In article 108 dated the 18th August 2020, I had quoted AAOIFI Shariah Standard No 12, Article 3.1 while explaining that Sharikat al-Inan (or Musharakah Inan) is a partnership between two or more partners where each partner contributes a specific amount of money in a manner that gives it a right to deal in the assets of the partnership, on the condition that the profit is distributed based on a pre-agreed ratio stated in the partnership agreement whereas the losses are borne pro-rata, ie in accordance with the contribution of each partner to the capital. Today I will further explain this type of Musharakah.
Most readers may know the meaning of Musharakah (from origin Arabic word ‘Sharikah’) in the context of mixing the two capital (cash or kind) in a manner so as to make it indivisible or conjoined; however, what does ‘Inan’ mean?
Celebrated Islamic law scholar of our time Dr Wahbah Al Zuhaili (1932–2015) wrote in his famous book ‘Financial Transactions in Islamic Jurisprudence (Volume 1)’ that there are a few stories about the term but the most reliable is describing the reins (Inan in Arabic) of two horses running side by side. He writes: “Each of the partners holds the proverbial reins of his partners, thus restricting their abilities to deal in the joint property”, hence the classification of Musharakah Inan as a limited partnership. In my opinion, ‘proverbial’ is used here to symbolize ‘well-known’ or ‘familiar’ in the sense that partners are familiar with their respective stake and responsibility.
Moving on, this type of partnership is most commonly found in the Islamic economy and finance due to the utmost flexibility it offers vis-à-vis the ratio of equity contribution as well as the roles and responsibilities which can be equal or dominating by one partner, irrespective of the level of equity contribution be it minor or major.
As such, a partner investing a 10% capital may have a bigger legal right in dealing with the Musharakah Inan assets compared with the other partner contributing the rest of the capital since a minor partner may possess the expertise to make the Musharakah entity work for their common benefit.
Similar to any other Islamic contract, in the Musharakah Inan — also commonly referred to as the Sharikat Aqd or contractual partnership — the customary offer and acceptance between the partners is mandatory. This could be achieved through the exchange of written correspondence such as letters, emails or fax, as well as a verbal offer and acceptance, paving the way for the partners to enter into the Musharakah Inan contract. It is also acceptable in Shariah if the partners directly enter into the contract without first exchanging the offer and acceptance since their signatures legally demonstrate their agreement to the partnership.
As I had explained in article 88 on Mudarabah, here too the debt cannot be treated as capital to Musharakah Inan or Sharikat Aqd. You may visit the article to be refreshed on the reason. Similarly, the capital contribution by all partners in cash or kind must be provided at the outset in order to fulfill the purpose of entering into the partnership by them. The deferment of contribution by one partner while the other contributes defeats the objectives stated in the Musharakah contract. If the capital is not readily available with one partner, the execution of a Musharakah contract should be postponed until such time that it is made available so that its deployment can take place instantly upon signing the contract.
Jurists prefer that the Musharakah capital is contributed by all partners in monetary terms to avoid any confusion between them as to the value of their respective contribution which must be fixed at the time of commencing the association. This is because the fixation of the ratio for capital contribution shall be the basis for apportioning the losses, if any.
Some jurists allow the flexibility of contributing the capital in kind, provided that its value is accurately ascertained on the day of entering into the partnership if the in-kind capital is a commodity relevant to the Musharakah objectives and can be immediately put to use. While ascertaining the value of the commodity, its conservative market price shall be taken into consideration to allow its instant sale for conversion into money toward capital contribution.
Why is there a need to sell the in-kind capital? Can it not remain in the Musharakah in its original form? No, it cannot. The reason being the value of such in-kind contribution may keep varying with the fluctuation in its market price, which shall make the Musharakah capital uncertain.
If the in-kind contribution is foreign currency, gold or silver, it should be sold at the prevalent market price and the amount thus realized shall be considered as the equity contribution for the relevant partner. What if the in-kind contribution is real estate or the usufruct? Well, so long as the commercial objective of the Musharakah is property trading or renting, it will obviously not serve the purpose of forming the joint venture.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions of the Dubai Islamic Economy Development Centre, nor the official policy or position of the government of the UAE or any of its entities. The purpose of this article is not to hurt any religious sentiments either consciously or even unwittingly.
Sohail Zubairi is the senior advisor with the Dubai Islamic Economy Development Centre. He can be contacted at [email protected].
Next week: Explanation of Musharakah Inan shall continue next week.