics of
different financial transaction Islam: Perspectives on musharakah
mutanaqisah (diminishing partnership), Financial Stability and Payment
System

Report

2007,

Malaysia.

http://www.bnm.gov.my/files/publication/fsps/en/2007/cp03_002_white
box.pdf.

Bank Negara Malaysia (2010) Draft Shariah Parameter. Reference 4:

musharakah Contracts (SPR4), Kuala Lumpur.
Tyser CR (1329) The Mejelle, Majallah Al-Ahkam Al-Adiyah. A Complete
Code or the Act of Civil Islam, thebook House, Pakistan. (Nd)
Chapra, MU (2002) Economic Future: Islamic Perspective, Leicester:
Islamic Foundation.
Hegazy, W. (2005) Fatwa and Islamic financial fortunes: A critique of the
contemporary practice of fatwa in the Islamic financial markets, Nazim
Ali, S., (Ed.) Islamic Finance: During Legal Issues and Regulatory,
Project Finance Islam. Harvard Law School, Cambridge.
Ibn Arfa (1984) Mukhtesan Sidi Khalil, as cited in Abdur Rahman I., Doi,
Shariah: Islamic law, ASNoordeen, Kuala Lumpur.
Ibrahim M. (2010) The Role of Islamic Finance and Malaysia. 21 st
Conference of Presidents of Law Association in Asia, Kuala Lumpur.
El-Gamal. M. (2008) Ketidaklojikan Based Contracts Finance Islamic Law in
the Age of Financial Engineering. Wisconsin International Law Journal.
25 (4).
International Fiqh Academy of the Organization of the Islamic Conference
(2004) 15th Session, Decision musharakah mutanaqisah and the
principles of Sharia, http://www.fiqhacademy.org.sa/.
Muhammad Ayub. (2007) Understanding Islamic Finance, Singapore; John
Wiley and Sons (Asia) Pte Ltd.
Raquib, Abdur and Ahmed, Mahmood (2003) Financing and Development
Issues Lending to Some MCC in Bangladesh, Mimeo.
Smolo, Edib (2007) Comparison between the Theory of Bithaman Ajil alBay, musharakah Partnership and Ijarah Sukuk, Masters Dissertation,
International Islamic University Malaysia.