SHIRKAH & ITS VARIANTS. LECTURE By Dr. Syed Zulfiqar Ali Shah. Summary of Last lecture. Securitization & Sukuk Potential of Sukuk in Fund Management and Developing the Islamic Capital Market Summary & Conclusion Introduction (Shirkah) Legality, Forms & Definition of Partnership
Dr. Syed Zulfiqar Ali Shah
Securitization & Sukuk
Potential of Sukuk in Fund Management and Developing the Islamic Capital Market
Summary & Conclusion
Legality, Forms & Definition of Partnership
Basic Rules of Musharakah
The Concept & Rules of Mudarabah
Mudarabah Distinguished From Musharakah
Modern Corporations: Joint Stock Companies
Modern Application of the Concept of Shirkah
Diminishing Musharakah as an Islamic Mode of Finance
Summary & Conclusion
Mudarabah is a special kind of Shirkah in which an investor or a group of investors provide capital to an agent or manager who has to trade with it; the profit is shared accordingto the pre-agreed proportion, while the loss has to be borne exclusively by the investor. The loss means a shortfall in the capital or investment of the financier. The loss of the agent (Mudarib) is by way of expended time and effort, for which he will not be given any remuneration. There is no restriction on the number of persons giving funds for business or any restriction on the number of working partners. As discussed in the case of Musharakah, profit cannot be in the form of a fixed amount or any percentage of the capital employed. Any ambiguity or ignorance regarding capital or ratio of profit makes the contract invalid. If a Mudarabah contract becomes invalid for any reason, the Mudarib will be working for the necessary period as a wage-earner and will get Ujratul-mithl (fair pay) for his job. He will not be given any share of the profit.
As evident from various books of Fiqh, the term Mudarabah is interchangeably used with Qir¯ad and Muqaradah. It is presumed that while the latter two originated in Hijaz, Mudarabah was of Iraqi origin. Subsequently, the difference appears to have been perpetuated by the legal schools, the Malikis and Shafi‘es adopting the terms “Qir¯ad” and “Muqaradah” and the Hanafis using the term “Mudarabah”.
Al-Sarakhsi, in his book Al-Mabsut, explains the nature of Mudarabah in the following words:
“The term Mudarabah is derived from the expression ‘making a journey’ and it is called this because the agent (Mudarib) is entitled to the profit by virtue of his effort and work. And he is the investor’s partner in the profit and in the capital used on the journey and in its dispositions.
The people of Madina call this contract Muqaradah, and that is based on a tradition concerning ‘Uthman, (Gbpwh), who entrusted funds to a man in the form of a Maqarada. This is derived from al-Qard, which signifies
cutting; for, in this contract, the investor cuts off the disposition of a sum of money from himself and transfers its disposition to the agent. It is therefore designated accordingly. We, however, have preferred the first term (Mudarabah) because it corresponds to that which is found in the book of Almighty Allah. He said: ‘while others travel in the land (yadribuna fil-ard) in search of Allah’s bounty,’ that is to say, travel for the purposes of trade.”
With regard to the legality of Mudarabah, Al-Marghinani says in Al-Hidaya:
“There is no difference of opinion among the Muslims about the legality of Qir¯ad. It was an institution in the pre-Islamic period and Islam confirmed it. They all agree that the nature of the Mudarabah business is that a person gives to another person some capital that he uses in the business. The user gets, according to conditions, some specified proportion, e.g. one-third, one-fourth or even one-half.”
A number of sayings of the holy Prophet (pbuh) and reports by his Companions on the subject indicate that Islamic jurists are unanimous on the legitimacy of Mudarabah. The terms of the Mudarabah contract offered by the Prophet’s uncle Abbas were approved by the Prophet (pbuh). Abu Musa, the governor of Kufa, wanted to remit public money to the Bayt al M¯al. He gave the amount to Abdullah bin Umar and his brother, who traded with it. The Caliph’s assembly treated it as an ex post facto Mudarabah and took half of the profits earned by the two brothers, because the public money in their hands was not the loan. Caliph Umar also used to invest orphans’ property on the basis of Mudarabah.
This practice was rather needed, since weaker members of society could not undertake long journeys for trading the way that most important professions of Arabs could at that time. Al-Sarakhsi, in this regard, says:
“Because people have a need for this contract. For the owner of capital may not find his way to profitable trading activity and the person who
can find his way to such activity may not have the capital. And profit cannot be attained except by means of both of these, that is, capital and trading activity. By permitting this contract, the goal of both parties is attained”.
By allowing Mudarabah, Islam has intended to fulfil an important economic function by way of encouraging the hiring of capital and that of trade skills on judicious terms of risksharing, leading to the benefit of society and the concerned parties. The Mudarib has to work in various capacities like trustee, agent, partner, indemnifier/liable and even wage-earner if the contract becomes void. Being an agent to the Rabbul-m¯al, he undertakes the business and shares the profit.
There could also be multilateral and sub-Mudarabahs. A multilateral Mudarabah may take various forms. A number of financiers may make a contract of Mudarabah with a single person, or a financier may contract Mudarabah with more than one worker, severally or jointly. Similarly, a number of workers may associate in order to work for one or more than
one subscriber. As regards a sub-Mudarabah, there seems to be a unanimity of opinion that a Mudarib may give the Mudarabah capital to a third party on Mudarabah terms only if the financier has allowed it either in clear terms or has left the business of the Mudarabah to the discretion of the Mudarib. The absence of the owner’s permission will make the former contract voidable.
Mudarabah, like other contracts, calls for lawful items of trade, failing which the contract will become void or voidable, as the case may be. Thus, a worker is not allowed to trade in wine or swine with the Mudarabah capital. The classical jurists generally restricted the use of Mudarabah to the act of trade (buying/selling), but an overwhelming majority of contemporary jurists and scholars allow the use of Mudarabah with a wider scope for use by Islamic banks as an alternative to interest-based financing. Mudarabah is a contract of fidelity and the Mudarib is considered trustworthy with respect to the capital entrusted to him. He is not liable for the loss incurred in the normal course of
business activities. As a corollary, he is liable for the property in his care as a result of the breach of trust, misconduct and negligence. A guarantee to return funds can be taken from him but can be enforced only in two situations: if he is negligent in the use of funds or if he breaches the stipulated conditions of Mudarabah. Hence, his actions should be in consonance with the overall purpose of the contract and within the recognized and customary commercial practice. In some situations, he becomes an employee when he performs some duty after the Mudarabah contract becomes invalid.
The Nature of Mudarabah Capital:
As described in the discussion on Shirkah, Mudarabah capital should preferably be in the form of legal tender money, because capital in the form of commodities may lead to uncertainties and disputes. The value of illiquid assets must be clearly determined in terms of legal tender at the time of entering into the Mudarabah contract and there should be no ambiguity or uncertainty about its value. It is not permitted to use a
debt owed by the Mudarib or another party to the capital provider as capital in a Mudarabah contract. This is because the capital to be given for Mudarabah business should be free from all liabilities. The conversion of debt into a Mudarabah is prohibited to safeguard against the abuse of usurious loan being camouflaged as a Mudarabah, where, in essence, the financier would possibly ensure for himself not only the recovery of his debt but also an illegal return on his loan under the cover of his share in Mudarabah profits. A financier cannot give the Mudarib two different amounts of capital with the stipulation that profit earned from one should go to him and from the other to the Mudarib. Similarly, he cannot specify different periods to state that profit earned in a specific period will be his and that of another period, the Mudarib’s. It is also not allowed to stipulate that profit from a particular transaction should go to the financier and the profit from another transaction will belong to the Mudarib.
Mixing of Capital by the Mudarib:
A Mudarib is normally responsible for the management only and all the investment comes from the financier. But there may be situations where the Mudarib also wants to invest some of his money into the business of Mudarabah. In such cases, Musharakah and Mudarabahare combined. Jurists allow the Mudarib to add his own capital to the capital of Mudarabahwith the permission of the Rabbul-m¯al. If a Mudarib subscribes his portion of profit or a portion of capital in the Mudarabah business, he will become a partner to the extent of his subscription, in addition to his remaining a worker. His rights and liabilities will be governed by Musharakah rules so long as his capital remains part of the business to the extent of his share of subscription. For example, A gives $100 000 to a Mudarib B, who also invests his own funds amounting to $50 000. This is the situation where Mudarabah and Musharakahhave been combined. In this combined business, B (the Mudarib) can stipulate for himself a certain percentage of profit against his own investment and
another percentage for his work as a Mudarib. In the above example, he has invested one-third of the capital. Therefore, according to normal business practice, he will get one-third of the actual profit on account of his investment, while the remaining two-thirds will be distributed between them equally. However, they may agree on another ratio for distribution.
Islamic banks normally mobilize deposits on Mudarabah principles and invest them in the business. If a bank also provides funds, it is entitled to get a profit on its own capital in proportion to the total capital of the Mudarabah. In addition to such a share in the profit, the bank shall also be entitled to share the remaining profit as Mudarib in an agreed proportion. For example, depositors provide $2000 for Mudarabah and the bank contributes $1000 to the business, and it was agreed to share the profit in the ratio 50:50. Let us assume that the profit earned by the bank as Mudarib is $300. The bank will get $100 as profit on its own
investment of $1000. The remaining profit of $200 will be distributed between the bank and the depositors on the agreed ratio of 50:50. In other words, out of the profit of $200, the bank will get $100 and the depositors $100.
2. Types of Mudarabah and Conditions Regarding Business:
Mudarabah business can be of two types: restricted and unrestricted Mudarabah. If the finance provider specifies any particular business, the Mudarib shall undertake business in that particular business only for items and conditions and the time set by the Rabbul-m¯al. This is restricted Mudarabah. But if the Rabbul-m¯al has left it open for the Mudarib to undertake any business he wishes, the Mudarib shall be authorized to invest the funds in any business he deems fit. This is called un-restricted Mudarabah. In both cases, the actions of the Mudarib should be in accordance with the business customs relating to the Mudarabahoperations: the subject matter of the contract.
Accordingly, a Mudarabah contract can be conditional or unconditional. The conditions may pertain to the nature of the work, the place of work and/or the period of the work. Conditions binding the worker to trade with a particular person or in a particular commodity, etc. are, according to Hanafi and Hanbali jurists, permissible, but these make the contract a special Mudarabah.
It is not legally necessary that the financier directly makes a contract with the Mudarib. Thus, a banker may act as an agent to an investor and become a middle man doing business on the basis of investment agency (WakalatulIstism¯ar).
The financier has a right to impose conditions on a Mudarib, provided they are not prejudicial to the interests of the business and are not counterproductive to the purpose of the Mudarabah. For example:
He may fix a time limit for the operation of the contract.
He may specify the articles to be traded in or whose trade is to be avoided.
He may stop the worker from dealing with a particular person or a company.
He may stop the worker from travelling to a particular place or may also specify the place where trade is to be carried out.
He may ask the worker to make sure to fulfil his fiduciary responsibilities (but not profitability).
According to some jurists, he may also compel his worker to sell the goods if the bargain is profitable (while the worker wants to hold then).
He also has a right to stop the worker from contracting a Mudarabah with any other party.
The Mudarib, on his part, is bound to follow the financier’s conditions. If he violates a restriction or contravenes a beneficial condition, he becomes a usurper and will be responsible in respect of capital to the capital owner. He is not entitled to sell the Mudarabah goods at less than
the general market price or buy goods for Mudarabah at a price higher than the common market price. He is also not allowed to donate Mudarabah funds or waive receivables of the business without explicit permission from the financier.
3. Work for the Mudarabah Business:
According to the majority of the traditional jurists, a financier in Mudarabah is not allowed to work for the joint business. He is not permitted to stipulate that he has a right to work with a Mudarib and to be involved in selling and buying activities, or supplying and ordering. However, he has the right to oversee and ensure that the Mudarib is doing his fiduciary duties honestly and efficiently.
It is only according to Hanbali jurists and, to some extent, Hanafi jurists that the owner is allowed to work for the business with the Mudarib. The reason for disapproval by the majority is that it jeopardizes the freedom of the worker to act according to his discretion. This classical
position is understandable if the basic idea that a person enters into a Mudarabah contract because he lacks business skill is presumed to exist. But if the financier also has skill and has contracted Mudarabah simply because he cannot do the entire work single-handedly, the rationale behind prohibiting him to work is not understandable. Moreover, it now seems more reasonable to allow the owner to ensure honesty and efficiency of the worker by taking a personal interest in the affairs of the business. Even some Hanafi jurists have allowed the financier’s sale of Mudarabah goods if it is profitable.
In present circumstances, it can be left to the parties, who may agree on any role by the investor keeping in mind its impact on profitability of the joint business. After transfer of the capital by the financier, the Mudarib needs to be given independence for the normal conduct of business. However, the financier can impose restrictions on the Mudarib in terms of place, object and method of trade. He may also want to have quick and direct access to his capital and may, for instance, stipulate that the
Mudarib may trade within a certain marketing zone.
4. Treatment of Profit/Loss:
Both parties in Mudarabah are at liberty to agree on the proportion or ratio of profit-sharing between them with mutual consent. This ratio has to be decided at the time the contract is concluded. They can agree on equal sharing or allocate different proportions. A lump sum amount as a profit/return on investment for any of the parties cannot be allowed or agreed upon. In other words, they can agree on, for example, 50, 40 or 60% of the profit going to the Rabbul-m¯al and the remaining 50, 60 or 40 %, respectively, going to the Mudarib. Different proportions can be agreed upon for different situations. For example, the financier can say to the Mudarib: “If you deal in wheat, you will get 50 %, but if you deal in cloth, you will be given 40% of the profit. Or if you do business in your town, you will get 40% and if in another town, your share in the profit will be 50 %.” Loss, if any, has to be borne by the financier. Loss means erosion of capital; no profit can be recognized or claimed unless the
the capital of Mudarabah is maintained intact.
The distribution of profit depends on the final result of the operations at the time of physical or constructive liquidation of the Mudarabah. Reserves can be created with mutual consent and if a Mudarabah incurs a loss, the loss can be compensated by the profit of the future operation of the joint business or the reserves created in the past. At the time of profit allocation, one partner can donate a part of his profit to the other partner(s). A financier can also award a good management bonus to a Mudarib. If losses are greater than profits at the time of liquidation, the balance (net loss) has to be deducted from the capital.
Profits are shared when they accrue, but this accrual does not mean a transaction-wise calculation of the profits; it means the overall adjustment of profits and losses over a particular period of time, which will be treated as the closing of the accounts but not necessarily the winding up of the business. However, the partners can provisionally draw the profit that will be subject to adjustment at the time of finalization of
of the accounts.
The Mudarib is entitled to a share of profit as soon as it is clear that the operations of the Mudarabah have led to the realization of a profit. However, this entitlement is not absolute, as it is subject to the retention of interim profits for the protection of the capital. It will be an absolute right only after distribution takes place. For valuation, receivables should be measured at the cash equivalent, or net realizable, value, i.e. after the deduction of a provision for doubtful debts. In measuring receivables, neither time value nor discount on current value for an extension of the period of payment shall be taken into consideration.
Parties can change the ratio for profit distribution at any time, but that ratio will remain effective for the period for which it has been mutually fixed. If the parties did not stipulate the ratio, they should refer to the customary practice, if any, to determine the shares of profit. If there is no customary practice, the contract will be regarded void ab intio and the Mudarib will get the common market wage for the kind and amount
of service he has rendered.
Although one party in Mudarabah cannot stipulate for himself a lump sum amount of money, the parties can agree with mutual consent that if the profit is over a particular ceiling, one of the parties can take the greater share of the profit and if the profit is below or equal to the stipulated ceiling, the distribution will be according to the agreed ratio. The profits realized from Mudarabah cannot be finally distributed until all expenses have been paid, in accordance with custom and the original agreement. Final accounting will be undertaken against the net profits of the Mudarabah operations. The part of profit of the Mudarib becomes secure after the liquidation of the Mudarabah and the capital owner recovers its capital and part of profit.
The Mudarib cannot claim any periodical salary or a fee or remuneration for the work done by him for the Mudarabah business over and above his share as agreed in the contract. However, Imam Ahmad has allowed the Mudarib to draw his daily expenses of food only from the
Mudarabah account. Hanafi jurists have also restricted the right of the Mudarib to claim expenses incurred during business journeys. The financier and the manager can enter into a separate agreement, independent of the Mudarabah agreement, for assigning any job that is not by custom a part of the Mudarabah business against a fee. This means that the Mudarabah contract will not be affected if the Mudarib is terminated from the service.
As a principle, in Mudarabah it is only the financier who bears the loss. However, if a Mudarib has also contributed capital, which he can do with mutual consent, he will bear the pro rata loss. If profit has been distributed upon constructive or actual liquidation of business, it cannot be withdrawn in order to make up for a later loss or for any other purpose. If loss has occurred in some transactions and profit has been realized in some others, the profit can be used to offset the loss at the first instance, then the remainder, if any, shall be distributed between the parties according to the agreed ratio.
5. Termination of a Mudarabah Contract:
The general principle is that Mudarabah is not a binding contract and each of the parties can terminate it unilaterally except in two cases: (i) when the Mudarib has already commenced the business, in which case the contract becomes binding up to the date of actual or constructive liquidation; and (ii) when the parties agree on a certain duration of the contract, in which case it cannot be terminated before expiry of that period except with mutual agreement. For termination, the Mudarib will be given time to sell the illiquid assets so that an actual amount of profit may be determined.
The unlimited power to terminate the Mudarabah may create difficulties in the context of the present circumstances, because most commercial enterprises today need time to bear fruit. Modern businesses also demand continuous and complex efforts. Therefore, if the parties agree, while 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 Shar¯ı´ah, particularly in the light of the famous Hadith 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 in Shar¯ı´ah.”
If all assets of the Mudarabah are in cash form at the 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, if the assets of the Mudarabah are not in cash form, the Mudarib shall be given an opportunity to sell and liquidate them, so that the actual profit may be determined.
A restricted Mudarabah will automatically wind up after the object is achieved. If the Mudarabah is general, it will be in the interests of both parties to wind up at will whenever both of them mutually agree to do so. The difficulty may arise if one of the parties wants to continue business. Reconciliation on this point should be sought through a court or any arbitration.
Mudarabah is distinguished from Musharakah briefly on the following grounds:
The investment in Musharakah comes from all the partners, while in Mudarabah, investment comes from a person or a group of persons, but not from the Mudarib.
In Musharakah, all partners have a right to participate in the management of the business and can work for it, while in Mudarabah, the Rabbul-m¯al has no right to participate in management. With mutual consent, however, he can work for the venture. Further, the financier has the right to ensure that the Mudarib is doing his fiduciary duties in the true sense.
In Musharakah, all the partners share the loss according to the ratio of their investment, while in Mudarabah, the loss, if any, is suffered by the Rabbul-m¯al only. However, if the Mudarib has conducted business with negligence or has been dishonest, he shall be liable for the loss caused by his negligence or misconduct.
The liability of the partners in Musharakah is normally unlimited. However, if all the partners have agreed that no partner shall incur any debt during the course of business, then the liabilities exceeding assets shall be borne by that partner alone who has incurred a debt on the business in violation of the aforesaid condition. Contrary to this, in Mudarabah, the liability of the Rabbul-m¯al is limited to his investment unless he has permitted the Mudarib to incur debts on his behalf.
In Musharakah, profit can be distributed on an annual, quarterly or monthly basis by valuation of the assets. In the case of Mudarabah, final distribution can take place only after liquidation of the Mudarabah business. However, on account payment of profit is possible subject to ultimate adjustment. To avoid problems in perpetual Mudarabah, the contemporary jurists have accepted the concept of constructive liquidation of assets by determining the market value of nonliquid assets.
In Musharakah, all assets of the Musharakah become jointly owned by all of the partners 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 sales. In Mudarabah, however, all the goods/assets purchased by the Mudarib are solely owned by the Rabbul-m¯al, and the Mudarib can earn his share in the profit only if he sells the assets profitably. However, there are some exceptions to this rule according to a minority view.
If the Mudarabah business is dissolved, its assets and profit, if any, can be distributed only after assessing its value in terms of money. In the case of Shirkah, this is not necessary.
Modern corporate bodies can be considered to be based on the concept of Shirkah al ‘Inan or a combination of Musharakah and Mudarabah, which is allowed by the generality of the contemporary jurists. There are a number of forms of modern corporations, including joint stock companies with limited liability, joint liability companies (a form of personal partnership), companies limited by shares (also a kind of personal partnership), partnerships in commendum (a form of financing partnership), etc. The general principles governing these forms are the same and we will be discussing mainly the modern stock companies with limited liability of the shareholders.
The main ingredient of modern corporate business is the issuance of shares or certificates to the investors in a joint business. A large number of people provide funds and are issued any specific type of receipts that are called shares or a variety of certificates that represent the proportionate ownership of the shareholders. The AAOIFI Standard on Musharakah has defined a stock company as an entity, the capital of
which is distributed into equal units of tradable shares with limited liability of the shareholders to their pro rata capital. The rules relating to Shirkah al ‘Inan are applicable to it except on the issue of the limited liability of the shareholders. In other words, shareholders are owners of the assets of the company to the extent of shares held by them. They can sell/transfer the shares to any other persons but have no discretion over the assets of the company.
A company incorporated by law is considered a juristic personality, and as such, cannot avoid its obligations to people dealing with it. This separates the liability of the company from the liability of the shareholders. The company’s liability can be limited to its paid-up capital if it is made public in order to make the customers aware of its financial position. It involves a binding contract for continuity in terms of its Articles of Association. Therefore, no one is entitled to terminate the company in terms of his shares. However, a shareholder can sell his shares or relinquish title to them in favour of other people.
The capital contribution for subscription to shares can be made in a lump sum or in instalments. Unpaid instalments would constitute an undertaking to increase the share in the company subsequently. It is permissible to issue new shares in order to increase the capital, provided the new shares are issued at the fair value of the old shares – this can be at a premium, discount or at the nominal value of the shares. Preference shares having special financial characteristics that give their holders a priority for profit allocation at the time of the company’s liquidation do not conform to the Shar¯ı´ah principles.
IFIs can purchase or sell shares of any company subject to the condition that the company is undertaking a Halal business. The price of the shares can be less or more than their nominal value, provided more than 50% of its shares comprise fixed assets, i.e. liquid assets (cash plus receivables) are less than 50 %. If the major business of any company is not against Shar¯ı´ah and some of its transactions involve un-Islamic elements, like dealing with interest-based institutions, its shares can also
be purchased, provided the part of income representing interest, if identified, is given to charity. One cannot sell shares that one does not own and a promise by a broker to lend a share to a short-seller at the date of delivery does not refer to ownership or possession of the shares. Shares can also be pledged, because anything that can be sold can also be given as pledge.
Shares that are gradually redeemed before the termination of the company only through the distribution of profits by the company do not conform to the Shar¯ı´ah principles. This is because the funds the certificate holders receive constitute profit in respect of their shares. The claim that the participations be redeemed in consideration for the distributed profit is invalid. Therefore, the certificate holders remain owners of the shares and are entitled to proceeds when the company is liquidated.
Preference shares, on the basis of which some of the partners in a concern are earmarked a fixed percentage of dividends, do not fulfil the
principles of Shar¯ı´ah. The basic principle of distribution of profit is that no gain can be had without undertaking to bear the risk of loss. In this respect, all the subscribing partners of a company should be treated alike, based on the number of shares held by them. Similarly, if any of the partners has been privileged to share in profits only without sharing in losses, the partnership contract is deemed to have become void due to the element of interest. The case of qualification shares is, however, different, as it determines the minimum extent of attention and devotion of the directors without any preferential treatment in pecuniary entitlement. Underwriting is a crucial part of the business related to modern corporations. A shareholder or any third party can underwrite an issue of shares without any consideration. The underwriter will undertake, by an agreement at the time of incorporation of the company or shares issue, to buy all or a part of the shares issue. It undertakes to buy the remaining shares at nominal value that are not subscribed through public or private placements.
The underwriter can charge for services provided, other than the underwriting, such as conducting feasibility studies or marketing the shares.
The actual rules of modern corporate business require more detailed analysis. Shares/certificates are floated for raising liquid assets. Trading in assets that represent the underlying assets is permissible as long as real assets and services constitute the majority of the total assets. As such, the instruments or shares represent only the money, they cannot be traded so long as the capital is in liquid form, i.e. in the form of cash raised or receivables or advances due from others. This is because the shares represent pro rata ownership of shareholders in the joint business/project. If the capital is still in liquid form, the shares may be sold only at face value, otherwise it would mean that money is being exchanged for more money, which is Riba. However, when the raised money is employed in purchasing nonliquid assets, like land, buildings, machinery, raw material, furniture, etc., the shares/Musharakah
certificates will represent the holders’ proportionate ownership in these assets. In this case, it will be allowed by the Shar¯ı´ah to sell these certificates in the secondary market for any price agreed upon between the parties, which may be more or less than the face value of the shares/certificates, because the subject matter of the sale is a share in the tangible assets and not in money only; therefore, the certificate may be taken as any other commodity which can be sold with profit or at a loss.
Another major feature of the present corporate structure is that running projects are normally a mixture of liquid and tangible assets, e.g. in the form of raw material, fixed assets, inventory of finished goods, sales proceeds, receivables (that being debt is treated as liquid, like money), etc. The opinion of contemporary jurists regarding the Shar¯ı´ah position of trading in shares of entities having mixed liquid and nonliquid assets is different. According to the classical jurists of the Shafi‘e school, combined assets of a business cannot be sold unless the tangible assets
are separated and sold independently. Hanafi jurists, however, are of the view that a combination of liquid and tangible assets can be sold/purchased for an amount that is greater than the amount of liquid assets in the combined assets. They prescribe no specific proportion of tangible assets to qualify for permission of such a sale/purchase. However, most of the contemporary scholars, including those of the Shafi‘e school, have allowed trading in the shares and certificates only if the nonliquid assets of the business are more than 50 %, while some reduce this floor to 33 %.
The Concept & Rules of Mudarabah
Mudarabah Distinguished From Musharakah
Modern Corporations: Joint Stock Companies