I have so far described the Musharakah Mufawadah (unlimited and equal partnership) and Musharakah Inan (limited and unequal partnership). If you recall, I had mentioned in article 107 two more types of Musharakah contracts which are credit partnership (Musharakah Wujuh) and labor partnership (Musharakah Amal). This week, I will explain how these partnerships are different from the traditional wisdom when we think of a partnership.
In the Arabic language, face is called ‘Wajh’ and its plural is ‘Wujuh’ or faces. A Musharakah Wujuh partnership takes place when two or more persons join hands to commence a commercial activity whereby they secure goods on a deferred payment basis by using their creditworthiness/market reputation (hence the term ‘Wujuh’ or faces) and sell them on cash or shorter term credit so that the partners are able to realize the sale proceeds prior to their debts related to the purchased goods becoming due.
A Musharakah Wujuh partnership neither requires contributing any monetary capital nor acquiring a bricks-and-mortar premises to operate from. This type of Musharakah can be formed at the lowest rung of the economy (eg micro SMEs) or even by housewives who would like to support their spouses to enhance the household income for sustenance by indulging in small-scale buying and selling.
I have observed that at times, the partners of a well-established enterprise also get involved in Musharakah Wujuh activity whereby they purchase the goods on a usance basis from within or outside the country by cashing in on their solid market reputation, and sell them down on cash or short-term credit. They earn a handsome profit without investing a penny in the entire cycle. But then did they not work so hard to reach that level that the suppliers can comfortably rely on them?
Can you think of any other activity which may be working on similar basis to the Musharakah Wujuh lines — partly or fully? How about the established chains of hypermarkets? Don’t they buy on medium to long-term credit and sell on cash? In fact, a majority of topline hypermarket chains do not even buy from many suppliers. They simply demand the suppliers to provide the goods on a consignment basis, ie without incurring any financial liability for the goods. As such, the suppliers are only paid when their goods are sold and any unsold goods are taken back by the suppliers. Also, the suppliers are charged rent for being allocated the shelves in the racks where they place the goods. Doesn’t it all boil down to the partners’ Wujuh or faces whereby they can strongly dictate their terms in the market?
There could be variations in Musharakah Wujuh such as if there are four partners, one or two of them could hold greater market reputation than the others, ie he is (or they are) able to secure more goods on credit than the other partners. What should be the profit distribution ratio in such a situation? Of course it cannot be equal but must be proportionate to the liability a partner is exposing himself to. Contrary to Musharakah Inan which we just finished exploring, here the ratio for sharing the profit and bearing the losses shall be directly pro-rated to the ability of a Musharakah Wujuh partner to secure goods from the market on credit and incur the liability.
But there could be situations where at the beginning of the year, partner ‘A’ secured a majority of the trading stock of the Musharakah Wujuh entity. Nonetheless, during the middle of the year, partner ‘B’ was able to beat partner ‘A’ in this regard. How then shall the profit be distributed among the partners at the end of the Musharakah term, or on a fiscal basis if it is an ongoing entity?
The solution lies in simplicity, ie the profit shall be ascertained on a consignment-by-consignment basis and the base profit percentage is allocated (but not distributed) to all partners and a bonus is rewarded to the partner who was able to secure the goods. This way, the Shariah condition of not denying any partner from sharing the Musharakah profit shall be fulfilled as well as the performing partner will also be fairly compensated.
If a situation arises where the brand name of the entity has outshone the individual reputations of the partners in a Musharakah Wujuh partnership, the sharing of the profit and bearing of the liability should become equal among all the partners. This is due to the fact that the entity is not attracting the suppliers’ attention based on who the partners are but its long-standing market presence, robust management and unblemished payment history.
Can readers look around and spot any Musharakah Wujuh entity operating in their respective vicinity?
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.
Next Week: Explanation on Musharakah Amal.