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COMPILED BY HAMDAN HJ IDRIS, BSc Econs, MBA (Islamic Banking & Finance) Certified Professional Trainer (MIM) Industry Expert INCEIF. PRESENTED BY HJ MAHMUD HJ BUNTAT, MBA (AUOL, UK), DBM (Swansea Inst., UK), CIL (UIA) Part-time Lecturer (INCEIF)
HAMDAN HJ IDRIS, BSc Econs, MBA (Islamic Banking & Finance)
Certified Professional Trainer (MIM)
HJ MAHMUD HJ BUNTAT, MBA (AUOL, UK), DBM (Swansea Inst., UK), CIL (UIA)
Part-time Lecturer (INCEIF)
Former Head of Islamic Banking Division, OCBC Bank (Malaysia) Bhd
When Islamic banks are not allowed to make profit by making loans to customers, what are the alternatives available?
How would Islamic finance respond to the requirement of capital and risks associated with the new business?
In Islamic jurisprudence, the term shirkah is commonly used to denote musyarakah.Shirkah means “sharing.”
Shirkat-ul-aqdmeans a partnership affected by a mutual contract, which can be translated as a ‘joint commercial enterprise.’ Shirkah-ul-aqdis divided into three categories:-
1. Shirkat-ul-amwal - All partners invest some
capital as well as expertise into the new
2. Shirkat-ul-‘amal - Involves only services
rendered by partners.
3. Shirkat-ul-wujuh - Where no capital input is
required. The business purchases goods on
credit and sell them cash.
The profit generated from the business of shirkat will be distributed among the partners at an agreed ratio or percentage.
Let us look again at the role of musyarakah/ shirkat-ul-amwal in all business set up.
(Partnership in work)
What are the rules available in musyarakah on the distribution of profit? There is no single definite rule available but here are some opinions of Muslim jurists.
Imam Ahmad contented that the ratio of profit may differ from the ratio of investment if it is agreed between partners with their free consent.
Venture capitalists provide equity funds to small business, especially start-ups.
Unlike banks and unit trust investors, venture capitalists work closely with entrepreneurs and investee companies.
The essential element in Islamic venture capital is the profit-loss sharing system (PLS) than runs on the principle of al-ghurm bil ghonm (i.e. the entitlement to return is related to the exposure of risk).
It serves to investigate the characteristics of the entrepreneur who is seeking financing.
A venture capitalist usually makes profits through capital gains generated from sale of shares upon exiting either via public listing or by stock repurchase by the investee company.
Division of ownership in venture capital is not based on relative monetary investment of the two parties.
Most of the rules on musyarakah are fiqh i.e. they are derived from human understanding of the Quranic teachings about justice and equity.
The fuqaha must look into this issue on ownership determination as it (i.e. owneship shares) is a parameter bearing legal claims once profits are realized
- Projected profit of venture
- Price-Earning ratio (P/E)
- Venture capital return (VCR)
Gharar must be avoided in Islamic law of contract (‘aqd), otherwise the contract is deemed null and void.