UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Musharakah (Partnership) in Islamic Finance


Musharakah is rooted in the word shirkah or ‘partnership’ in English and refers to a joint-venture agreement between two or more parties to engage in a specified business activity based on profit -and- loss sharing.  

According to Bank Negara Malaysia, Musharakah is a contract between the partners to contribute capital (monetary or non-monetary) to a venture (where in general debt cannot form the capital), whether existing or new, or to an owner of real estate or moveable asset, either on a temporary or permanent basis. Profits generated by that venture,  real estate, or asset are shared in accordance with the terms of the Musharakah agreement, while losses are shared in proportion to each partner’s share of capital.  Also according to Bank Negara Malaysia, it is not permissible to include a condition in a Musharakah contract that stipulates a predetermined fixed amount of profit to one partner, which deprives the profit share of the other partner.


Basically, in this financing structure, an Islamic investment company and the client(s) agree to partake in a joint-venture within a specified time period.  Both parties to the joint-venture agree to contribute capital (in a lump-sum or staggered basis), which is agreed upon at execution of the contract and mutually amendable at a future date so as to allow the injection of new capital.  In addition, new partners to the venture can be added after the initial execution of the agreement with mutual consent.

Each party’s net profit is determined in a pre-agreed ratio like the Mudharabah, however, the portion of profit due to a partner does not have to correspond to the amount invested.

For example, it can be agreed that a partner that contributes a large portion of labor receive a larger portion of the profit than a partner that contributed more capital.  It is great to see a system of finance that recognizes the value of labor and does not see labor as just a person to squeeze profit out of in an exploitative formula of paying labor an hourly wage, which does not include the value added to the product or service by the laborer.  A laborer should not just be an expendable input of production in a calculation of profit, however, a laborer should be increasingly viewed as a producer of profit where in which the laborer should be able to share in that profit to enhance the overall productivity and profitability of the venture.  This system actually encourages higher productivity levels as laborers are paid their worth and given incentive to work harder instead of squeezed dry and tired by a capitalistic system that sees them as a valueless, expendable machine used in someone else’s quest for profit generation.

According to Bank Negara Malaysia:

“A partner who has agreed to a certain profit- sharing ratio may waive the rights to profits to be given to another partner on the basis of Tanazul (waiver) at the time of profit realization and distribution as well as at the time of the contract.  However, a waiver of profit that takes place at the time of contract shall be by way of unilateral promise (wa’d).

The mechanism for estimating profit on Musharakah capital employed may be benchmarked to conventional benchmarks, such as but not limited to Base Lending Rate (BLR) in order to determine the indicative profit rate.

Profit may be distributed from actual or realized profits through the sale of assets of the Musharakah partnership (al-tandhid alhaqiqi / al-fi’li).

Profit distribution may also be on the basis of constructive valuation (al-tandhid al-hukmi) on the assets including accounts receivables.

In the case of constructive valuation based on market valuation or a third party verification, the unrealized profit shall be recorded as a reserve.”

According to Bank Negara Malaysia, ‘examples of Musharakah financing are structuring project financing, syndicated financing, asset financing, working capital financing, contract financing, trade financing and structured products based on securitization such as sukuk. One of the common Musharakah applications in asset financing is Musharakah Mutanaqisah (diminishing partnership).  Musharakah may also be applied to acquire a stake in another entity in the form of Musharakah investment.’

Unlike the Mudharabah, both parties may participate in the management of the profit-making venture.   However, according to Bank Negara Malaysia, it may be decided that one party may manage the venture or management may be outsourced to a third- party based on a relevant contract such as Wakalah, Ujrah or the Mudharabah contract.

Similar to the Mudharabah, in a Musharakah both parties may mutually pre-agree on the profit-distribution ratio, which may or may not correspond to the level of capital contribution.  In a Musharakah, similar to an LLC, all parties bear loss in proportion to the amount of invested capital.  This is in contrast to the Mudharabah structure where in general only the investor suffers the loss with exception to negligence, misconduct, or violation of certain terms and conditions by the Mudharib.  However, in Musharakah as well, according to Bank Negara Malaysia, ‘any partner acting on his own or as agent who has caused the loss of capital due to misconduct or negligence shall be liable to refund the loss of capital to the other partners.’  In addition, according to Bank Negara Malaysia, upon realization of loss, a partner may agree, without any prior condition, to bear the loss of another partner at the time such a loss is realized.

Therefore, in a Musharakah, the profit may be distributed according to pre-agreed contributions not necessarily based on capital contribution, however, loss is spread in proportion to the capital contribution of each partner unless a partner has aggravated loss due to negligent conduct, in which case, the negligent partner may be liable for more than the proportion to his invested capital.  Also, a partner may agree to bear the loss of another partner.

Similar to a Mudharabah, the provisions of the Musharakah contract must be written in a manner to avoid the possibility of dispute during the operation of business or at the time of distribution of profit, bearing loss, or winding down.   A Musharakah contract can be terminated based on expiration of a time period, after fulfillment of certain conditions, or by the liquidation of the assets that constitute the subject-matter of the partnership. Furthermore, according to Bank Negara Malaysia, ‘failure to contribute capital by the capital provider as per the agreed schedule shall constitute a breach of promise according to specified terms and conditions of the contract. The partners shall than have an option to terminate the agreement or may agree to revise the agreement based on actual capital contribution.’

Each partner is entitled to terminate the venture agreement after giving notice as per the contract.  The withdrawing partner is then entitled to her share in the partnership.  The remaining partners may then enter into a binding promise to continue the partnership for a specified period of time (after withdrawal of one or more of the partners).  For the withdrawing partner, all obligations, which existed before termination under the Musharakah shall continue to exist after the partner’s withdrawal.

It may be the case, according to Bank Negara Malaysia, that ‘the Musharakah agreement may impose a condition that compels a partner to offer the redemption of the partner’s share of capital to existing partners based on certain agreed terms and conditions,’ for example before offering the shares to a third- party. According to Bank Negara Malaysia, a share of a Musharakah capital may be transferred to existing partners or a third -party according to the existing terms and conditions of the Musharakah contract.

‘Two Categories of Musharakah

  1. Sharikah Mulk (Property Partnership) – Involves the joint- ownership of a property without its joint- exploitation, such as the joint- ownership of a house transmitted by devolution to the heirs of a deceased person.  According to Bank Negara Malaysia, ‘in general, it refers to joint-ownership in a particular asset.’
  2. Sharikah ‘Akd (contractual partnership) – It emphasizes the joint- exploration of capital and the joint- participation in profits and losses where joint ownership is a consequence of and not a prerequisite for the formation of the partnership.  According to Bank Negara Malaysia, ‘it is generally a venture with a commercial objective.’

Three Different Methods in Establishing the Sharikah ‘Akd, which can be in the form of Mufawadha or an unlimited, unrestricted, and equal partnership or Sharikah ‘Inan or a limited investment partnership.

  1. Sharikah Mal (finance partnership) – Where money is the main criteria in the formation of the partnership;
  2. Sharikah A’mal (labor partnership) – Partnership based on a partner’s experience or skill;
  3. Sharikah Wujuh (credit partnership) – Where credit alone is used for the partnership investment.’

(The Law and Practice of Islamic Banking and Finance by Dr. Nik Norzrul Thani; Mohamed Ridza Mohamed Abdullah; and Megat Hizaini Hassan.  (2003))

The Musharakah Contract

According to Bank Negara Malaysia, ‘the essential features attributable to a Musharakah contract are capital, management, profit- sharing, loss- sharing, and a joint- venture.


The essential conditions of a valid Musharakah capital are as follows:-

i. Musharakah capital shall be readily available;

ii. Musharakah capital shall be contributed by all partners; and

iii. The capital may be in the form of monetary assets such as cash or non-monetary assets that includes tangible and intangible assets.’

Furthermore, according to Bank Negara Malaysia, business ventures of Musharakah shall be Sharia’h compliant and may be conducted in various sectors such as trading, plantation, construction, manufacturing, investment, and services.

A Musharakah contract may be adopted for non-commercial activities, which are non-profit oriented.  Pre-contracting costs incurred to conclude Musharakah contracts such as the conduct of technical and feasibility studies of the financial viability of the Musharakah venture by the IFI may be charged to the customer subject to the latter’s consent.

Origin in the Qu’ran and Sunnah

According to Bank Negara Malaysia, ‘Musharakah has been practiced before the Prophet Muhammad’s Sallallahu `Alaihi Wasallam (SAW) first revelation and since then, the practice of Musharakah has been assimilated as part of Islamic jurisprudence by virtue of Sunnah of the Prophet Muhammad (SAW).

The legitimacy of the Musharakah contract is based on the Qur’an, the Sunnah of the Prophet Muhammad (SAW), and the consensus of Muslim jurists.


The following Qur’anic verses generally indicate the validity of Musharakah.

i. “…but if more than two, they share in a third…” (Al-Nisa’:12)  The verse specifically underlines the rule of Islamic inheritance.  However, in general context, Muslim jurists have regarded the text as containing general permissibility of any form of partnership.

ii. “Verily many are the partners (in business) who wrong each other, except those who believe and work deeds of righteousness and how few of them….” (Al-Sad: 24)


The Narration of Abu Hurayrah

Abu Hurayrah said that: The Prophet SAW said: Allah says: I am the third [partner] of the two partners as long as they do not betray each other. When one of them betrays the other, I depart from them”. (Sunan Abu Daud)

The Narration of Abu al-Minhal

Abu al-Minhal narrated that Zayd Ibn Arqam and al-Barra’ Ibn ‘Azib were partners, and they bought silver in cash and credit. Their practices were brought to the Prophet SAW, and the Prophet SAW pronounced that what was bought on cash then they could benefit from it and what was bought on credit then they should reject it.”

(Musnad Ahmad)

It is learned from the narration that Prophet Muhammad SAW approved the partnership formed between Zayd Ibn Arqam and al- Barra’ Ibn ‘Azib but disapproved their venture into business activity of purchasing silver on credit.


This type of partnership has been practiced throughout the history of Muslims without objection from the jurists.

Imam Ibn al-Munzir states in his book al-Ijma’: “And they (Muslim jurists) agree on the validity of partnership where each of the two partners contributes capital in dinar or dirham, and co-mingles the two capitals to form a single property, which is indistinguishable, and they would sell and buy what they see as (beneficial) for the business, and the surplus will be distributed between them whilst the deficit will be borne together by them, and when they really carry out [as prescribed], the partnership is valid.”’

Based on Information from (The Law and Practice of Islamic Banking and Finance by Dr. Nik Norzrul Thani; Mohamed Ridza Mohamed Abdullah; and Megat Hizaini Hassan.  (2003))   and Bank Negara Malaysia.

Introduction to Musharakah

Musharkah (Usmani)

Sharia’h Parameters for Musharakah by Bank Negara Malaysia

Musharakah and Mudharabah By Mufti Taqi Usmani


UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

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